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 provisions.
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.
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