Editorial

• Author: Michael Rudnicki Rudnicki
• DOI: 10.10520/ejc-btclq_v13_n3_a1
• Published date: 01 September 2022
• Date: 01 September 2022
• Pages: v-vi

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Editorial

MICHAEL RUDNICKI

The f‌irst article in this issue deals with a cross-border-related tax provision

of the Income Tax Act of 1962, namely section 9I. This section provides

relief for so-called ‘headquarter companies’ in respect of dividends tax,

controlled foreign company rules and from the transfer pricing and thin

capitalisation rules. In addition, paragraph 64B of the Eighth Schedule to

the Act provides for a headquarter company to enjoy the participation

exemption from capital gains tax in respect of the disposal of it shares in a

foreign company.

The core of the article is the so-called 80% cost rule. The section provides

that at the end of the year of assessment and of all previous years of assess-

ment, 80% or more of the cost of the total assets must be attributable to

particular assets, such as equity shares, for example. The article considers

the interpretation given to this requirement in the SARS Interpretation

Note 87 (issue 3) which proposes that the rule must be strictly applied at

the end of the year of assessment. The article considers the correctness of

the interpretation by SARS by applying a purposive interpretation citing

leading cases decided in recent years. The counter-argument proposed by

the author is that it is not required that the shares in the foreign company

continue to be held, as long as 80% or more of the cost of the total cost of

the company during that year of assessment was attributable to its equity

shares in a foreign company.

The author considers that the arguments on both sides are evenly

balanced, but his view is that the narrower interpretation of the require-

ment would probably prevail if the matter were to proceed to court.

* * *

The second article deals with the deductibility of expenditure incurred by

holding companies of groups of companies, particularly where expendi-

ture such as interest exceeds interest income. The deductibility of expendi-

ture, including interest, must meet the carrying on of trade test. The article

considers case law dealing with the activities of so-called moneylenders

particular to the deductibility of losses and whether or not the losses are

of a capital nature. But it is submitted and evidenced in later case law,

that these activities serve as guidelines in addressing the ‘trade’ test. The

salient features of these guidelines are: the level of activity of the taxpayer,

a system or plan that displays a degree of continuity and the derivation of

prof‌it.

The above features may be evidenced by the cost of treasury profes-

sionals employed by the company or within the group to manage the