A resident is defined in section 1 of the Income Tax Act No.
58 of 1962 ("the Act"). The definition includes a
place of effective management test as one of the tests to determine
the residence of a company.
In terms of the definition a company that has its place of
effective management in South Africa will be a resident in South
Africa. The effect thereof would be that the company would be
subject to tax in South Africa on its worldwide income as opposed
to being subject to tax in South Africa on its South African
In an effort to eliminate the potential for double taxation, the
definition of "resident" was amended to include a further
exclusion from the definition, providing a relief from the
effective management test in the case of high taxed controlled
foreign companies ("CFC"). The Tax Laws Amendment Act No.
22 of 2012 ("TLA Act 2012") introducing the amendment was
published on the 1 February 2013 and the amendment became effective
retrospectively for years of assessment commencing on or after 1
January 2013. According to this exclusion a company would not be
treated as a resident in South Africa, even if it had its place of
effective management in South Africa, if the company complied with
the requirements listed below:
The company was incorporated, established or formed in a country
other than the Republic;
The company had its place of effective management in the
The company would constitute a controlled foreign company even
if it was not effectively managed in South Africa; and
The company was subject to a high level of tax during the
relevant year of assessment i.e. at least 75% of the normal tax
that would have been payable in respect of its taxable income,
should that company had been a resident for that foreign tax
In a situation where a company shifted its tax residency status
as of 1 January 2013 by virtue of the place of effective management
exemption, that company could potentially trigger an exit charge if
it technically ceased to be a resident. Since this was not the
intended tax policy, the exit charge was accordingly switched off
in terms of section 9H(6)(b), for companies that ceased to be
resident by reason of the introduction of this concession in the
"resident" definition. It is however important to note
that this concession has been deleted from the Act, by the Taxation
Laws Amendment Act No.31 of 2013 (12 December 2013) with
retrospective effect from the 1 January 2013.
The above situation is likely to cause confusion for companies
that relied on the dated definition when determining the residency
status of their CFCs. In this regard we strongly urge taxpayers who
determined their residency status based on the effective management
exemption from 1 February 2013 (introduction of the exemption by
the TLA Act 2012) until 12 December 2013 (deletion of the exemption
by the TLA Act 2013) to seek advice in order to obtain more clarity
on their tax treatment.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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