Tax on for­eign fund man­aged in SA

Amend­ment does not ad­dress lo­cal tax im­pli­ca­tions which arise as a re­sult of re­ceiv­ing Sa-sourced in­come

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - LAV­INA DAYA

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.

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