Curbing the Use of Foreign Trusts to Bypass Controlled Foreign Company Rules: A Critical View of Recent Taxation Amendments
Author: Reinhard Rudd
Affiliations: B Com (Hons) M Com CA (SA), Senior Lecturer, School of Accountancy, University of the Witwatersrand
Source: Stellenbosch Law Review, Volume 31 Issue 3, 2020, p. 505 – 525
The legislature set out to close the gap in the tax treatment of schemes where a foreign trust is interposed between a South African resident and a foreign company. With regards to South African resident companies, this was done by amending the definition of a Controlled Foreign Company (“CFC”) to include any company of which the financial results would be included in the consolidated financial statements of the resident company in terms of IFRS 10. As far as resident natural persons are concerned, after failing to include such companies in the definition of a CFC, amendments were made to the provisions relating to the taxation of trusts. In this regard, section 7(8)(aA) and section 25B(2B) of the Income Tax Act were introduced, both of which require the foreign dividend exemption in terms of section 10B(2)(a) to be ignored when determining whether an amount would have constituted income had the relevant person been a resident. In this article, a number of concerns regarding these amendments are discussed. First, consideration is given as to whether the amendments to section 7(8) were needed at all considering court decisions regarding the interpretation of the provisions of section 7. Next, consideration is given to whether the deemed net income inclusion which would result from determining the income of the foreign trust as if it were a resident could trigger the attribution rule in terms of section 7(8). The question is also raised why the legislature only required section 10B(2)(a) to be ignored in determining whether an amount would have constituted income had the person been a resident and not also section 10B(2)(c). Lastly, consideration is given to whether the amount included in the income of a beneficiary of a foreign trust in terms of section 25B(2A) retains its nature as income or whether it becomes capital in nature, which would result in excessively harsh treatment of the amount in the hands of the resident beneficiary.