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Far-reaching proposed changes to the taxation of foreign trusts

Wednesday, 22 August 2018   (0 Comments)
Posted by: Authors: Jenny Klein and Sheryl Kunaka
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Authors: Jenny Klein and Sheryl Kunaka (ENSafrica)

The South African Draft Taxation Laws Amendment Bill, 2018 (the “Draft Bill”), which was published by the Minister of Finance on 16 July 2018, introduces many of the tax proposals announced in the 2018 Budget Review earlier this year. 

Consistent with the general trend of combatting perceived areas of tax avoidance, among the tax changes contained in the Draft Bill are proposed amendments to the provisions in the Income Tax Act, 1962 (the “Act”) dealing with foreign trusts that hold the majority of the shares in an underlying foreign company. The Explanatory Memorandum on the Draft Bill states that the proposed amendments are intended to close the loophole in the current tax legislation regarding the use of trusts to defer tax or recharacterise the nature of income.

The current position is that the controlled foreign company (“CFC”) rules in the Act do not apply to foreign companies that are held by interposed foreign trusts or other foreign foundations that have South African resident beneficiaries. 

In 2017, the CFC rules were extended to South African resident companies having an indirect interest in a foreign company through a foreign trust or foreign foundation whose financial results form part of the consolidated financial statements of a group of which the parent company is a South African resident.

The proposed amendments in the Draft Bill will expand the ambit of the donor attribution rules for South African resident donors of a foreign trust and the taxation of capital distributions from a foreign trust in the hand of the South African resident beneficiaries.

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