Where a more than 50% of foreign company is held by South African residents, the foreign company qualifies as a "controlled foreign company" (CFC) for South African income tax purposes. The CFC's income will need to be imputed to the South African shareholders for South African tax purposes, in accordance with their respective interests (subject to certain exemptions).

One of the exemptions from the CFC rules is the so-called "high tax" exemption, which exempts all the income of the CFC from South African tax where the CFC pays an amount of foreign tax equal to at least 75% of the tax which would have been due under South African law, had the CFC been a South African tax resident. A South African tax calculation must be performed in order to confirm whether the high tax exemption applies.

Another exemption from the CFC rules provides that certain CFC income, which is attributable to a "foreign business establishment" (FBE) as defined, is not subject to tax in South Africa.

Arguably, the way in which the CFC provisions are currently worded obliges taxpayers to first determine whether their CFC qualifies for the high tax exemption. If the CFC does not qualify, the taxpayer can then claim the FBE exemption. However, where a taxpayer owns a number of CFCs, it is administratively burdensome for it to have to perform South African tax calculations to determine whether the CFCs comply with the high tax exemption. Accordingly, relief is being proposed in this regard by allowing a taxpayer to use the FBE exemption in respect of its CFCs where this is applicable, without having to first undertake the time-consuming South African tax calculation process in order to determine whether or not the high tax exemption is available. In practice, many taxpayers have already been following this approach and it will be good to resolve the uncertainty around whether or not this is justifiable.

This Budget mentions that a taxpayer may deem the net income of its CFC to be nil, if either the high tax test is met or if most of the income is attributable to the FBE, when applied to "aggregate taxable amounts". No mention is made of any requirement that the income should be exempt under such FBE test. This raises the question of whether, if the CFC has an amount of "tainted" income (eg passive income that might not otherwise be allowed relief under the FBE exemption), this "tainted" income will be exempt, going forward, on the basis that it forms part of the CFC's "aggregate taxable amounts" viewed as a whole. We await the draft legislation for more detail on how this may work in practice.