Tax on foreign fund managed in SA
Amendment does not address local tax implications which arise as a result of receiving Sa-sourced income
IN THE 2012 Budget Review it was stated that a specific carve out will be created for foreign “funds” which have active SA investment managers who provide guidance regarding African assets of such funds.
It was stated that the investment managers’ presence in SA may trigger various tax risks. Local investment managers may cause the effective management of the foreign fund to be in SA, resulting in the foreign fund being brought into the local tax net and being subject to tax on a world-wide basis. This is because SA taxes “residents” on their world-wide income, whereas nonresidents are taxed only on income sourced in the country or deemed to be from a source in the country.
A South African resident is defined in the Income Tax Act No 58 of 1962 (“Income Tax Act”) as a person (other than a natural person) which is incorporated, established or formed in the Republic or which has its place of “effective management” in the Republic, but does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any double tax agreement entered into by SA.
Therefore if a foreign fund is effectively managed in SA as a result of the activities of the local investment manager, it would be regarded as being a resident for income tax and as such, be subject to local tax on its world-wide income. To mitigate this tax risk, the SA investment manager’s ability to make decisions may have been limited, undermining the very purpose of utilising a local investment manager. Alternatively the SA investment manager may have been forced to relocate abroad.
The draft Taxation Laws Amendment Bill (the Amendment Bill) 2012,the latest version of which was released on October 25 2012, , has suggested amendments to the tax legislation to deal with the above issue.
In particular, National Treasury has attempted to address the issue of subjecting foreign funds to tax in SA as a result of the activities of a local investment manager, by proposing amendments to the definition of a “resident” in section 1 of the Income Tax Act. The Amendment Bill provides for a specific carve-out from the effective management test for foreign investment funds.
In terms of the proposed amendment, the “effective management” test in relation to the foreign investment entity will not take into account financial services (as defined in the Financial Advisory and Intermediary Services Act 2002 (Act No. 37 of 2002) (FAIS Act)) or any incidental services in respect of an exempt financial product provided by a company that qualifies as a licensed “financial services provider” under the FAIS Act (that is, a South African investment manager). The foreign fund must, however, meet the following requirements:
The fund must be incorporated, formed or otherwise established in a foreign country;
The fund must operate in a comparable fashion to a local collective investment scheme and must carry on its business outside of SA;
The sole assets of the fund must consist of cash or listed financial instruments (or financial instruments determined with reference to listed financial instruments, such as derivatives or rights to receive such assets);
The fund must have no employees, directors or trustees that are engaged in the management of that company or trust on a full time basis; and
South African residents may not directly or indirectly own more than 10% of the value of the shares, units or participatory interests in the fund.
Although the explanatory memorandum to the Amendment Bill states that the purpose of this carve out is to remove the potential for SA worldwide taxation due to the full and free use of a local investment manager, this amendment does not address the local tax implications which arise as a result of receiving SA-sourced income.
Even if the foreign fund does not qualify as a resident as defined on the basis that it is not effectively managed in SA, any income which it derives as a non-resident may still be subject to tax if the source of such income is located locally. As such, the income of the foreign fund may be brought into the local tax net if the source thereof by virtue of the activities of the investment manager is located in SA.
It is proposed that the amendment will come into operation on January 1 next year and apply in respect of years of assessment commencing on or after that date.