INVESTMENT MIGRATION
IS MORE THAN JUST A PLAN B
Join Henley & Partners South Africa, in partnership with Tax Consulting South Africa, on the 14th of June at 10:00 for an online session of our
South Africa Roadshow event.
Join Henley & Partners South Africa, in partnership with Tax Consulting South Africa, on the 14th of June at 10:00 for an online session of our
South Africa Roadshow event.
Date:
14 June 2023
Time:
10:00 (SA Time)
Platform:
On your PC via Zoom
Attendance Fee:
Free
The presentation is specifically designed for South Africans interested in securing alternative residence or citizenship through real estate investment in Europe, Namibia and the Caribbean. Our experts will share advice on tax planning and exchange control, and financial and physical emigration.
The overall purpose of the webinar is to provide attendees with a roadmap on their investment migration journey while clearing up the misinformation that exists in the market and on social media.
Today, residence and citizenship planning have become topics of significant interest among an increasing number of entrepreneurs, investors, and families. Henley & Partners is the global leader in this field and provides its clients with a seamless service for alternative residence or citizenship worldwide.
Through its offices in key regions and relationships with trusted local partners, the firm provides an unparalleled service to private clients and their advisors.
Tax Consulting South Africa was founded by Jerry Botha in 2005 and has become South Africa’s largest independent tax practice. Tax Consulting South Africa further authored two editions of the LexisNexis “Expatriate Tax” textbook, as critically acclaimed by the esteemed Judge Dennis Davis. The practice has developed to now cover all areas of South African tax, especially dealing with more complex tax matters; often assisting fellow professionals with more complex and specialised areas for their tax clients. Tax Consulting South Africa’s presentations are highly geared towards information sharing and drawing from vast practical examples encountered daily as one of South Africa’s largest 6 tax providers.
Amanda Smit – Managing Partner of Henley
Jerry Botha – Managing Partner of Tax Consulting SA
Tiago Mendonça
Mercan Properties – Portugal
Thomas Scott
Caribbean Real Estate
Andrew van Schalkwyk
Benefits of President Links Estate in Namibia
Controlled Foreign Companies –
South African Tax Considerations
Controlled Foreign Companies – South African Tax Considerations
South Africa’s tax system includes a Controlled Foreign Company (CFC) regime designed to address the taxation of income earned by foreign companies owned by South African tax residents.
Where a South African tax resident holds or controls a foreign company, they may be subject to income tax in South Africa on the CFC’s foreign income, even if that income has not yet been distributed. This is an anti-avoidance measure to prevent South African tax residents from utilising foreign companies in the avoidance of South African tax.
What is a Controlled Foreign Company?
A CFC is broadly defined in section 9D of the Income Tax Act, No. 58 of 1962, as any foreign company where more than 50% of the total participation rights or voting rights are directly or indirectly held or exercisable by one or more South African tax residents.
Where this threshold is met, and unless a specific exemption applies, the net income of the CFC must be included in the income of the South African resident(s) in proportion to their participation rights, and taxed accordingly.
Taxpayers who fail to accurately account for a CFC’s income risk audit or reassessment by SARS, especially in light of increased global transparency and data sharing through mechanisms such as the Common Reporting Standard.
Key Features of the CFC Regime
Place of Effective Management and Corporate Tax Residency in South Africa
South Africa follows a residence-based system of taxation, meaning that resident companies are subject to tax on their worldwide income.
In terms of section 1 of the Income Tax Act, No. 58 of 1962 (the Act), a company is regarded as a South African tax resident if it is either:
unless a double tax agreement (DTA) provides otherwise.
The concept of POEM is central to determining a company’s tax residency, particularly where cross-border structures are involved. It affects both foreign companies with South African involvement and South African-incorporated entities that may be managed from abroad.
What is Place of Effective Management?
Although not defined in the Act, POEM has been interpreted through South African case law, SARS guidance, and international commentary, particularly the OECD Model Tax Convention and Commentary thereto.
Broadly, POEM refers to the location where key management and commercial decisions necessary for the conduct of the entity’s overall business are made, in substance and not merely in form.
The determination of POEM is a factual enquiry, and is not limited to formalities such as the registered office, place of incorporation, or location of board meetings. Instead, it focuses on:
Application in Cross-Border Contexts
POEM plays a critical role in determining corporate tax residency in both inbound and outbound scenarios:
Both scenarios must be carefully evaluated in light of South African domestic law and any applicable DTA.
Interaction with Double Tax Agreements
Where a company is regarded as resident in both South Africa and another jurisdiction, the relevant DTA will typically contain a tie-breaker clause to resolve the conflict.
Most of South Africa’s DTAs allocate tax residency to the country where the company’s POEM is located. However, some newer treaties apply a Mutual Agreement Procedure (MAP), requiring the tax authorities of both states to determine residence based on additional factors.
Correct DTA application is essential to avoid dual residency exposure and to obtain treaty relief on dividends, interest, royalties, and other income.
Practical Implications for Companies
Incorrect or dual tax residency status can expose a company to:
Permanent Establishment – Tax Exposure in Cross-Border Contexts
As businesses expand across borders, one of the key tax risks they face is the inadvertent creation of a permanent establishment (PE) in a foreign jurisdiction. A PE may trigger foreign income tax exposure for a company even in the absence of incorporation or tax residency in that jurisdiction.
South African companies with offshore activities, or foreign companies with South African operations, must be aware of the PE concept, how it arises, and how it interacts with applicable Double Tax Agreements (DTAs).
What Is a Permanent Establishment?
A PE is generally defined in a DTA as a fixed place of business through which the business of an enterprise is wholly or partly carried on. Common examples include:
South Africa’s DTAs typically follow the OECD Model Tax Convention, and many incorporate updated provisions from the Multilateral Instrument (MLI), which narrows common avoidance strategies and expands the scope of PE risk.
Inbound vs Outbound Permanent Establishment Risk
Even short-term or project-based activities can give rise to PE risks if not carefully managed and monitored.
Consequences of a Permanent Establishment Finding
If a PE is found to exist:
Non-compliance can result in penalties, double taxation, and reputational harm.
In a connected world, even limited physical or digital presence in a foreign country can create tax exposure. Managing PE risk is essential for international tax compliance and operational efficiency.
Controlled Foreign Companies –
South African Tax Considerations
South Africa’s tax system includes a Controlled Foreign Company (CFC) regime designed to address the taxation of income earned by foreign companies owned by South African tax residents.
Where a South African tax resident holds or controls a foreign company, they may be subject to income tax in South Africa on the CFC’s foreign income, even if that income has not yet been distributed. This is an anti-avoidance measure to prevent South African tax residents from utilising foreign companies in the avoidance of South African tax.
What is a Controlled Foreign Company?
A CFC is broadly defined in section 9D of the Income Tax Act, No. 58 of 1962, as any foreign company where more than 50% of the total participation rights or voting rights are directly or indirectly held or exercisable by one or more South African tax residents.
Where this threshold is met, and unless a specific exemption applies, the net income of the CFC must be included in the income of the South African resident(s) in proportion to their participation rights, and taxed accordingly.
Taxpayers who fail to accurately account for a CFC’s income risk audit or reassessment by SARS, especially in light of increased global transparency and data sharing through mechanisms such as the Common Reporting Standard.
Key Features of the CFC Regime