Tax consequences on disposal of shares held by a CFC

• Jurisdiction: South Africa
• Author: Bheki Sibiya,Roy Naude
• DOI: 10.10520/EJC181954
• Published date: 01 December 2015
• Date: 01 December 2015
• Pages: 13-23
• Published By: Siber Ink

13

© SIBER INK

Tax Consequences on Disposal

of Shares Held by a CFC

A ROAD MAP

ROY NAUDÉ1 • BHEKI SIBIYA2

ABSTRACT

Where a foreign company constitutes a controlled foreign company (‘CFC‘)

as defined in terms of section 9D(1) of the Income Tax Act 58 of 1962 (‘the

Act’), the ‘net income’ of the CFC must be included in the South African resi-

dent’s income in the proportion of such resident’s participation rights to the

total participation rights in the CFC. The net income of a CFC for a particular

foreign tax year is an amount that is equal to the taxable income of that CFC

that is determined with reference to the provisions of the Act and as if that

CFC is a South Africa taxpayer and a resident for specific sections of the Act.

The net income of a CFC shall be deemed to be nil in instances where the

CFC can be said to qualify for the high tax jurisdiction or the FBE exemptions.

Where a CFC qualifies for the high tax jurisdiction exemption, any amount

that arises from the disposal of shares by a CFC will not form part of the net

income of that CFC.

Where the amounts derived from the disposal of shares by the CFC are

evidenced to be attributable to a FBE of that CFC, then those amounts may be

ignored when determining the net income of that CFC subject to the specific

carve-out provisions contained in section 9D(9A) of the Act. The carve-out

provisions in section 9D(9A)(a) of the Act provide that, irrespective of the fact

that an amount can be said to be attributable to a FBE of that CFC, it must

nonetheless be included as part of the net income of that CFC where the

requirements in section 9D(9A)(a) of the Act are met. In particular, section

9D(9A)(a)(iii) of the Act provides that an amount that arises in respect of a

financial instrument will not qualify for the FBE exemption, unless the prin-

cipal trading activities of the FBE constitutes that of a bank, financial service

provider or insurer and do not constitute the activities of a treasury operation

or captive insurer.

In so far as an amount that arises in respect of the disposal of shares by a

CFC is not ignored when determining the net income of that CFC through

the application of the high tax jurisdiction or FBE exemptions (as a result of

the application of the carve-out provisions contained in section 9D(9A)(a) of

the Act) then it should be considered whether the participation exemption

from capital gains and losses in paragraph 64B(1) of the Eighth Schedule to

the Act could apply.

In its current format, paragraph 64B(1) of the Eighth Schedule to the Act

provides that a person must disregard any capital gains and losses, provided

that some very specific requirements are met. Section 117 of the 2015

1

Associate Director at KPMG.

2

Tax consultant at KPMG.