Key Developments

• Steady CIT Rate: Maintaining the rate signals caution, preserving South Africa’s investment appeal despite revenue pressures.
• Global Minimum Tax Act (2024): Effective since 2024, this OECD-aligned reform mandates a 15% minimum effective tax rate for multinationals with revenues over €750 million. Top-up taxes to SARS start in 2026/27, projected to add R8 billion, curbing profit-shifting without altering the headline rate.
• Revenue Resilience: Despite a 28% mining sector drop in 2024/25, CIT collections exceeded forecasts, buoyed by financial and manufacturing profits. Projections show growth from R316.4 billion in 2024/25 to R391.1 billion by 2027/28, though volatility persists.

Technical Adjustments

The Budget proposes several CIT-related proposals to address loopholes, enhance clarity, and align with international norms. These include:

• Anti-Avoidance Enhancements: The government targets structures exploiting third-party backed shares, where dividends are reclassified as taxable income unless used for qualifying purposes. New measures will counter circumvention, ensuring these arrangements don’t erode CIT revenue. Similarly, the definition of “hybrid equity instruments” (e.g., preference shares with debt-like features) will be tightened to prevent taxpayers from dodging anti-hybrid rules, reinforcing tax base integrity.
• Interest Limitation Rules: Clarifications to sections 23M and 23N refine interest deduction limits. The definition of “interest” will align with section 24J for consistency in calculating “adjusted taxable income,” while carve-outs will extend to back-to-back lending without controlling relationships. Foreign exchange differences on restricted debts will also be addressed, ensuring limits apply when no creditor accrual occurs. These changes curb excessive deductions and provide clearer guidelines.
• Controlled Foreign Company (“CFC”) Adjustments: Gaps in CFC rules are tackled by ensuring the section 9H exit charge triggers when CFCs acquire shares in South African holding companies, closing a loophole. The comparable tax exemption—waiving CFC income imputation if foreign tax is at least 67.5% of South Africa’s—will now factor in shareholder tax refunds, aligning with global anti-profit-shifting efforts and complementing the global minimum tax.
• Corporate Reorganisations: Special rollover relief for listed shares in asset-for-share transactions will be restricted to shareholders owning less than 20% of the target company’s equity, aligning with the 2010 policy intent. A review of tax-free transfers to collective investment schemes (“CISs”), flagged in a 13 December 2024 discussion document, aims to curb unintended tax avoidance where gains remain untaxed on disposal.
• Financial Sector-Specific Measures: For “covered persons” (e.g., banks) under IFRS 9, dividends hedging tax-deductible liabilities will be taxed to match accounting treatment, closing an arbitrage gap. The tax treatment of first loss after capital (“FLAC”) instruments, mandated by the Prudential Authority, will be clarified to ensure compliance and support financial sector stability.
• Assessed Loss Set-Offs: Since 2023, assessed losses are capped at 80% of taxable income (or R1 million, whichever is higher). Uncertainty around their sequencing with deductions like donations (section 18A) or insurer policyholder fund transfers prompts a proposed clarification. This aims to ensure a logical order—likely applying losses before other deductions—reducing ambiguity and aiding companies in tax planning, especially those recovering from prior losses.

The 2025 Budget avoids rate hikes, favouring long-term stability through global tax reforms and detailed technical enhancements. By integrating the global minimum tax and addressing domestic loopholes, South Africa safeguards revenue without inhibiting growth, challenging businesses to adapt to a shifting tax landscape.

The crux of the Coronation matter revolved around identifying the “primary operations” of the CGFM Coronation Global Fund Managers (Ireland) Ltd’s (CGFM) business and determining if these functions were outsourced.

The case between Coronation and SARS stands as a pivotal moment in South African tax law, influencing the interpretation of the current CFC regulations.

Future amendments to Section 9D of the South African Income Tax Act may still redefine a FBE. Following the ruling on Coronation’s case by the Supreme Court of Appeal (SCA) in 2023, South Africa’s Draft Taxation Laws Amendment Bill of 2023 proposed amending the definition of FBE to require all “important functions” as opposed to the be performed internally, not outsourced.

Following comments and discussions with regulatory bodies and tax advisors regarding this proposed amendment’s far-reaching implications, the proposal was postponed pending the outcome of the Constitutional Court’s judgement.

It remains to be seen whether National Treasury will again propose any amendments to section 9D post the recent judgement.

At this stage, taxpayers would be wise to assess the operations of CFCs relying on the FBE exemption. It’s crucial to verify that these companies do not outsource their primary operations and genuinely perform these functions themselves.

Background

Coronation, a prominent South African taxpayer, oversees various subsidiaries, including CGFM based in Ireland. SARS assessed Coronation and contended that the net income of CGFM, as a CFC, should be included in the taxable income of Coronation, its South African parent company in terms of section 9D of the Income Tax Act. As of March 31, 2024, the total impact of the lawsuit amounted to R794 million.

In brief, section 9D states that a CFC’s net income is attributed proportionally to a South African resident who directly or indirectly hold a qualifying amount of participation or voting rights. However, exceptions exist, notably for income derived from a FBE, aiming to exclude such income from the South African tax base. A FBE is characterised by having a fixed place of business located outside South Africa, which includes a dedicated facility equipped and staffed appropriately to conduct its core operations.

