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In the 2012 Budget Review it was stated that a specific carve
out will be created for foreign funds which have active South
African investment managers who provide guidance regarding African
assets of such funds. It was stated that the investment
managers' presence in South Africa may trigger various tax
risks. In particular South African investment managers may cause
the effective management of the foreign fund to be in South Africa,
resulting in the foreign fund being brought into the South African
tax net and being subject to South African tax on a world-wide
basis. This is because South Africa taxes
"residents" on their world-wide income, whereas
non-residents are taxed only on income sourced in South Africa or
deemed to be from a source in South Africa.
A South African resident is defined in the Income Tax Act No 58
of 1962 ("Income Tax Act") as a person (other than a
natural person) which is incorporated, established or formed in the
Republic or which has its place of "effective
management" in the Republic, but does not include any
person who is deemed to be exclusively a resident of another
country for purposes of the application of any Double Tax Agreement
entered into by South Africa.
Therefore if a foreign fund is effectively managed in South
Africa as a result of the activities of the South African
investment manager, it would be regarded as being a resident for
income tax and as such, be subject to South African tax on its
world-wide income.
In order to mitigate this tax risk, the South African investment
manager's ability to make decisions may have been limited,
undermining the very purpose of utilising a South African
investment manager. Alternatively the South African investment
manager may have been forced to relocate abroad.
The draft Taxation Laws Amendment Bill, 2012 ("TLAB")
which was released for comment on 5 July 2012 has proposed
suggested amendments to the tax legislation to deal with the
above.
In particular, National Treasury has attempted to address the
issue of subjecting foreign funds to tax in South Africa as a
result of the activities of a South African investment manager, by
proposing amendments to the definition of a "resident" in
section 1 of the Income Tax Act.
In particular, the TLAB provides for a specific carve-out from
the effective management test for foreign investment funds. In
terms of the proposed amendment, the "effective
management" test in relation to the "foreign investment
entity" will not take into account financial services (as
defined in the Financial Advisory and Intermediary Services, Act
2002 (Act No. 37 of 2002) ("FAIS Act")) or any incidental
services in respect of an exempt financial product provided by a
company that qualifies as a licensed "financial services
provider" under the FAIS Act (i.e. a South African investment
manager). The foreign fund must, however, meet the following
requirements:
The fund must be incorporated, formed or otherwise established
in a foreign country;
The fund must operate in a comparable fashion to a local
collective investment scheme and must carry on its business outside
of South Africa;
The sole assets of the fund must consist of cash or listed
financial instruments (or financial instruments determined with
reference to listed financial instruments, such as derivatives or
rights to receive such assets);
The fund must have no employees, directors or trustees that are
engaged in the management of that company or trust on a full time
basis; and
South African residents may not directly or indirectly own more
than 10 per cent of the value of the shares, units or participatory
interests in the fund.
Although the explanatory memorandum to the TLAB states that the
purpose of this carve-out is to remove the potential for South
African worldwide taxation due to the full and free use of a South
Africa investment manager, in our view, this amendment does not
address the South African tax implications which arise as a result
of receiving South African sourced income.
As mentioned above, non-residents are only subject to tax in
South Africa on income that is sourced or deemed to be sourced in
South Africa. Therefore even if the foreign fund does not qualify
as a resident as defined, on the basis that it is not effectively
managed in South Africa, any income which it derives as a
non-resident may still be subject to tax in South Africa if the
source of such income is located in South Africa. As such, the
income of the foreign fund may be brought into the South African
tax net if the source thereof by virtue of the activities of the
investment manager is located in South Africa.
It is proposed that the amendment will come into operation on 1
January 2013 and apply in respect of years of assessment commencing
on or after that date.
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