1887

n Business Tax and Company Law Quarterly - Tax consequences on disposal of shares held by a CFC

Volume 6, Issue 4
  • ISSN : 2219-1585

Abstract

Where a foreign company constitutes a controlled foreign company ('CFC') as defined in terms of section 9D(1) of the Income Tax Act 58 of 1962 ('the Act'), the 'net income' of the CFC must be included in the South African resident'sincome in the proportion of such resident's participation rights to the total participation rights in the CFC. The net income of a CFC for a particular foreign tax year is an amount that is equal to the taxable income of that CFCthat is determined with reference to the provisions of the Act and as if that CFC is a South Africa taxpayer and a resident for specific sections of the Act. The net income of a CFC shall be deemed to be nil in instances where theCFC can be said to qualify for the high tax jurisdiction or the FBE exemptions. Where a CFC qualifies for the high tax jurisdiction exemption, any amount that arises from the disposal of shares by a CFC will not form part of the netincome of that CFC. Where the amounts derived from the disposal of shares by the CFC are evidenced to be attributable to a FBE of that CFC, then those amounts may be ignored when determining the net income of that CFC subject to the specific carve-out provisions contained in section 9D(9A) of the Act. The carve-out provisions in section 9D(9A)(a) of the Act provide that, irrespective of the fact that an amount can be said to be attributable to a FBE of that CFC, it must nonetheless be included as part of the net income of that CFC where the requirements in section 9D(9A)(a) of the Act are met. In particular, section9D(9A)(a)(iii) of the Act provides that an amount that arises in respect of a financial instrument will not qualify for the FBE exemption, unless the principaltrading activities of the FBE constitutes that of a bank, financial service provider or insurer and do not constitute the activities of a treasury operation or captive insurer.In so far as an amount that arises in respect of the disposal of shares by a CFC is not ignored when determining the net income of that CFC throughthe application of the high tax jurisdiction or FBE exemptions (as a result of the application of the carve-out provisions contained in section 9D(9A)(a) of the Act) then it should be considered whether the participation exemption from capital gains and losses in paragraph 64B(1) of the Eighth Schedule to the Act could apply.In its current format, paragraph 64B(1) of the Eighth Schedule to the Act provides that a person must disregard any capital gains and losses, provided that some very specific requirements are met. Section 117 of the 2015 Taxation Laws Amendment Bill provides for an additional requirement to be met, in order for a person to qualify for the participation exemption from capital gains and losses. Under the proposed amendment, the equity sharesare required to be disposed of to a person that is not a connected person in relation to the person disposing of the shares at the time of disposal. It followsthat where the acquirer of the shares can be said to be a connected person in relation to the disposing CFC, then the participation exemption in paragraph 64B of the Eighth Schedule to the Act will not find application.Where the foreign company that is being disposed of by the CFC also constitutes a CFC for purposes of section 9D of the Act, it must be established whether the foreign company that is being disposed will remain a CFCsubsequent to that disposal. In so far as that foreign company ceases to be a CFC after being disposed of, there will be a deemed disposal in the hands of the CFC being disposed of under the provisions of section 9H of the Act.However, where any capital gain or capital loss was disregarded under paragraph 64B(1) of the Eighth Schedule to the Act, there is no deemed disposaltriggered under the exit charge provisions of section 9H(3)(a)(ii) of the Act.

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/content/btclq/6/4/EJC181954
2015-12-01
2019-12-15

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