Tax Court Ruling

Coronation contested SARS’s decision in the Tax Court, asserting that CGFM qualified as a FBE and should therefore be exempt from taxation. The Tax Court ruled in Coronation’s favour, determining that CGFM fulfilled the FBE criteria and was eligible for the tax exemption.

SCA Ruling

SARS appealed the Tax Court’s decision to the SCA, which subsequently overturned the initial ruling. The SCA held that CGFM did not satisfy the FBE requirements, thereby mandating that Coronation include CGFM’s net income in its taxable income.

The SCA interpreted CGFM’s business to be investment management. It argued that if CGFM had outsourced all their primary operations, then their fixed place of business in Ireland lacked the necessary personnel and infrastructure to conduct these operations.

Furthermore, the Court reasoned that if these outsourced functions are pivotal to CGFM’s business, defining its fundamental nature, then CGFM cannot be considered as conducting its primary operations in Ireland.

Constitutional Court Ruling

In a historic decision, the Constitutional Court overturned the SCA’s ruling, declaring that CGFM’s activities primarily focus on fund management rather than investment management.

According to the Constitutional Court, a CFC’s business is defined by its actual operations. CGFM’s business plan, submitted with its license application, outlined an outsourced model where it handles specified fund management functions directly. It outsources investment management trading activities to competent third parties, while maintaining overall supervision and regulatory responsibility.

This determination qualified CGFM for the tax exemption under the FBE rules confirming that the “primary operations” were performed by CGFM in Ireland. This judgment establishes a crucial precedent in South African tax law, particularly influencing the interpretation and application of CFC rules and economic substance requirements for tax exemptions.

Importance of the Ruling

The ruling clarifies the application of FBE exemptions, ensuring that legitimate business activities conducted abroad do not automatically subject companies to South African taxation. This provides assurance to South African companies engaged in global operations that they can structure their activities abroad without losing tax exemptions, thus promoting competitiveness.

Additionally, the ruling emphasizes the importance of accurate tax assessments by SARS, safeguarding businesses against undue tax burdens resulting from misinterpretations. Furthermore, the decision may influence future legislative changes to ensure that tax laws align with international business practices.

Conclusion

The Coronation case stands as a landmark decision that clarifies crucial aspects of the CFC rules and supports the competitiveness of South African businesses globally. This ruling promotes a fairer tax environment and provides a vital reference for accountants and tax professionals in South Africa navigating complex international tax landscapes.

Disclaimer

The information provided in this article is for general informational purposes only and does not constitute legal, tax, or financial advice. Readers should consult with a tax advisors before making any decisions based on the content of this article. The authors and publishers are not responsible for any actions taken as a result of reading this article.

One of the most prominent topics at the forefront of the African Revenue Authorities are the indirect tax compliance matters relating to non-resident businesses supplying digital services within their respective jurisdictions.

African Revenue Authorities continue to align their indirect tax legislation with international best practise to recover indirect taxes from non-resident suppliers in the digital economy. There is a prominent drive to increase their indirect tax base by implementing tax policies which requires non-resident suppliers of digital services to register and levy VAT on supplies made to residents and/or users based in their jurisdictions.

Some of the most recent countries to have introduced VAT on digital services are Uganda and Tanzania. Various African countries such as Kenya continue to introduce additional VAT rules further clarifying tax policies for non-resident suppliers.

What has become of significant importance is that the African Authorities have started contacting affected digital services businesses to notify them of their tax obligations in the relevant Countries.

It is therefore crucial for Digital Services Suppliers to be proactive by investigating and ensuring compliance in African Countries to avoid surprise notifications from such Revenue Authorities.

Contact CentaTax to ensure compliance today.

Historically, taxpayers were required to follow the formal dispute resolution process by way of objection and appeal in an effort to get an assessment reduced by SARS.

With the recent introduction of the Request for Reduced Assessment (“RRA01”) form on SARS e-Filing, taxpayers are no longer required to submit a Notice of Objection to have an assessment reduced. It is however important to note that a request to reduce an assessment does not replace the objection and appeal process. It merely offers a less formal method to resolve errors that are readily apparent and is only applied in limited circumstances where all the requirements are met.

The Tax Administration Act, 2011 (“TAA”) sets out the circumstances under which a taxpayer may request a reduced assessment. Taxpayers need to submit detailed grounds proving it meets the requirements set out in the TAA and they should be able to substantiate its RRA01 form by submitting relevant supporting documentation with their request.

In the guide issued by SARS in respect of the RRA01 form it confirms that the following letters will be issued by SARS in respect of the Request for Reduced Assessment Process:

• A letter acknowledging receipt of the request for reduced assessment;
• Request for additional supporting documents (should it be required);
• Outcome letter in which taxpayers will notified whether the request for a reduced assessment has been allowed or disallowed.

The introduction of the RRA01 form is expected to allow a simpler method of requesting a reduced assessment and assist taxpayers in resolving the requests more timeously.

It is crucial that taxpayers ensure it meets the requirements set out in the TAA prior to submitting its RRA01 form on SARS E-filing in an effort to allow for an efficient process. For this reason it is advisable to engage with an experienced tax practitioner firm such as VAT IT SA to assess whether you meet the relevant requirements and to assist you in setting out the detailed grounds to your request.