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Unintended consequences of the new CFC rules

20 September 2017   (0 Comments)
Posted by: Author: Judith Becker
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Author: Judith Becker (ENSafrica)

In the 2017 South African Budget speech, the Minister of Finance raised government’s concern that the current Controlled Foreign Company (“CFC”) rules do not capture foreign companies held by interposed trusts or foundations, and it was announced that countermeasures for the treatment of foreign companies held by trusts or foundations will be considered. Treasury, in an attempt to cover these loopholes, has introduced certain changes into the CFC legislation and a section that might have more disadvantages than Treasury intended.

Current CFC rules

South Africa imposes taxes on worldwide income of residents. The Income Tax Act, 1962 (the “Act”) contains various anti-avoidance provisions which aim to curb tax avoidance. One of these provisions was the introduction of CFC provisions contained in section 9D of the Act. The CFC rules are aimed at preventing South Africans from shifting income offshore by investing in a CFC.

A CFC is a foreign company where one or more South African residents directly or indirectly hold or exercise more than 50% of the participation or voting rights. The CFC rules make provision for the net income of a CFC to be attributed and included in the income of its South African resident shareholders. However, structures where the offshore company is being held through a foreign trust or foundation do not fall within the ambit of South African CFC rule. The profit of the foreign company therefore falls outside of the South African tax net.

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