South Africa historically determined the status of a company’s “residence” in part based on the company’s place of effective management.
A company that had its place of effective management in South Africa was deemed to be a resident of South Africa—and as such, the company was subject to tax in South Africa on its worldwide income (as opposed to being subject to tax in South Africa on its South African sourced income).
Changes to definition of “resident”
To eliminate the potential for double taxation, the definition of “resident” was amended to provide a further exclusion and relief from the effective management test in the case of “high taxed” controlled foreign companies (CFC).
Under this exclusion, a company is not treated as a resident in South Africa, even if it had its place of effective management in South Africa, if the company complies with certain requirements:
- The company was incorporated, established or formed in a country other than South Africa.
- The company had its place of effective management in South Africa.
- The company would constitute a CFC 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, if the company had been a resident for that foreign tax year).
When a company transferred its tax residency status by virtue of the place of effective management exemption, the company could potentially trigger an “exit charge” if it technically ceased to be a resident. This, however, was not the intended tax policy.
This situation is likely to cause confusion for companies that relied on the prior definition when determining the residency status of their CFCs.
Read a March 2014 report prepared by the KPMG member firm in South Africa: The repeal of the place of effective management exemption in the definition of resident