Global

Details

  • Service: Tax, Global Transfer Pricing Services, International Tax
  • Type: Regulatory update
  • Date: 10/30/2013

South Africa - Transfer-pricing relief for loans with equity-like features 

October 30:  South Africa’s Taxation Laws Amendment Bill, 2013 (proposed 24 October 2013, following the draft bill of 4 July 2013) would offer transfer pricing relief for loans with equity-like features—i.e., loans extended by a South African company to its non-resident subsidiary, provided certain requirements are met.

Generally, the transfer pricing provisions apply to any loan granted by a South African tax resident to a foreign related-party entity, regardless of the substantive character of the loan. However, South African companies often capitalise their offshore operations with loans that have equity-like characteristics—e.g., the loan bears very little or no yield and is deeply subordinated with long-term or indefinite maturity dates.


The bill proposes to extend transfer pricing relief to outbound loans that clearly resemble equity. It is intended that a debt owed by a foreign company to a South African company would not be subject to South African transfer pricing provisions provided that certain requirements are met:


  • The creditor must be a South African tax resident company.
  • The creditor (or any company that forms part of the same group of companies as the 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.
  • The full redemption of the loan is legally conditional upon the solvency of the foreign company.

A loan that meets these criteria, in substance, is 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 would not be subject to the South African transfer pricing provisions.


The proposed amendment would apply in respect of years of assessment commencing on or after 1 April 2014.


Read an October 2013 report prepared by the KPMG member firm in South Africa: Extended Transfer Pricing Relief



Contact a tax professional with KPMG's Global Transfer Pricing Services.




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