1) For the purposes of this section—
a) ‘business establishment’, [deleted by Revenue Laws Amendment Act No. 20 of 2006]
"controlled foreign company"means any foreign company where more than 50 per cent of the total participation rights in that foreign company are held, or more than 50 per cent of the voting rights in that foreign company are directly or indirectly exercisable, by one or more residents: Provided that-
a) no regard must be had to any voting rights in any foreign company—
i) which is a listed company; or
ii) if the voting rights in that foreign company are exercisable indirectly through a listed company;
b) any voting rights in a foreign company which can be exercised directly by any other controlled foreign company in which that resident (together with any connected person in relation to that resident) can directly or indirectly exercise more than 50 per cent of the voting rights are deemed for purposes of this definition to be exercisable directly by that resident; and
c) a person is deemed not to be a resident for purposes of determining whether residents directly or indirectly hold more than 50 per cent of the participation rights or voting rights in a foreign company, if—
i) in the case of a listed company or a foreign company the participation rights of which are held by that person indirectly through a listed company, that person holds less than five per cent of the participation rights of that listed company or
ii) in the case of a scheme or arrangement contemplated in paragraph (e)(ii) of the definition of ‘company’ in section 1 or a foreign company the participation rights of which are held and the voting rights of which may be exercised by that person indirectly through such a scheme or arrangement, that person—
(aa) holds less than five per cent of the participation rights of that scheme or arrangement; and
(bb) may not exercise at least five per cent of the voting rights in that scheme or arrangement,
unless more than 50 per cent of the participation rights or voting rights of that foreign company or other foreign company are held by persons who are connected persons in relation to each other;
‘country of residence’, in relation to a foreign company, means the country where that company has its place of effective management;
‘foreign business establishment’, in relation to a controlled foreign company, means—
a) a fixed place of business located in a country other than the Republic .that is used or will continue to be used for the carrying on of the business of that controlled foreign company for a period of not less than one year, where-
i) that business is conducted through one or more offices, shops, factories, warehouses or other structures;
ii) that fixed place of business is suitably staffed with on-site managerial and operational employees of that controlled foreign company who conduct the primary operations of that business;
iii) that fixed place of business is suitably equipped for conducting the primary operations of that business;
iv) that fixed place of business has suitable facilities for conducting the primary operations of that business; and
v) that fixed place of business is located outside the Republic solely or mainly for a purpose other than the postponement or reduction of any tax imposed by any sphere of government in the Republic:
Provided that for the purposes of determining whether there is a fixed place of business as contemplated in this definition, a controlled foreign company may take into account the utilisation of structures as contemplated in subparagraph (i), employees as contemplated in subparagraph (ii), equipment as contemplated in subparagraph (iii), and facilities as contemplated in subparagraph (iv) of any other company-
aa) if that other company is subject to tax in the country in which the fixed place of business of the controlled foreign company is located by virtue of residence, place of effective management or other criteria of a similar nature;
bb) if that other company forms part of the same group of companies as the controlled foreign company; and
cc) to the extent that the structures, employees, equipment and facilities are located in the same country as the fixed place of business of the controlled foreign company;
b) any place outside the Republic where prospecting or exploration operations for natural resources are carried on, or any place outside the Republic where mining or production operations of natural resources are carried on, where that controlled foreign company carries on those prospecting, exploration, mining or production operations;
c) a site outside the Republic for the construction or installation of buildings, bridges, roads, pipelines, heavy machinery or other projects of a comparable magnitude which lasts for a period of not less than six months, where that controlled foreign company carries on those construction or installation activities;
d) agricultural land in any country other than the Republic used for bona fide farming activities directly carried on by that controlled foreign company; or
e) a vessel, vehicle, rolling stock or aircraft used for the purposes of transportation or fishing, or prospecting or exploration for natural resources, or mining or production of natural resources, where that vessel, vehicle, rolling stock or aircraft is used solely outside the Republic for such purposes and is operated directly by that controlled foreign company or by any other company that has the same country of residence as that controlled foreign company and that forms part of the same group of companies as that controlled foreign company;
'foreign company' means any association, corporation, company, arrangement or scheme contemplated in paragraph (a), (b), (c), (e) or (f) of the definition of ‘company’ in section 1, which is not a resident;
‘foreign financial instrument holding company’ means a foreign financial instrument holding company as defined in section 41: Provided that in determining whether the prescribed proportion of all the assets of the company and all influenced companies consist of financial instruments, the following assets must be wholly disregarded-
a) any share in any other company in the same associated group of companies;
and
b) any instrument as defined in section 24J (I) entered into between companies which form part of the same associated group of companies;
Provided further that in making any such determination, paragraph (i) of the proviso to the definition of ‘‘foreign financial instrument holding company’’ in section 41 shall not apply;
‘foreign tax year’ in relation to a controlled foreign company means the year or period of reporting for foreign income tax purposes or, if that company is not subject to foreign income tax, the annual period of financial reporting by that company;
'participation rights', in relation to a company, means-
(a) the right to participate directly or indirectly in the share capital, share premium, current or accumulated profits or reserves of that company, whether or not of a capital nature; or
(b) paragraph (a) or no such rights can be determined for any person, the right to exercise any voting rights in that company.
