Case Notes: The exit tax consequences of the migration of companies from South Africa: Commissioner for the South African Revenue Service v Tradehold Ltd
| Jurisdiction | South Africa |
| Author | Liezel G Classen |
| Date | 25 May 2019 |
| Pages | 387-403 |
| Published date | 25 May 2019 |
THE EXIT TAX CONSEQUENCES OF THE
MIGRATION OF COMPANIES FROM SOUTH
AFRICA: COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE SERVICE v
TRADEHOLD LTD
LIEZEL G CLASSEN
Department of Mercantile Law, University of South Africa
I INTRODUCTION
The recent emergence of global markets, e-commerce and cross-border
corporate structures has caused many companies to revise their strate-
gies to enhance trade. A strong international presence and a multina-
tional structure have become essential to achieving commercial success
and worthwhile profit margins, and to attracting suitable investors. In
order to improve competition and create an international profile,
company migration to other tax jurisdictions is necessary and can be
achieved with relative administrative ease by South African companies.
Yet the migration of taxpayer companies may adversely affect the tax
base in South Africa. Income tax is levied on a residence basis in South
Africa. Consequently, the loss of South African taxpaying resident
companies will usually equate to a loss in tax revenue. The residence of a
company is normally changed by moving the place of effective manage-
ment of a company to a new tax jurisdiction. Before this migration from
South Africa, a final capital gains tax liability arises in this country.
When a taxpayer company changes its residence, it will be deemed
to have disposed of all its assets at market value on the day prior to
departure and deemed to have reacquired the same assets immediately at
the same value. If this deemed disposal results in a gain, a final capital
gains tax (CGT) liability will arise. This liability is also known in
international circles as an exit tax, departure tax, or exit charge.
This deemed disposal was provided for in paragraphs 12(1) and
12(2)(a) read with paragraph 13(1)(g)(i) of the Eighth Schedule to the
Income Tax Act 58 of 1962 for all deemed disposals that occurred before
1 April 2012. After 1 April 2012, the new section 9H (as amended by the
Taxation Laws Amendment Act 22 of 2012) governs deemed disposals
upon emigration (see section 26(1) of the Taxation Laws Amendment
387
(2013) 25 SA Merc LJ 387
© Juta and Company (Pty) Ltd
Act 24 of 2011, which inserted section 9H into the Income Tax Act and
deleted the general exit tax provision from the previous paragraph
12(2)(a) of the Eighth Schedule to the Income Tax Act; see also
Madeleine Stiglingh et al Silke: South African Income Tax 2013 2013
ed (2012) 843; Phillip Haupt Notes on South African Income Tax 31 ed
(2012) 840–1; Lynette Olivier & Michael Honiball International Tax: A
South African Perspective 5 ed (2011) 43–4, 59;APdeKoker&RC
Williams Silke on South African Income Tax 2012 Service 47 (December
2012) vol 3 para 24.45).
In the recent decision Commissioner for the South African Revenue
Service v Tradehold Ltd [2012] 3 All SA 15 (SCA) (Tradehold), delivered
on 8 May 2012, the controversial exit tax provisions were considered and
found not to apply to the change of residence of a South African
company in certain circumstances. This note will critically analyse the
Tradehold decision with reference to three issues: the application of
the phrase ‘place of effective management’ as a requirement for the
residence of a company; the timing of the event that gave rise to possible
CGT liability; and the question whether the provisions of a double tax
agreement should be given preference above domestic legislation.
Finally, the general exit tax provisions have recently been amended in
reaction to Tradehold: accordingly, the Taxation Laws Amendment Act
22 of 2012, promulgated on 1 February 2013, with retrospective effect to
8 May 2012, will be analysed. A few additional observations will be made
and the impact of the Tradehold decision illustrated. The scope of this
note will be limited to the general CGT deemed disposal rule as it was
applicable in Tradehold. The note will not include a detailed analysis of
the previous and new deemed dividend provisions or the exit tax
provisions relating to controlled foreign companies that cease to be
controlled by South African residents or the changing to the new
headquarter company regime by resident companies.
II THE FACTS OF TRADEHOLD
The respondent, Tradehold Ltd (‘Tradehold’), was an investment
company incorporated in South Africa with its registered office in
Parow. Its main asset was its 100 per cent shareholding in Tradegro
Holdings Ltd. Tradegro held all the shares in Tradegro Limited, a
company incorporated in Guernsey. This Guernsey subsidiary owned 65
per cent of the issued share capital of Brown & Jackson plc, which was
based in the United Kingdom (at 17c–f).
During the 2002–2003 year of assessment, the board of directors of
Tradehold decided to hold all future board meetings in Luxembourg.
(2013) 25 SA MERC LJ388
© Juta and Company (Pty) Ltd
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