Generally the transfer pricing provisions apply to any loan granted by a South African tax resident to a foreign connected party regardless of the substantive character of the loan. However, South African companies often capitalise their offshore operations with loans which resemble equity like characteristics in that the loan bears very little or no yield and are deeply subordinated with long-term or indefinite maturity dates.
The Bill proposes that transfer pricing relief should be extended to outbound loans which clearly resemble equity. It is intended that a debt owed by a foreign company to a South African company will not be subject to South African transfer pricing provisions provided that the following requirements are met:
- The creditor must be a South African tax resident company;
- That creditor or any company that forms part of the same group of companies as that creditor must hold at least 10% of the equity shares and voting rights directly or indirectly in the foreign company (i.e. the debtor);
- The loan must be perpetual or be non-redeemable within a period of 30 years from the date the loan is incurred; and
- The full redemption of the loan is legally conditional upon the solvency of the foreign company.
A loan that meets the above criteria is in substance exposed to the same economic risk as equity and thus poses little or no risk to the South African tax base if interest is under-charged and therefore will not be subject to the South African transfer pricing provisions.
The proposed amendment will apply in respect of years of assessment commencing on or after
1 April 2014.
Should you require assistance to ensure that new or existing loans have been adequately structured to comply with the proposed requirements and qualify for this relief, please contact on of our tax professionals.