2) There shall be included in the income for the year of assessment of any resident who holds any participation rights in a controlled foreign company –
a) on the last day of the foreign tax year of that controlled foreign company which ends during that year of assessment, an amount equal to –
i) where that foreign company was a controlled foreign company for the entire foreign tax year, the proportional amount of the net income of that controlled foreign company determined for that foreign tax year, which bears to the total net income of that company during that foreign tax year, the same ratio as the percentage of the participation rights of that resident in relation to that company bears to the total participation rights in relation to that company on that last day; or
ii) where that foreign company became a controlled foreign company at any stage during that foreign tax year, at the option of the resident, either –
aa) an amount which bears to the proportional amount determined in accordance with subparagraph (i), the same ratio as the number of days during that foreign tax year that the foreign company was a controlled foreign company bears to the total number of days in that foreign tax year; or
bb) the proportional amount determined in the manner contemplated in subparagraph (i) (as if the day that foreign company commenced to be a controlled foreign company was the first day of its foreign tax year), of the net income of that company for the period commencing on the day that the foreign company commenced to be a controlled foreign company and ending on the last day of that foreign tax year; or
b) immediately before that foreign company ceased to be a controlled foreign company at any stage during that year of assessment before the last day of the foreign tax year of that controlled foreign company, an amount which shall be equal to, at the option of the resident, either –
i) an amount determined in accordance with paragraph (a)(ii)(aa); or
ii) the proportional amount determined in the manner contemplated in paragraph (a)(i) (as if the day that foreign company ceased to be a controlled foreign company was the last day of its foreign tax year), of the net income of that company determined for the period commencing on the first day of that foreign tax year and ending on the day before the company so ceased to be a controlled foreign company :
Provided that this subsection shall not apply –
A) where that resident (together with any connected person in relation to that resident) –
i) at the end of the last day of the foreign tax year of the controlled foreign company; or
ii) in the case where that foreign company ceased to be a controlled foreign company during the relevant foreign tax year, immediately before that foreign company so ceased to be a controlled foreign company, in aggregate holds less than 10 per cent of the participation rights and may not exercise at least 10 per cent of the voting rights in that controlled foreign company; or
B) to the extent that the participation rights are held by that resident indirectly through any company which is a resident; or
C) to the extent that—
i) the participation rights are held by an insurer as defined in section 29A in any policyholder fund as defined in terms of that section, and are directly attributable to-
aa) a linked policy as defined in section 1 of the Long-Term Insurance Act, 1998 (Act No. 52 of 1998); or
bb) a policy as defined in section 29A, other than a policy contemplated in item (aa), of which the amount of the policy benefits as defined in the Long-Term Insurance Act, 1998 (Act No. 52 of 1998), is not guaranteed by the insurer and is to be determined wholly by reference to the value of particular assets or categories of assets;
ii) the holding of the participation rights by the insurer does not form part of any transaction, operation or scheme entered into or effected solely or mainly for purposes of utilising the provisions of this paragraph in order to avoid the inclusion of an amount in the income of a resident as contemplated in this subsection.
