Significant changes will enter into force in South Africa in
2017 after parliament approved the annual tax amendments in
December 2016, some of which are discussed below.
Loans to trusts
To discourage avoidance of estate duty, the annual interest
foregone on certain loans to trusts will, subject to certain
exemptions, be treated as a donation made on the last day of
the trust's tax year. This will apply after March 1 2017 to
both existing and future loans.
Typically, such loans are used to purchase growth assets and
cap the dutiable estate of the lender. The reference interest
rate for this rule is the official rate of interest (8% on
rand-denominated loans at present). Interest foregone below
this rate will attract donations tax at 20% per year.
Loans to non-resident trusts by residents will, however, be
excluded from the new deemed donation rule where such
arrangements are subject to the transfer pricing
Employee share scheme dividends
Generally, local dividends are subject to a 15% withholding
tax and foreign dividends are subject to an effective maximum
income tax rate of 15%, whereas employee remuneration is
subject to income tax of up to 41%.
Consequently, various anti-avoidance rules already exist to
prevent the conversion of employee remuneration into dividends,
typically via share schemes. These anti-avoidance rules will be
extended further in 2017, with dividends received or accrued
after March 1 2017 by or to employees in respect of certain
equity instruments being taxed in full where such dividends
arise from, or constitute, a share repurchase or redemption, or
amounts derived on a company winding-up.
CFC group losses
South Africa imposes a sophisticated controlled foreign
company (CFC) regime, subject to certain exemptions.
The so-called high tax exemption (HTE) applies to shield all
income of the CFC from imputation to South Africa where the
total foreign tax payable by the CFC is at least 75% of the
notional South African tax that would have been due had the CFC
been a South African tax resident.
The HTE foreign tax calculation requires losses other than
the CFC's active year losses, including group losses, to be
disregarded. The use by the CFC of such losses is effectively
treated as foreign tax paid.
In this regard, it is important to note that South Africa
does not operate a consolidated or group tax regime, but
imposes corporate tax per entity.
Under the 2016 amendments, the HTE will be changed to delete
the allowance of group losses so that where a CFC pays lower
taxes in its jurisdiction as a result of group relief, only
cash tax payable will be counted as foreign tax payable by the
CFC. This amendment will proceed despite vociferous objections
from practitioners and industry.
Consequently, a CFC that makes use of group loss relief in a
foreign tax year commencing on or after March 1 2017 is
extremely unlikely to qualify for the HTE, even though the tax
rate in the foreign country may be similar to, or higher than,
the tax rate in South Africa.
A CFC will still be able to disregard its own losses for
purposes of the foreign tax calculation provided that such
losses arose subsequent to the CFC becoming a CFC.
Dan Foster (email@example.com)
Tel: +27 11 530 5652