It is quite common for multinational organisations to embark on restructuring projects affecting subsidiaries situated across the globe, including South Africa. As part of a restructuring process, it may result in the control of a South African subsidiary being transferred to another offshore holding company. This article deals with selected tax and exchange control implications where shares in an unlisted South African subsidiary are transferred between offshore group companies.

As a first step in considering the possible tax consequences, one would need to determine whether the offshore group companies forming part of the transaction could be regarded as residents under South African tax law. This is an important consideration as South African residents are taxed on worldwide income whereas non-residents are only taxed on South African sourced income, subject to the application of a relevant Double Tax Agreement (DTA).

A "resident", as defined in section 1 of the Income Tax Act No. 58 of 1962 (the Act), means any person (other than a natural person) that is incorporated, established or formed in South Africa or that has its place of effective management (POEM) in South Africa. Further, the definition of the "resident" in section 1 of the Act specifically excludes any person that is deemed to be exclusively a resident of another country by virtue of the application of a relevant DTA that South Africa has entered into.

Essentially, the determination of residence in relation to a company incorporated offshore comes down to where its POEM is situated. This is obviously a question fact depending on particular facts and circumstances and no hard and fast rules apply. Guidance is provided by the South African Revenue Service under Interpretation Note 6, which may not necessarily be relevant in a treaty context where OECD guidance would be more relevant.

On the assumption that the offshore holding company transferring the shares does not have its POEM in South Africa, and is therefore not regarded as a "resident", one must consider whether the source rules come into play. This is because non-residents are only subject to tax in South Africa on income from, or deemed to be from a South African source. Where amounts are from, or deemed to be from a South African source, a further enquiry is necessary to establish whether South Africa's taxing rights have been limited under a relevant DTA.

The source of income from the sale of shares was considered in Overseas Trust Corporation Ltd v CIR, dealing with an investment company which carried on business in South Africa by buying and selling shares and securities, with a view to profit. During the course of the year of assessment in dispute the company had sold, among other assets, certain shares through brokers in Germany.

The court held that the profits were derived from a source within South Africa due to the fact that the taxpayer carried on its share dealing activities in South Africa. It follows then that provided the factual circumstances support the view that the transfer of shares from one offshore group company to another occurred outside South Africa, it is unlikely that the source will be regarded as being from a source within or deemed to be within South Africa.

Notwithstanding the source rules discussed above, a non-resident will be subject to capital gains tax (CGT) on the disposal of shares in a South African company (commonly referred to as 'land rich ompanies) if 80% or more of the market value of the equity shares at the time of disposal is attributable, directly or indirectly, to immovable property situated in South Africa and the non-resident owns at least 20% of the share capital of that company.

An important aspect to consider with regards to CGT, where a land rich company is concerned, is that certain DTA's limit South Africa's taxing rights in cases where shares are disposed of / transferred by non-residents.

The transfer of a security (including a share) of a company incorporated, established or formed inside South Africa will attract Securities Transfer Tax (STT) at the rate of 0,25% of the taxable amount (generally market value) of that security and is payable by the person acquiring the security, unless a specific exemption applies.

In the current circumstance, STT would be payable by the South African subsidiary, however it has the right of recovery from offshore company acquiring the shares.

Exchange Control is an often overlooked area in transactions of this nature. Dealings in securities in which non-residents have an interest are controlled in terms of Exchange Control Regulations which include the acquisition or disposal of any controlled security by a non-resident.

The control is exercised by placing the endorsement "non-resident" on all securities owned, or in which non-residents have an interest. Without the required endorsement the offshore holding company would not be allowed to sell or transfer the affected securities to another offshore holding company.

The endorsement of the securities will further facilitate the smooth repatriation of dividends in future.

Written by Ruaan van Eeden, Senior Associate in the Tax Practice at Cliffe Dekker Hofmeyr