2A) For the purposes of this section, the ‘net income’ of a controlled foreign company in respect of a foreign tax year is an amount equal to the taxable income of that company determined in accordance with the provisions of this Act as if that controlled foreign company had been a taxpayer, and as if that company had been a resident for purposes of the definition of ‘gross income’, sections 7(8), 10(1)(h), 25B and paragraphs 2(1)(a), 24, 70, 71, 72 and 80 of the Eighth Schedule: Provided that -
a) any deductions or allowances which may be allowed, or any amounts which may be set off against, the income of that foreign company in terms of this Act shall be limited to the amount of that income;
b) any amount whereby such deductions or allowances or amounts exceed the amount of such income, shall be carried forward to the immediately succeeding foreign tax year and be deemed to be a balance of assessed loss which may be set off against the income of such company in such succeeding year for the purposes of section 20;
c) no deduction shall be allowed in respect of any-
i) interest, royalties, rental or income of a similar nature which is paid or payable or deemed to be paid or payable by that company to any other controlled foreign company (including any similar amount adjusted in terms of section 31);
ii) exchange difference determined in terms of section 24I in respect of any exchange item to which that company and any other controlled foreign company are parties;
iii) exchange difference in respect of any forward exchange contract or foreign currency option contract entered into to hedge the exchange item referred to in subparagraph (ii); or
iv) reduction or discharge by that company of a debt owed to that company by any other controlled foreign company for no consideration or for consideration less than the amount by which the face value of the debt has been so reduced or discharged,
where that controlled foreign company and that other controlled foreign company form part of the same group of companies, unless any resident has elected in terms of subsection (12) that the provisions of subsection (9) shall not apply in respect of the net income of that other controlled foreign company for the relevant foreign tax year or that interest, rental, royalty, other income, adjusted amount, exchange difference, reduction or discharge is taken into account to determine the net income of that other controlled foreign company;
d) deleted by section 13 of the Revenue Laws Amendment Act, 74 of 2002
e) where a foreign company becomes a controlled foreign company after 1 October 2001, the valuation date for purposes of the determination of any taxable capital gain or assessed capital loss in terms of the Eighth Schedule, shall be the day before such company becomes a controlled foreign company;
f) where the resident contemplated in subsection (2) is a natural person, special trust or an insurer in respect of its individual policyholder fund, the taxable capital gain of the controlled foreign company shall, for the purposes of paragraph 10 of the Eighth Schedule, be 25 per cent of that company’s net capital gain for the relevant foreign tax year
g) deleted by section 13 of the Revenue Laws Amendment Act, 74 of 2002
h) [deleted by Revenue Laws Amendment Act No. 31 of 2005];
i) for the purposes of section 31 –
(aa) any transaction, operation or scheme between that controlled foreign company and any connected person in relation to that controlled foreign company is subject to section 31(2); and
(bb) that controlled foreign company must for purposes of section 31(3)(a)(i) and (ii) be deemed to be a resident;
j) [deleted by Revenue Laws Amendment Act No. 31 of 2005];for the purposes of paragraph 43 of the Eighth Schedule, ‘local currency’ of a controlled foreign company otherwise than in relation to a permanent establishment of that controlled foreign company, means the currency used by that company for purposes of financial reporting.
Provided further that-
i) the net income of a controlled foreign company in respect of a foreign tax year shall be deemed to be nil where the aggregate amount of tax payable to all spheres of government of any country other than the Republic by the controlled foreign company on the net income of that controlled foreign company in respect of the foreign tax year of that controlled foreign company is at least 75 per cent of the amount of normal tax that would have been payable in respect of any taxable income of the controlled foreign company had the controlled foreign company been a resident for that foreign tax year; and
ii) the aggregate amount of tax payable contemplated in subparagraph (i) must be determined-
aa) after taking into account any applicable agreement for the prevention of double taxation and any credit, rebate or other right of recovery of tax from any sphere of government of any country other than the Republic; and
bb) after disregarding any loss in respect of a year other than a year contemplated in subparagraph (i) or from a company other than a company contemplated in subparagraph (i).
