Binding Private Ruling 166 – A change of domicile by a controlled foreign company
05 September 2014
Posted by: Author: PwC South Africa
Author: PwC South Africa
Binding Private Ruling
166, issued by SARS on 1 April 2014, involved an issue of concern to many
holding companies in South Africa that have non-resident subsidiaries which
hold their off-shore investments.
The issue is whether a South African holding company
will be deemed, for the purposes of para 11 of the Eighth Schedule to the
Income Tax Act 58 of 1962, to have incurred a ‘disposal’ of assets if its
controlled foreign subsidiary changes its domicile, even where its place of
effective management remains outside South Africa.
this particular case the applicant for the ruling was a company that was
incorporated in and was a tax resident of South Africa. It had a wholly owned
subsidiary, incorporated in a tax haven, that was a ‘controlled foreign
company’ (as defined in s 9D) in relation to the applicant.
The proposed change
to the subsidiary’s place
of effective management
The applicant company proposed to change the
domicile of its subsidiary to another foreign tax-haven country in order to
gain the benefit of double taxation agreements between those two foreign
countries. The proposed plan would result in the place of effective management
of the subsidiary changing from the one foreign country to the other.
applicant sought a ruling from SARS as to whether the proposed course of action
would be regarded as involving a disposal as defined in para 1 of the
Eighth Schedule to the Income Tax Act, read with para 11 of the Schedule.
applicant company’s concern was no doubt that disposal is so widely
defined in the Eighth Schedule that the proposed arrangement might result in an
unintended and undesired actual or deemed disposal, with adverse capital gains
tax consequences for itself.
The ruling and its conditions and assumption
In its ruling, SARS affirmed that the proposed
change of domicile of the subsidiary from country X to country Y would not, as
regards the applicant, constitute a ‘disposal’ as defined in para 1 read with
para 11 of the Eighth Schedule to the Income Tax Act.
ruling was, however, made subject to the following conditions and assumptions,
inter alia, that –
ruling depended on the consequences
of the proposed change of
domicile in terms of foreign
change of domicile of the subsidiary was to be effected in terms of the law of
the country whose domicile it was giving up, and the country in which it was to
new legal entity would be created;
- there would be no change to the legal
identity of the subsidiary;
would be no effect on the subsidiary’s property, rights or obligations; and
effective management of the subsidiary would be located outside of South Africa
both before and after the implementation of the proposed arrangement.
the proposed change of domicile of the subsidiary was to be effected in terms
of foreign law, the question whether the conditions andassumptions of
the Ruling weresatisfied (save, presumably, for the last-mentioned
condition, namely, that the subsidiary’s place of effective management would
remain located outside South Africa) would have to be determined with reference
to foreign law, and not in terms of South African law.
the applicant’s apprehensions would not be put at rest by the binding private
ruling itself, and the applicant would have to take professional advice on the
legal consequences, in terms of the relevant foreign law, of the proposed
re-domiciliation of its subsidiary. It is not inconceivable that a tax-haven
country may have idiosyncratic legal rules in this regard.
Of particular concern to the applicant will
presumably be whether, in terms of the laws of the tax-haven country, the
proposed arrangement would result in a change to the subsidiary’s ‘property
rights’ in relation to assets held within that tax-haven country, and to its
‘legal identity’ in one of the tax-haven countries. In either of those events,
a condition and assumption of binding private ruling 166 will not have been
satisfied, and the Ruling will cease to operate.
This article first appeared on pwc.co.za