24 February 2016 Special Edition Tax and Exchange Control Alert

Adjustment for foreign group losses to be removed from the CFC high-tax exemption calculation

The controlled foreign company (CFC) provisions contained in s9D of the Income Tax Act were amended with effect from 1 January 2008 (applicable to foreign tax years of CFCs ending during years of assessment ending on or after that date). Provided that the ‘net income’ of a CFC be deemed nil if the total amount of tax payable to all spheres of government of any country other than South Africa by the CFC on its net income amounts to at least 75% of the amount of normal tax that would be payable in respect of any taxable income of the CFC had it been a resident for the relevant foreign tax year.

The objective of the amendment was to disregard CFC income if negligible South African tax was at stake once having taken South African tax rebates into consideration.

In calculating the hypothetical foreign tax of the CFC, foreign losses of the CFC or another foreign group company must be disregarded. In consequence, situations may arise where a CFC may qualify for the high-tax exemption in circumstances where no foreign tax is actually payable.

This anomalous outcome is compounded by the fact that in the absence of the high-tax exemption, resident shareholders of the CFC would not have been entitled to foreign tax rebates against their proportional entitlement to the CFC’s net income.

To redress the above, it is now proposed that the adjustment for foreign group losses be removed from the calculation of the high-tax exemption.

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