3) Deleted by section 10 of Act 59 of 2000
4) Deleted by section 10 of Act 59 of 2000. 4A) Deleted by section 10 of Act 59 of 2000
5) Deleted by section 10 of Act 59 of 2000.
6) The net income of a controlled foreign company, shall be determined in the currency used by that controlled foreign company for purposes of financial reporting and shall, for purposes of determining the amount to be included in the income of any resident during any year of assessment under the provisions of this section, be translated to the currency of the Republic by applying the average exchange rate for that year of assessment : Provided that –
a) in respect of the disposal of any asset contemplated in paragraph 43(4) of the Eighth Schedule which is not attributable to any permanent establishment of that controlled foreign company outside the Republic,any capital gain or capital loss of that controlled foreign company shall, when applying paragraph 43(4) of the Eighth Schedule, be determined in the currency of the Republic and that capital gain or capital loss shall be translated to the currency used by that controlled foreign company for purposes of financial reporting by applying that average exchange rate;
b) in respect of the disposal of any foreign equity instrument which constitutes trading stock and which is not attributable to any permanent establishment of that controlled foreign company outside the Republic, the amount to be taken into account in determining the net income of that controlled foreign company must be determined in the currency of the Republic and that amount shall be translated to the currency so used by that controlled foreign company by applying that average exchange rate, and
c) for the purposes of section 24I, ‘local currency’ in relation to an exchange item of a controlled foreign company which is not attributable to any permanent establishment of that company outside the Republic, means the currency of the Republic and any exchange difference determined must be translated to the currency so used by that controlled foreign company by applying that average exchange rate;
d)
i) any asset or foreign equity instrument that is disposed of; and
ii) any exchange item denominated,
in any currency other than the currency used by that controlled foreign company for purposes of financial reporting shall be deemed not to be attributable to any permanent establishment of the controlled foreign company if the currency used for financial reporting purposes is the currency of a country which has an official rate of inflation of 100 per cent or more throughout that foreign tax year.
7) Deleted by section 10 of Act 59 of 2000.
8) Deleted by section 10 of Act 59 of 2000.
9) In determining the net income of the controlled foreign company in terms of subsection (2A), there must not be taken into account any amount which-
a) [deleted by the Revenue Laws Amendment Act of 2003]
b) is attributable to any foreign business establishment (including the disposal or deemed dispoal of any assets forming part of that foreign business establishment) of that controlled foreign company: Provided that the provisions of this paragraph shall not apply to any net income that is attributable to–
i) any amounts derived from any transaction relating to the supply of goods or services by or to that controlled foreign company with any connected person (in relation to that controlled foreign company), who is a resident, unless the consideration in respect of that transaction reflects an arm’s length price that is consistent with the provisions of section 31; or
ii) any amounts derived from–
aa) any sale of goods by that controlled foreign company to any connected person (in relation to that controlled foreign company) who is a resident, unless -
A) that controlled foreign company purchased those goods within the country of residence of that controlled foreign company from any person who is not a connected person in relation to that controlled foreign company;
B) the creation, extraction, production, assembly, repair or improvement of goods undertaken by that controlled foreign company amount to more than minor assembly or adjustment, packaging, repackaging and labeling; or
C) that controlled foreign company sells a significant quantity of goods of the same or a similar nature to persons who are not connected persons in relation to that controlled foreign company, at comparable prices (after accounting for the level of the market, volume discounts and costs of delivery); or
D) that controlled foreign company purchases the same or similar goods mainly within the country of residence of that controlled foreign company from persons who are not connected persons in relation to that controlled foreign company;
bb) any sale of goods by that controlled foreign company to a person, other than a connected person (in relation to that controlled foreign company) who is a resident, where that controlled foreign company initially purchased those goods or any tangible intermediary inputs thereof from one or more connected persons (in relation to that controlled foreign company) who are residents, unless –
A) those goods or tangible intermediary inputs thereof purchased from connected persons (in relation to such controlled foreign company) who are residents amount to an insignificant portion of the total goods or tangible intermediary inputs of those goods;
B) the creation, extraction, production, assembly, repair or improvement of goods undertaken by that controlled foreign company amount to more than minor assembly or adjustment, packaging, repackaging and labeling; or
C) the products are sold by that controlled foreign company to a person who is not a connected person in relation to that controlled foreign company, for physical delivery to a customer’s premises situated within the country of residence of that controlled foreign company; or
D) products of the same or similar nature are sold by that controlled foreign company mainly to persons who are not connected persons in relation to that controlled foreign company for physical delivery to customers’ premises situated within the country of residence of that controlled foreign company;
