BPR 382: Rebate in respect of foreign taxes

Summary of the corporate structure:

The applicant is a resident company, and the purchasers consist of a resident and non-resident company (“the Purchasers”).

Proposed transaction:

The applicant is a resident company owning 50% of the shares in Company B, a resident company, which holds immovable property in Country X. The applicant proposed to sell a portion of the shares it holds in Company B to the Purchasers.

According to Country X’s domestic law, any capital gain arising from  the direct or indirect transfer of shares held by non-resident in a company with assets located in Country X, is regarded as income sourced in Country X and subject to tax in Country X.

In terms of the treaty between South Africa and Country X, the capital gain from the disposal of these shares may be taxed in Country X due to the fact that the shares in Company B principally derive its value from immovable property located in Country X. Furthermore, the treaty provides that immovable property for treaty purposes is determined with reference to the domestic laws of the country in which the property is situated.

Country X’s domestic tax laws stipulates that capital gains will be taxed by applying a specific inclusion rate based on source principles. The inclusion rate determination can be summarised as follows:

Total value of Company B’s assets located in Country X / Total asset value of Company B

The inclusion rate calculated by Country X was 60%.

The applicant will eventually dispose the shares for a purchase price equal to a determined amount plus, if applicable, a deferred amount which will be determined in the future.

A formula will determine the fixed amount, whereas the deferred amount consists of additional proceeds which may accrue in a future tax year, depending on whether or not certain conditions are met.

Ruling:

Below is the ruling made in connection with the proposed transaction:

1. The applicant will qualify for a rebate under the provisions of section 6quat(1) of the Income Tax Act No 58 of 1962 in respect of the disposal of shares.
2. Provisions of subsection (1A) and (1B), will guide the rebate to be determined under provisions of section 6quat, however, there will be no limitation because Country X applies a lower inclusion rate than  South Africa.
3. The foreign taxes will not qualify for a rebate to the extent that any capital losses for the year of assessment, or an assessed capital loss for a previous year of assessment, is set off against the foreign capital gain under consideration.
4. For the purposes of paragraph 35, the proceeds will be the purchase price finally determined and agreed on, excluding any amount not received by or accrued to the applicant in respect of that disposal during that year of assessment.
5. If deferred amounts relating to the disposal are not received and do not accrue in a year of disposal, but are received or accrue in a subsequent year of assessment, the capital gain will be included in that subsequent year.
6. If any element of proceeds that has not accrued to or been received by applicant is included in the tax calculation in Country X, the foreign tax attributable to the inclusion of those proceeds will not qualify for a tax rebate under section 6quat(1), read with section 6quat(1A).

Find a copy of BPR 382 here.

18/11/2022