The Court considered section 9D of the Act which provides the requirements for an FBE exemption.
To be considered an FBE, the CFC must have a fixed place of business in the foreign country, used for the carrying on of business for a period of not less than one year. In addition, the business must be conducted through one or more office or other structures, which are suitably staffed and have on-site managerial and operational employees who conduct the primary operations. In addition, the premises must be suitably equipped, with suitable facilities for its
primary operations and the reasons for its location being outside South Africa must not be to facilitate a postponement or reduction of tax in South Africa.
An FBE may utilise the structures, employees, equipment and facilities of another company, albeit provided that the other company is subject to tax in the same jurisdiction, as well as a
part of the same group of companies, and is situated in the same country as the FBE.
According to the Court, the core functions of CGFM were indeed investment management, as stated in its Memorandum of Incorporation and as echoed by certain witnesses, i.e., the managing director of CGFM, one of the founders of Coronation Group.
Furthermore, the Court held that “these functions had to fall within the ambit of its business in order to be outsourced. An agent cannot perform a function which does not form part of the business of the principal. In other words, CGFM could not outsource a function it did not
possess in the first place.”
The Court concluded that the primary business operations of CGFM were those of fund management, including investment management. Since these functions were not conducted in Ireland and were, in fact, outsourced to CAM in South Africa and CIL in the United Kingdom, the requirements for FBE status exemption were not met, with respect to the proviso contained in section 9D(1)(aa) to (cc).
With regards to SARS’ claim for understatement penalties, the Court found that SARS was unable to prove that the exclusion of CGFM’s profits from CIMSA’s taxable income was not due to a bona fide error, and accordingly did not discharge its onus in this regard. As such, the understatement penalties were set aside.