cc) any service performed by that controlled foreign company to a connected person (in relation to such controlled foreign company) who is a resident, unless the service is performed outside the Republic and –
A) such service relates directly to the creation, extraction, production, assembly, repair or improvement of goods utilised within one or more countries outside the Republic;
B) such service relates directly to the sale or marketing of goods of a connected person (in relation to that controlled foreign company) who is a resident and those goods are sold to persons who are not connected persons in relation to that controlled foreign company for physical delivery to customers’ premises situated within the country of residence of that controlled foreign company;
C) such service is rendered mainly in the country of residence of the controlled foreign company for the benefit of customers that have premises situated in that country; or
D) to the extent no deduction is allowed of any amount paid by that connected person to that controlled foreign company in respect of that service;
dd) the granting by that controlled foreign company of the use, right of use or permission to use an intangible asset as defined in paragraph 16(2) of the Eighth Schedule to a connected person (in relation to such controlled foreign company) who is a resident;
iii) any amounts in the form of dividends, interest, royalties, rental, annuities, insurance premiums or income of a similar nature, or any capital gain determined in respect of the disposal or deemed disposal of any asset from which any such amounts are or could be earned, or any foreign currency gain determined in respect of any foreign equity instrument or any foreign currency gain determined in terms of section 24I (other than foreign currency gains which arise in the normal course of business of that controlled foreign company which is not a foreign financial instrument holding company), except –
aa) to the extent that any income and capital gains attributable to those amounts (other than income or capital gains in respect of which any of the provisions contained in paragraphs (e) to (fB) apply) do not in total exceed ten per cent of the income and capital gains of the controlled foreign company attributable to that foreign business establishment other than income or capital gains—
A) attributable to those amounts; or
B) [deleted by the Revenue Laws Amendment Act No. 20 of 2006]
bb) where those amounts arise from the principal trading activities of any banking or financial services, insurance or rental business, excluding any such amounts derived-
A) by a company which is a foreign financial instrument holding company at the time that the amounts are so derived;
B) from any connected person (in relation to that controlled foreign company) who is a resident or any resident who directly or indirectly holds at least five per cent of the participation rights in-
i) that controlled foreign company; or
ii) any other company in the same group of companies which holds shares in that controlled foreign company; or
C) to the extent that those amounts form part of any transaction, operation or scheme in terms of which any amount received by or accrued to any person is exempt from tax while any corresponding expenditure (other than expenditure for the delivery of any goods including electricity) is deductible by that person or by any connected person in relation to that person in determining the liability for tax of that person or connected person, as the case may be, in terms of this Act;
cc) where those amounts arise from the disposal or deemed disposal of any intangible asset as defined in paragraph 16(2) of the Eighth Schedule (other than an intangible asset created, devised or developed in the Republic), if that intangible asset—
A) formed an integral part of any business conducted by that controlled foreign company; and
B) was not acquired by that controlled foreign company within a period of 18 months prior to that disposal; and
C) was so disposed of as part of the disposal of that business and where all the assets which are necessary for carrying on that business are disposed of as a going concern;
dd) in the case of royalties received by or accrued to that controlled foreign company, if that company directly and regularly creates, develops or substantially upgrades any intellectual property as defined in section 23I which gives rise to those royalties;
c) is attributable to any policyholder that is not a resident or a controlled foreign company in relation to a resident in respect of any policy issued by a company licensed to issue any long-term policy as defined in the Long-term Insurance Act, 1998 (Act No. 53 of 1998), in its country of residence;
d) deleted by Act 59 of 2000
e) is included in the taxable income of the company and has not been or will not be exempt or taxed at a reduced rate in the Republic, as a result of the application of any agreement for the avoidance of double taxation;
f) is attributable to any foreign dividend declared to that controlled foreign company, by any other controlled foreign company in relation to the resident, to the extent that the foreign dividend does not exceed the aggregate of all amounts which have been or will be included in the income of the resident in terms of this section in any year of assessment, which relate to the net income of-
i) the company declaring the dividend; or
ii) any other company which has been included in the income of that resident by virtue of that resident’s participation rights in that other company held indirectly through the company declaring the dividend,
reduced by—
aa) the amount of any foreign tax payable, in respect of the amounts so included in that resident’s income; and
bb) so much of all foreign dividends received by or accrued to that controlled foreign company as was-
A) excluded from the application of this section in terms of this paragraph or section 10(1)(k)(ii)(dd);
B) previously not included in the income of that resident by virtue of any prior inclusion in terms of section 9D.
