How Foreign is Your Business Establishment?

• Jurisdiction: South Africa
• Date: 01 June 2023
• Pages: 1-7
• Author: David Clegg
• Published date: 01 June 2023
• DOI: 10.10520/ejc-btclq_v14_n2_a2

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© Juta and Company (Pty) Ltd

How Foreign is Your Business

Establishment?

DAVID CLEGG*

ABSTRACT

The introduction of full residence-based taxation in 2001 brought with it the

concept of a ‘Controlled Foreign Company’ (CFC), whose prof‌i ts (calculated

on SA income tax principles) would be attributed to qualifying South African

shareholders (‘participants’) as taxable income. Exempted from attribution

were those prof‌i ts of a CFC which arose from a ‘business establishment’, a

term which was tightly def‌i ned and relied in part upon the establishment

displaying the hallmarks of a real operating business in the foreign country

and not having been set up for the purpose of tax avoidance.

Since those early days, the def‌i nition of what is now a ‘foreign business

establishment’ (FBE) has undergone detail change. Today, and central to the

def‌i nition, is the requirement that in order to qualify there must be a ‘f‌i xed

place of business’ located in the foreign country and ‘used for the carrying on

of the business of the CFC , … where that f‌i xed place of business is (inter alia)

… suitably staffed with on-site managerial and operational employees … who

conduct the primary operations of that business …’.

Over the years there has been much comment in the tax specialist press

dealing with the extent to which the operations of an FBE can be outsourced,

before it is no longer ‘suitably staffed’ for conducting its primary operations.

Silke and Income Tax South Africa took slightly different positions on this issue

and now the SCA has handed down judgement in Commissioner for the South

African Revenue Service v Coronation Investment Management SA (Pty) Ltd 2023

JDR 0295 (SCA), which sets out that court’s view on the point.

In Volume 14, Issue 1 of this journal Wally Horak criticised elements of this

judgment and in this edition David Clegg raises some additional concerns.

These are whether the court was correct in its identif‌i cation of the ‘primary

operations’, and in f‌i nding that a ‘primary operation’ cannot, in principle,

be outsourced. Clegg also addresses what he sees as a fundamental mistake

made by the taxpayer, in setting up his foreign business.

In order for a ‘foreign business establishment’ to exist for purposes of

section 9D of the Income Tax Act (‘the Act’),1 the CFC concerned must

ensure that the f‌i xed place of business in a foreign country through which

it carries on its business:

• is ‘suitably staffed with on-site managerial and operational employees

who conduct the primary operations of that business’;

• is ‘suitably equipped for conducting the primary operations of that

business’; and

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58 of 1962.

* David Clegg, Tax Consultant, Cape Town.