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Supreme Court Judgment in DTA Case

South Africa

Judgment was delivered by acting Judge of Appeal, Boruchowitz AJA in the Supreme Court of Appeal between the Commissioner for the South African Revenue Service and Tradehold Limited on 8 May 2012. Taxand South Africa discusses this unprecedented case and looks at how it is likely to change capital gains tax treatment in South Africa.

The respondent, Tradehold, is a South African incorporated investment holding company which is listed on the JSE Limited. Briefly, the facts were that, on 2 July 2002, at a meeting of Tradehold's board of directors in Luxembourg, it was resolved that all further board meetings of the company would be held in Luxembourg. This had the effect that, as from 2 July 2002, Tradehold became effectively managed in Luxembourg. Tradehold, however, remained a resident of South Africa for tax purposes, notwithstanding the relocation of its effective management to Luxembourg, by reason of the definition of the term "resident" in section 1 of the Income Tax Act No. 58 of 1962 as it applied at that time, due to its incorporation in South Africa. This definition was amended, with effect from 26 February 2003, resulting in Tradehold ceasing to be a "resident" as envisaged in the definition in section 1 of the Act.

Taxand South Africa provides a more detailed account of the full case

Taxand's Take

This judgment prompted the Minister of Finance to issue a statement in respect of the judgment on 9 May 2012. The Minister states therein that the capital gains tax system has, since its inception in 2001, been based on the principle that South African residents were taxed on all of their assets, irrespective of where these assets were located. Therefore, whilst it would be unfair to tax a resident's capital gains accumulated before the taxpayer became a resident, equally, not taxing capital gains accumulated while a taxpayer was a resident would be unfair. He further states that the SCA judgment that a double taxation agreement applied to a deemed disposal and thus did not allow for an exit charge, appears to disturb the balance that has been achieved. The Minister concludes by stating that National Treasury is studying the judgment and that, if necessary, it would propose amendments to the tax laws to clarify that a DTA does not apply to exempt capital gains upon a person ceasing to qualify as a "resident". To maintain stability in the tax system, the Minister confirms that he would propose that any amendment take effect from 8 May 2012.

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Peter Dachs

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Nikki Smit
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Taxand's Take Author