fA) is attributable to-
i) any interest, royalties, rental or income of a similar nature, which is paid or payable or deemed to be paid or payable to that company by any other controlled foreign company (including any similar amount adjusted in terms of section 31);
ii) any exchange difference determined in terms of section 24I in respect of any exchange item to which that company and any other controlled foreign company are parties;
iii) any exchange difference in respect of any forward exchange contract or foreign currency option contract entered into to hedge the exchange item referred to in subparagraph (ii); or
iv) the reduction or discharge by any other controlled foreign company of a debt owed by that company to that other controlled foreign company for no consideration or for consideration less than the amount by which the face value of the debt has been so reduced or discharged,
where that controlled foreign company and that other controlled foreign company form part of the same group of companies;
: Provided that any such amount may, at the election of any resident contemplated in subsection (2), be so taken into account; or
fB) is attributable to the disposal of any asset, as defined in the Eighth Schedule, (other than any financial instrument or intangible asset as defined in paragraph 16 of the Eighth Schedule), where that asset was attributable to any foreign business establishment of any other controlled foreign company where that company and that other controlled foreign company form part of the same group of companies;
g) deleted by section 10 of Act 59 of 2000
h) [deleted by the Revenue Laws Amendment Act of 2003]
10)
a) The Commissioner may issue a ruling that—
i) [this sub-paragraph deleted by Taxation Laws Amendment Act No. 17 of 2009] ;
ii) disregards the application of paragraph (ii) of the proviso to subsection (9)(b) in respect of the sale of goods or performance of services by a controlled foreign company where the foreign business establishment of that controlled foreign company situated in that company’s country of residence mainly serves as a central location for the sale or performance of identical or similar goods or services in at least two countries that are contiguous to the country of residence of that company;
iii) [deleted by the Revenue Laws Amendment Act No. 60 of 2008];
iv) [this sub-paragraph deleted by Taxation Laws Amendment Act No. 17 of 2009]
v) [this sub-paragraph deleted by Taxation Laws Amendment Act No. 17 of 2009]
Provided that the Commissioner must take into account the activities and transactions carried out or to be carried out by the persons involved.
Provided that the Commissioner-
i) must take into account the activities and transactions carried out or to be carried out by the persons involved; and
ii) must not issue any ruling in terms of this section if the application for the ruling relates to the determination of the net income of a controlled foreign company in respect of a foreign tax year and that application is submitted after the end of the year of assessment in which that foreign tax year ends.
b) Any ruling issued in terms of paragraph (a) will be subject to the same procedures, terms and conditions as a ‘‘binding private ruling’’ as contemplated in Part IA of Chapter III but disregarding-
i) Section 76G(1)(a)(ii); and
ii) The requirement that the transaction must be a proposed transaction.
11) [paragraph 11 deleted by the Revenue Laws Amendment Act of 2003]
12) A resident who, together with any other resident who is a connected person in relation to that resident, in aggregate holds at least 10 per cent but not 20 per cent or more of the participation rights and voting rights of a controlled foreign company may elect that all the provisions of subsection (9) shall not apply in respect of the net income determined for a relevant foreign tax year of any controlled foreign company in which that resident holds any participation rights.
13) Any resident who, together with any other resident who is a connected person in relation to that resident, in aggregate holds at least 10 per cent but not 20 per cent or more of the participation rights and voting rights of a foreign company may elect that the foreign company be deemed to be a controlled foreign company in relation to that resident in respect of any foreign tax year of that foreign company.