Commissioner for the South African Revenue Service v Tradehold Ltd (132/11)  ZASCA 61
21 May 2012
Posted by: Stiaan Klue
The issue before the Supreme Court of Appeal was an appeal by the Commissioner for the South African Revenue Service from a decision delivered by the Tax Court in Cape Town.
The respondent, Tradehold Limited ("Tradehold"), successfully appealed against an additional assessment raised by the Commissioner based on a taxable capital gain which, according to the Commissioner, arose from a deemed disposal by Tradehold of its shares in Tradegro Holdings Limited, in terms of para 12(1) of the Eighth Schedule to the Income Tax Act 58 of 1962 (the Act).
On 2 July 2002, at a meeting of Tradehold’s board of directors in Luxembourg, it was resolved that all further board meetings would be held in that country. This had the effect that, as from 2 July 2002, Tradehold became effectively managed in Luxembourg. It nevertheless remained a ‘resident’ in the Republic notwithstanding the relocation of the seat of its effective management to Luxembourg by reason of the definition, at that time, of the term ‘resident’ in s 2 of the Act.This status changed with effect from 26 February 2003, when the definition was amended and Tradehold ceased to be a resident of the Republic.
Relying on the provisions of para 12 of the Eighth Schedule to the Act, the Commissioner contended that when the respondent relocated its seat of effective management to Luxembourg on 2 July 2002, or when it ceased to be a resident of the Republic on 26 February 2003, it was deemed to have disposed of its only relevant asset, namely its 100 per cent shareholding in Tradegro Holdings, resulting in a capital gain being realised in the 2003 year of assessment in an amount of R405 039 083. This tax is colloquially referred to as an ‘exit tax’.
Acting Judge Boruchowitz upheld the Tax Court's position and confirmed that from 2 July 2002, when Tradehold relocated its seat of effective management to Luxembourg, the provisions of the DTA
became applicable and that country had exclusive taxing rights in respect of all of Tradehold’s capital gains.
The Commissioner therefore incorrectly included a taxable gain resulting from the deemed disposal of Tradehold’s investment in its income for the 2003 year of assessment and dismissed the application with cost.