1. Attribution of CFC Income
If you’re a South African resident who directly or indirectly holds more than 50% of a foreign company’s participation rights, SARS may attribute that company’s net income to you.
That means:
- The net income of the CFC (calculated using South African tax principles) is added to your own taxable income in proportion to your ownership.
- Even if the profits are retained offshore, you still pay tax on them in South Africa.
Example:
- You own 60% of a company in Mauritius (15% tax rate).
- The company earns R1 million profit.
- You didn’t draw a dividend.
- SARS will include R600,000 (60%) of that profit in your SA taxable income, unless an exemption applies.
2. Foreign Tax Credit
To avoid double taxation:
- You can claim a foreign tax credit for tax already paid in the foreign country.
- But if the foreign tax is much lower than SA tax (currently 27%), you may still owe SARS the difference.
Example:
- Foreign tax paid: 15% (R90,000 on R600k share)
- SA tax rate: 27% (R162,000 on R600k)
- You owe SARS the R72,000 difference.
3. Provisional Tax Payments
- Since the CFC income is part of your taxable income, you may need to estimate and pay provisional tax in SA on it during the year — even though you haven’t received a cash distribution.
4. Impact on Effective Tax Rate
If your CFC earns substantial income in a low-tax country, this will increase your overall tax liability in SA, unless a relief applies.
Possible Reliefs & Exemptions
Not all foreign income is taxed under the CFC rules. SARS does allow for exemptions if certain conditions are met:
Foreign Business Establishment (FBE) Exemption
If the CFC runs a genuine business with:
- A fixed place of operations
- Local staff and infrastructure
- Commercial autonomy
Then the income may be exempt.
This is to prevent penalising real, active businesses — the rules mainly target shell companies and artificial tax structures.
High Foreign Tax Exemption
If the CFC paid tax in its country at 75% or more of the SA corporate tax rate, then SARS won’t tax that income again.
- Current SA corporate tax rate: 27%
- Threshold: 75% × 27% = 20.25%
- So if your CFC pays more than 20.25% tax offshore, you may be exempt.
Certain Passive Income Exemptions
- Dividends from a 10%+ owned foreign subsidiary
- Certain interest or royalty income (if not sourced from South Africa)
Strategic Considerations
If you have or are planning to set up a CFC, consider:
- Structuring the entity so that it qualifies for the FBE exemption
- Ensuring you’re not sitting on undistributed profits that create tax without cash
- Assessing your foreign tax credit eligibility carefully
- Avoiding triggers for permanent establishment (PE) in other jurisdictions
Summary: How a CFC Impacts You
| Impact Area | Description |
| Taxable Income Increases | Pro-rata share of CFC’s net income added to your SA income |
| Provisional Tax | May need to pay tax in advance even if you don’t receive the cash |
| Foreign Tax Credit | Offset SA tax liability with taxes paid offshore |
| Cash Flow Pressure | Tax due in SA even if foreign income isn’t distributed |
| Exemptions Possible | If FBE or foreign tax is high, income may be exempt |