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South Africa: 2018 budget: international tax proposals

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The Minister of Finance presented the 2018 budget speech on February 21. The supporting documentation noted some potential amendments to the South African Income Tax Act which are of interest in a cross-border context.

CFC reforms on the horizon

Various proposed amendments to the controlled foreign company (CFC) legislation were published during 2017, in order to curb perceived abuse arising as a result of the utilisation of foreign discretionary trusts as intermediary vehicles to hold interests in foreign companies in order to circumvent the CFC provisions.

Among other proposals, the amendments sought to include within the definition of a CFC, a foreign company in which more than 50% of the 'participation rights' (being the rights attaching to a share) or voting rights are held by a foreign discretionary trust, if such trust has South African resident beneficiaries. In terms of the existing law, such a company would not fall within the definition of a CFC, as no 'participation rights' or voting rights could be ascribed to the beneficiaries of the trust holding the interest in the foreign company. The proposed amendments were not implemented following lobbying initiatives and public feedback, as they were considered to have far-reaching and unintended consequences.

It was announced in the 2018 budget speech that the proposed reforms were still being considered and it is likely that a revised framework will again be proposed in the coming months when draft amending legislation is published.

On a more positive note for taxpayers, an exemption from the CFC imputation rules exists if a CFC is subject to tax at an aggregate rate of foreign tax which is equal to at least 75% of the tax that would have been imposed had the CFC been tax resident in South Africa. It has been proposed that the 75% threshold be reduced in view of the fact that many countries (e.g. the UK and the US) have substantially reduced their headline corporate tax rates in recent years. No further details were provided.

Withholding tax on interest – clarifying provisions

A withholding tax on interest is levied on the payment of any interest to or for the benefit of a foreign person, if such interest arises from a source within South Africa. The relevant tax is imposed at a rate of 15% (subject to relief under applicable double tax agreements).

The withholding obligation rests with the person responsible for making the payment of the interest.

There is some uncertainty regarding the payment of interest to a South African discretionary trust, which then vests the amount in a non-resident beneficiary during the same year of assessment. The uncertainty relates to who is liable for the tax and also to who bears the obligation to withhold the tax.

It is proposed that provisions be introduced to cater for these circumstances.

VAT developments – provision of electronic services

During 2017, it was announced that the relevant regulations regarding the provision of foreign electronic services in South Africa would be broadened to include cloud computing and other online services for value added tax (VAT) purposes.

Updated draft regulations prescribing the relevant foreign electronic services are to be published for public comment.


Sean Gilmour (, Johannesburg

Webber Wentzel


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