We have recently come across a number of clients that are unsure of Controlled Foreign Companies (CFS’s) as well as the impact this might have on their tax situation. Perhaps time for a recap:
Where companies are incorporated offshore, clients often assume this automatically means that the profits/loss from that company will not be taxed in South Africa. This is not true, and it’s very important to review any investments in offshore companies you might have to make sure if you do in fact need to declare additional incomes in your tax return.
What is a CFC?
In the instance of a South African resident holding more than 50% interest in a foreign company (this can be held directly via shares, or only via rights to participate in voting) this company is considered as a CFC.
A couple of things to take note of:
1. It does not have to be one person holding the 50%, as long as SA residents together hold more than 50% of the interest;
2. If a person holds less than 5% in listed entity, this can be excluded;
3. All headquarter companies are excluded from the above.
What do I need to include in my tax return?
You would have to include a notional amount of net income of the entity – thus:
If the company has a net income before tax of R 100 000, and you own 30% (20% is held by other South African residents) – you would include R 30 000 in your tax return as income from CFC’s.
You may claim back rebates on foreign taxes already paid, but this is evaluated on a case by case basis.
What if the business is set up offshore but managed in South Africa?:
If the CFC is managed in South Africa, it is considered a South African tax resident;
A few clients have in the past set up businesses offshore, and we have seen scenarios where the business is considered to be effectively managed in South Africa;
For your CFC to not be effectively managed in South Africa you have to prove the company has a Foreign Business Establishment (amongst other things), however the Foreign Business Establishment rule is where most people get stuck.
What is a Foreign Business Establishment?
This is a FIXED PLACE OF BUSINESS located in a country other than
South Africa, which is used AND will continue to be used for the
carrying on of business of that CFC, for a period no less than one year,
a) The business is conducted through one of more office, shop, factory, warehouse or other structure;
b) The fixed place of business is suitably staffed with on-site managerial and operational employees of that CFC, who conduct the primary operations of the business;
c) The fixed place of business is suitable equipped and has suitable facilities;
d) AND, is located outside of South Africa for purposes OTHER than the reduction in tax.
Remember, this entire section of the income tax act is aimed at Anti-Avoidance. If you feel you are setting up a scheme to avoid tax, you probably are, and you probably are not allowed to! Make sure you stay within the law, and always consult with an expert prior to making rush decisions on setting up companies in foreign areas.
Please note this is only a simple interpretation of Section 9D for conversation purposes and should not be considered as tax advice in any way. If you require advice on structures or even just want to chat, please give me a shout.