South African investment into Africa
Ide Louw The 2011 Taxation Laws Amendment Act introduced a new use it or lose it tax credit system in respect of foreign taxes imposed on South African sourced income (in the form of services). Effectively, if a South African holding company renders management services (from South Africa) to a foreign subsidiary, and that country imposes a withholding tax on the payment of the management fees, the South African holding company may claim a tax credit of that foreign taxes (subject to a limitation) opposed to a deduction under the current section 6quat system.
Active South African management of the foreign subsidiary may create a tax residency issue in South Africa, if it is seen to be effectively managed here. This may create a potential dual residency problem, especially if the day to day operations of the subsidiary is performed at the subsidiary level. Generally, if a double tax treaty exists, the dual residency may be resolved in terms of the so-called tie breaker test. This may lead to further problems, if the tie breaker test is effective management, and this is interpreted differently in the 2 countries that are parties to the double tax treaty.
It is proposed that the dual-residence tax status be removed if the tax of the foreign country is roughly on par with otherwise applicable South African tax. One can assume that the proposal refers to the South African corporate tax rate of 28%. African countries with a
A concern exists a South African investor funding its foreign operations by mean of interest free funding may be subject to a transfer pricing adjustment. It is proposed that the concept of quasi equity be recognised in the instance where the purpose is to provide for a more flexible use of capital, not to avoid South African tax.
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