Enjoying the high tax exemption with your Controlled Foreign Company?
Enjoying the high tax exemption with your Controlled Foreign Company?
Currently, no tax is attributed back to the SA shareholder if their controlled foreign company (CFC) meets the high tax exemption.
In essence, if the CFC pays tax that is at least 67.5% of the tax that would have been paid had the CFC been a South African tax resident then the high tax exemption is met.
Ascertaining whether a CFC meets this exemption, accordingly, requires two tax calculations. The first in the foreign country applying local law, and the second applying South African law to the foreign company, which is a hypothetical calculation to ascertain if the high tax exemption will be met. Yes, it’s a bit complicated and administratively intensive.
At issue presently is that a particular well known foreign (tax friendly) jurisdiction has a regime which allows a “decent” rate of tax to be applied to its resident company (X), and then when X’s shareholder receives a dividend, the shareholder can claim a refund of the tax paid by X.
In effect the tax rate of X is reduced, albeit at X’s shareholder level.
The Budget suggests that if a shareholder receives such refund, that refund should be taken into account when determining whether X meets the high tax exemption.
In our view, that would be levelling the playing field, as such structures are often only put in place to gain a tax advantage.
In essence, if the CFC pays tax that is at least 67.5% of the tax that would have been paid had the CFC been a South African tax resident then the high tax exemption is met.
Ascertaining whether a CFC meets this exemption, accordingly, requires two tax calculations. The first in the foreign country applying local law, and the second applying South African law to the foreign company, which is a hypothetical calculation to ascertain if the high tax exemption will be met. Yes, it’s a bit complicated and administratively intensive.
At issue presently is that a particular well known foreign (tax friendly) jurisdiction has a regime which allows a “decent” rate of tax to be applied to its resident company (X), and then when X’s shareholder receives a dividend, the shareholder can claim a refund of the tax paid by X.
In effect the tax rate of X is reduced, albeit at X’s shareholder level.
The Budget suggests that if a shareholder receives such refund, that refund should be taken into account when determining whether X meets the high tax exemption.
In our view, that would be levelling the playing field, as such structures are often only put in place to gain a tax advantage.