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Steps Taken To Establish Gateway Into Africa

South Africa

New changes concerning the definition of the term 'resident', as outlined in the Income Tax Act, have been proposed in the draft Taxation Laws Amendment Bill. The aim is to facilitate the Government's initiative to establish South Africa as the gateway into Africa by eliminating the potential triggering of a dual residence status for a foreign operating subsidiary. Taxand South Africa investigates the impact this will have on multinationals who are managed locally.

A foreign incorporated company may find itself having a dual residence status in cases where it is effectively managed from South Africa but incorporated in a foreign jurisdiction. The foreign company may be subject to double taxation and in some cases the corporate tax payable in the foreign jurisdiction may be higher than in South Africa resulting in little or no additional revenue for the South African fiscus when foreign tax rebates are applied. To eliminate the potential double residency risk, the Bill proposes eliminating the "place of effective management" test in the definition of "resident" where a company:

  • Is incorporated, established or formed in a foreign country
  • Has a "foreign business establishment" as defined in section 9D(1)
  • Has its place of effective management in South Africa
  • Would, but for the company having its place of effective management in South Africa, be a controlled foreign company
  • The aggregate of all tax payable by the company to a government of any foreign country, in respect of any tax year
  • Is at least 75% of the amount of normal tax that would have been payable by that company, if it had been a resident of South Africa.

Discover more: The draft Taxation Laws Amendement Bill proposes new definition of 'resident'

Taxand's Take

The effect of this proposed change is that foreign companies which meet the requirements need not concern themselves with questions as to whether the South African management activities will trigger a basis for taxation in South Africa based on residency.

The proposed effective date for this change is 1 January 2013 and it will apply in respect of years of assessment commencing on or after that date.

Your Taxand contact for further queries is:
Bernard Du Plessis
T. +27 11 269 7891

Taxand's Take Author