Section 9D is an anti-avoidance section in the Income Tax Act aimed at countering schemes whereby taxpayers avoid South African tax on foreign income by routing income through an off-shore company. Where South African residents own an interest of more than 50 percent in the profits or capital of an off-shore company or by means of voting rights, the off-shore company will be a controlled foreign company (CFC) and the South African resident will be taxed on their proportionate share of tainted income. Tainted income consists of passive income and includes interest, dividends, royalties, rentals annuities, exchange differences, insurance premiums, similar income and associated capital gains. The attribution rules are however subject to various exemptions which are aimed at ensuring that transactions that do not pose a risk to the tax base are not unfairly taxed.
The CFC regime has been in place for 10 years and although the regime has closed many obvious loopholes, there are still issues with the legislation. The rules are considered to be overly complex and create uncertainties. For this reason, it has been proposed in the draft Taxation Laws Amendment Bill, 2011 that the CFC legislation be revised.
In this regard, section 9D will be overhauled to simplify the core calculations associated with the tainted income calculations. The rules relating to passive income will be split into separate categories setting out different tax treatment for the various categories. The exemption regulations will also be amended. In addition, the CFC rules will be adjusted to treat different cells of an off-shore company as a separate CFC for tax purposes.
Further to the changes to be effected in section 9D the following other amendments will be made:
- The domestic corporate roll-over provisions will be extended to allow roll-over relief to apply to the restructuring of off-shore companies that are CFCs.
- The proposed definition of an affected transaction for transfer pricing purposes in section 31 of the Income Tax Act will be amended to include transactions between a non-resident and a CFC in relation to any resident where those persons are connected parties.
The aim of the amendments is to provide simplicity and certainty with regard to determining amounts attributable to the South African resident. Furthermore, the proposed amended rules provide improved measures to guard against the possible erosion of the South African tax base.