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South Africa: Treaty shopping in a South African context


Peter Dachs

Shifting profits and other actions that could erode countries' tax bases have been topics of debate at various international fora and the Davis Tax Committee has been tasked with addressing the issues in a South African context. Treaty shopping is one of the issues considered by the OECD in its base erosion and profit shifting (BEPS) reports.

From a South African perspective, treaty shopping could apply in the context of, for example, a parent company with a South African subsidiary where the parent company has advanced interest-bearing loan funding to its subsidiary. However, because of the introduction of the new interest withholding tax, the parent company now looks to route its loan funding to its South African subsidiary through a company in an intermediate jurisdiction that has a more favourable double tax agreement with South Africa. This double tax agreement would then not allow South Africa to impose its interest withholding tax on interest paid by the South African subsidiary to the company in the intermediate jurisdiction.

South African tax law already provides several defences against treaty shopping. Important among these are the concepts of beneficial ownership and effective management as well as the use of South Africa's domestic anti-avoidance rules.

Take the example of the parent company looking to route its loan funding to its South African subsidiary through a company in an intermediate jurisdiction with a favourable double tax agreement with South Africa. If the company set up in the intermediate jurisdiction does not qualify as the beneficial owner of the interest received from the South African subsidiary then the terms of the relevant double tax agreement will simply not be applicable.

A further issue is whether the company in the intermediate jurisdiction is "effectively managed" in that jurisdiction. If it is simply a letterbox company with no substance then it is very likely that it will not be effectively managed there and South Africa can simply ignore the provisions of the relevant double tax agreement and impose its interest withholding tax on the payments made to that company.

South Africa also has anti-tax-avoidance provisions. In terms of these rules if the "sole or main purpose" of an arrangement is to obtain a tax benefit and certain abnormal features exist, the anti-tax-avoidance rules can be applied to disregard the transaction entered into by the parties.

Peter Dachs (

ENSafrica – Taxand Africa

Tel: +27 21 410 2500


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