Binding Private Ruling 166 – A change of domicile by a controlled foreign company

sarsAuthor: BDO South Africa

Binding Private Ruling 166, issued by SARS on 1 April 2014, involved an issue of concern to many holding companies in South Africa that have non-resident subsidiaries which hold their off-shore investments.

The issue is whether a South African holding company will be deemed, for the purposes of para 11 of the Eighth Schedule to the Income Tax Act 58 of 1962, to have incurred a ‘disposal’ of assets if its controlled foreign subsidiary changes its domicile, even where its place of effective management remains outside South Africa.

In this particular case the applicant for the ruling was a company that was incorporated in and was a tax resident of South Africa. It had a wholly owned subsidiary, incorporated in a tax haven, that was a ‘controlled foreign company’ (as defined in s 9D) in relation to the applicant.

The proposed change to the subsidiary’s place of effective management

The applicant company proposed to change the domicile of its subsidiary to another foreign tax-haven country in order to gain the benefit of double taxation agreements between those two foreign countries. The proposed plan would result in the place of effective management of the subsidiary changing from the one foreign country to the other.

The applicant sought a ruling from SARS as to whether the proposed course of action would be regarded as involving a disposal as defined in para 1 of the Eighth Schedule to the Income Tax Act, read with para 11 of the Schedule.

The applicant company’s concern was no doubt that disposal is so widely defined in the Eighth Schedule that the proposed arrangement might result in an unintended and undesired actual or deemed disposal, with adverse capital gains tax consequences for itself.

The ruling and its conditions and assumption

In its ruling, SARS affirmed that the proposed change of domicile of the subsidiary from country X to country Y would not, as regards the applicant, constitute a ‘disposal’ as defined in para 1 read with para 11 of the Eighth Schedule to the Income Tax Act.

The ruling was, however, made subject to the following conditions and assumptions, inter alia, that –

  • the change of domicile of the subsidiary was to be effected in terms of the law of the country whose domicile it was giving up, and the country in which it was to become domiciled;
  • no new legal entity would be created;
  • there would be no change to the legal identity of the subsidiary;
  • there would be no effect on the subsidiary’s property, rights or obligations; and
  • the effective management of the subsidiary would be located outside of South Africa both before and after the implementation of the proposed arrangement.

The favourable ruling depended on the consequences of the proposed change of domicile in terms of foreign law

Since the proposed change of domicile of the subsidiary was to be effected in terms of foreign law, the question whether the conditions andassumptions of the Ruling weresatisfied (save, presumably, for the last-mentioned condition, namely, that the subsidiary’s place of effective management would remain located outside South Africa) would have to be determined with reference to foreign law, and not in terms of South African law.

Consequently, the applicant’s apprehensions would not be put at rest by the binding private ruling itself, and the applicant would have to take professional advice on the legal consequences, in terms of the relevant foreign law, of the proposed re-domiciliation of its subsidiary. It is not inconceivable that a tax-haven country may have idiosyncratic legal rules in this regard.

Of particular concern to the applicant will presumably be whether, in terms of the laws of the tax-haven country, the proposed arrangement would result in a change to the subsidiary’s ‘property rights’ in relation to assets held within that tax-haven country, and to its ‘legal identity’ in one of the tax-haven countries. In either of those events, a condition and assumption of binding private ruling 166 will not have been satisfied, and the Ruling will cease to operate.