n SA Mercantile Law Journal = SA Tydskrif vir Handelsreg - The challenges of taxing investments in offshore hybrid entities : a South African perspective

Volume 21, Issue 1
  • ISSN : 1015-0099
  • E-ISSN: 1996-2185



Tax avoidance (by contrast with tax evasion) involves using perfectly legal methods of arranging one's affairs to pay less tax. This is done by utilising loopholes in tax laws and exploiting them within legal parameters. So, for instance, taxpayers often exploit the fact that there are tax variations across international borders and international tax systems that can be used avoid taxes. This article deals with the resulting tax avoidance when taxpayers invest in entities that two or more countries classify differently for tax purposes. These entities, often referred to as 'hybrid entities', are basically legal relationships in which the entity is treated as a taxable entity (eg, a corporation) in one jurisdiction and as a transparent (non-taxable) entity in another. In a treaty context, the different tax treatment of these entities may be used to take advantage of treaty benefits and even to avoid taxes. Hybrid entities usually take the form of trusts or partnership structures. This article covers only partnership structures.

In South Africa, the topic of the taxation of hybrid entities has received little attention, and there is no legislation in place dealing with the taxation of these entities. However, a number of South African residents have been known to invest in offshore hybrid entities whereby it is possible to avoid South African taxes on their income. This article discusses the difficulties of taxing partnership hybrid structures and the methods of manipulating these difficulties to avoid taxes. The challenges of taxing these entities in South Africa are also discussed, and recommendations are provided on how the ensuing tax avoidance can be prevented.

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