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South Africa Loses CGT Exit Charge Appeal

by Lorys Charalambous, Tax-News.com, Cyprus

11 May 2012


The South African Revenue Service (SARS) has lost its Supreme Court appeal on a case concerning the capital gains tax (CGT) that it said should be applied on a deemed disposal when a taxpayer becomes non-resident.

On May 8, 2012, the Supreme Court of Appeal gave its judgment in the matter of the SARS Commissioner v Tradehold Ltd. That case arose in 2003 after SARS raised an additional assessment of just over ZAR405m (USD50.6m) based on a taxable capital gain that arose from the deemed disposal of shares in its wholly-owned subsidiary, Tradegro Holdings, by Tradehold, a Johannesburg Stock Exchange-listed company, when it moved its place of effective management to Luxembourg from South Africa.

Tradehold has successfully argued on appeal that the assessment of the deemed disposal arose when it was already considered to be a Luxembourg resident, and that, therefore, any CGT payable should have been levied in Luxembourg, not South Africa, under the terms of the South Africa-Luxembourg double taxation agreement (DTA).

The relevant article of the DTA provides that “gains from the alienation of any property … shall be taxable only in the contracting state of which the alienator is a resident.”

The South African Minister of Finance Pravin Gordhan noted the judgement, but explained that “the CGT system has, since its inception in 2001, been based on the principle that South African residents are taxed on all of their assets, irrespective of where these assets are located. Another principle has been that it would be unfair to tax a resident’s capital gains accumulated before the taxpayer became a resident. Equally, not taxing capital gains accumulated while a taxpayer was a resident would be unfair.”

“Taxpayers are therefore,” he added, “deemed to have sold their assets, except those with a particularly close connection to South Africa, at market value on the day before the change in their residence. The tax payable on this basis is known internationally as an exit charge or exit tax. It is encountered in varying forms in, for example, Australia, Canada, the US, the UK and a number of other European jurisdictions.”

He concluded that the Supreme Court of Appeal’s judgment that a DTA applied to a deemed disposal, and thus did not allow for an exit charge, “appears to disturb the balance that has been achieved.”

The National Treasury and SARS were said to be studying the judgment. Gordhan explained that, if necessary, amendments will be proposed “to further clarify that a DTA does not apply to deemed or actual disposals while a taxpayer is resident in South Africa. Measures such as the immediate termination of a taxpayer’s year of assessment on the day before becoming non-resident, as is the practice in Canada, are being explored.”

He also stated that, “in order to maintain stability in the tax system, (he) will propose that any amendment should take effect from May 8, 2012.

TAGS: court | capital gains tax (CGT) | South Africa | tax | investment | double tax agreement (DTA) | law | Luxembourg | agreements | exit tax | Africa

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