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Extending the application of controlled foreign company rules to foreign trusts and foundations

The Proposed Amendments to the Draft Taxation Laws Amendment Bill

 

NOTE: The following article is an extract from information circulated by Galbraith Rushby on 21 July 2017

 

In the third and final part of our summary on the much-anticipated Draft Taxation Laws Amendment Bill that was released on Wednesday 19 July, Galbraith Rushby discuss the last proposed amendment, as follows:

 

Extending the application of controlled foreign company rules to foreign trusts and foundations

 

This almost felt a bit like an afterthought with the Draft Bill, stuck on at the end of the explanatory memorandum. However, I think it probably has the potential to be pretty devastating. SARS has included a new section, section 25BC and amended section 9D to achieve maximum impact.

 

The amendments to section 9D probably would not affect you as it deals with international groups being consolidated in South Africa in terms of IFRS 10. This means that if you have a foreign company forming part of a group and that company should be consolidated for IFRS reporting purposes then that company will be viewed as a CFC for South African tax purposes.

 

The main concern is the new section added section 25BC. Here is the wording of the proposed amendment verbatim:

 

25BC. If—

  • any person that is a resident, other than a person that is a company, is a beneficiary in relation to a trust that is not a resident or a foreign foundation; and
  • that trust or foundation holds a participation right as defined in section 9D(1) in a foreign company and that company would have constituted a controlled foreign company as defined in that section had that trust or foundation been a resident,

 

any amount received by or accrued to or in favour of that person during any year of assessment from that trust or foundation by reason of that person being a beneficiary of that trust or foundation must be included in the income of that person.

 

What this means is that if a South African resident is a beneficiary of a foreign trust and that trusts owns a company and that company would have been considered a CFC had that trust not been in place then the distribution received from that trust would be deemed ordinary income in the hands of the resident beneficiary when distributed.

 

The effective date of this amendment is proposed to take effect from 1 January 2018 for tax years ending thereafter. For individuals, the 2017/18 tax year is therefore when this would take effect.

 

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