South Africans Living Abroad – Is Your Company a CFC?
This blog is for South African individuals living abroad who have a company in a foreign jurisdiction and want to understand how Controlled Foreign Company Tax may apply to them. If you’re unsure whether the South African CFC rules might apply to you, this guide will help you identify when they do and when they don’t.
For South Africans living abroad, it’s important to note that if you haven’t formally broken your South African tax residency, these rules may still apply, even if you no longer live in South Africa. Unless you have notified SARS that your tax residency has ended, you are still considered a South African tax resident. This means you may be required to submit tax returns and report your worldwide income in South Africa.
We’ll begin with when the CFC rules don’t apply and then explain when they do—and what that means in practice.
When the CFC Rules Don’t Apply
The Controlled Foreign Company (CFC) rules in Section 9D of the Income Tax Act are intended to tax South African residents on income earned through foreign companies they control. However, there are several exemptions.
Under Sections 9D(2A) and 9D(9), certain types of income are excluded from CFC treatment:
- Income that is taxed at a level comparable* to South Africa in the foreign jurisdiction;
- Income already taxed in South Africa;
- Income from genuine business operations outside South Africa, with sufficient economic substance.
* Comparable means that the amount of tax paid in the foreign jurisdiction is sufficiently similar to what would have been payable in South Africa. South African tax law defines this as at least 67.5% of the South African tax that would have been due on the same income under South African tax rules.
The third category refers to income earned through a Foreign Business Establishment (FBE). For a company to qualify as an FBE, all of the following conditions must be met:
- The business must operate through a fixed physical location (e.g. office, warehouse, retail space);
- The premises must be staffed with on-site management and operational employees of the CFC;
- The location must be adequately equipped to carry out the company’s core business functions;
- The necessary infrastructure must be in place to support its operations.
Understanding the company’s core business model is essential to determining whether these conditions are satisfied. Some activities – such as mining, agriculture, or construction – may naturally meet the FBE requirements when carried out abroad.
In addition, under Section 9D(2), proviso (A), a South African resident who holds less than 10% of the participation or voting rights in a foreign company is exempt from the CFC rules.
When the CFC Rules Apply
A foreign company qualifies as a Controlled Foreign Company under Section 9D(1) if any of the following conditions are met:
- More than 50% of the participation rights are directly or indirectly held by one or more South African residents (excluding headquarter companies);
- More than 50% of the voting rights are indirectly exercisable by South African residents (excluding headquarter companies); or
- The financial results of the foreign company are consolidated into the financial statements of a South African company (excluding headquarter companies), as required by IFRS 10.
The term “participation rights” refers to:
- The right to share in benefits (excluding voting rights) attached to a share or similar interest in the foreign company; or
- Where no person holds a determinable right, the right to exercise voting rights in that company.
What Does It Mean If a Non-SA Company Is Classified as a South African CFC?
If the CFC definition is met and no exemptions apply, you must include your proportional share of its income in your South African tax return, as if you earned it personally.
This can be problematic: the tax rate in South Africa may be higher than the tax your foreign company has paid in its country of residence. So, even if you’re able to claim a tax rebate in your South African return for the foreign tax paid, the South African tax could still exceed it – meaning you may end up paying more tax overall than if the company were not classified as a CFC.
Due to the complex nature of these rules and the nuanced differences in individual cases, it is important to seek professional tax advice tailored to your unique position to avoid unintended consequences.
If you need any CFC support, please contact Savanna McAllister on +44 (0)20 3405 2320 or +27 (0)21 300 2380 or email sm@eoacc.com.