Some Foreign Entities Escape Tax In South Africa

by Lorys Charalambous, Tax-News.com, Cyprus

05 February 2002

Foreign entities in South Africa are exempt from local income tax only if the countries in which they generate income are on the designated country lists issued by the SA Revenue Service (SARS) last year. Countries such as Australia and Spain enjoy such tax concessions. SARS uses three criteria in determining whether a country should fall on the designated list: the country must have a tax system similar to SA, it must operate on a residence-based system of taxation and it must have implemented CGT. The list can evidently change: SARS has still not finalised the draft list for the current tax year and is unlikely to complete the list before the budget. Entities will continue to operate on the basis of the previous list.

Deloitte & Touche says that although some foreign entities fall outside the income tax net they will be subject to capital gains tax (CGT) in SA on gains and losses at a rate of 13.5%. However, there are exemptions which are available to controlled foreign entities. Deloitte & Touche says a controlled foreign entity is a company operating outside SA controlled by an SA resident or in which SA residents have voting rights. Such a foreign entity would qualify for an exemption if a gain was subject to tax in a designated country at a rate of 13.5% or more. It would also qualify if the gain was attributable to a business establishment unless the assets sold generated dividends, interest rentals, annuities or income of a similar nature. An entity would also be exempt if a gain is attributable to a sale of shares.

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