South Africa: Excise duty changes in 2024 Budget Speech

TAX abstract

National Treasury announced above-inflationary ‘sin tax’ increases in the 2024 Budget Speech. This marks another round of significant increases in the rates of excise duty applicable to alcohol and tobacco products, well above the previous policy benchmark of Consumer Price Index (CPI)-linked annual increases.

Continue reading

South Africa: Get ready for an increased annual earnings threshold

With effect from 1 April 2024, the earnings threshold determined by the Minister of Employment and Labour in accordance with the Basic Conditions of Employment Act will be increased to ZAR 254 371.67 per annum (ZAR 21 197.64 per month). This represents an increase of approximately 5.5% from the previous earnings threshold of ZAR 241 110.59, which has been in effect since 1 March 2023.  

Continue reading

South Africa: Tax residence by mutual agreement or disagreement

TAX abstract

The tax residence of a company is generally confirmed by applying two primary tests. The first is that a company that is incorporated under the law of that country is tax resident in that country. The second is typically some form of management test. The two most common management tests applied are ‘management and/ or control’ and ‘effective management’ (collectively referred to as management test).
• What makes the position tricky is that there is no uniform meaning of the ‘management test’. The meaning applied by a specific country may differ materially to that of the other country also claiming the company as a tax resident.
• All parties with multinational groups are urged to assess the current residence status of their existing operations.

Continue reading

South Africa: National Budget Speech 2024 – tax takeaways within the private equity context

TAX abstract

On 21 February 2024, South African Finance Minister Enoch Godongwana delivered his Budget Speech. Members of our Tax Practice have highlighted the following implications of the Speech for the private equity industry.

Foreign direct investment – private equity funds

In terms of the current foreign direct investment (FDI) policy, private equity (PE) funds that are members of the South African Venture Capital Association (SAVCA) and that are mandated to invest outside the Common Monetary Area (CMA), may apply to the Financial Surveillance Department (FinSurv) for approval to invest offshore.

In the 2024 Budget Speech, the Finance Minister indicated that authorised dealers will now be authorised to allow South African PE funds, that are licensed with the Financial Sector Conduct Authority (FSCA), to invest offshore up to ZAR 5 billion per applicant per calendar year in line with the outward foreign direct investment policy. (Note: the fund manager and not the PE fund itself will be required to be licensed with the FSCA.)

FinSurv has issued a draft circular to this effect for public comment. Once it has finalised the circular, the new dispensation will come into effect.

The connected person definition in relation to partnership

In the PE space, an en commandite partnership, also known as a limited partnership, is commonly used as an investment vehicle. The liability of the limited partners to creditors of the partnership is limited to their capital contributions to and income from the partnership.

In terms of paragraph (c) of the definition of ‘connected person’ in section 1 of the Income Tax Act, members of a partnership are ‘connected persons’ in relation to each other and to any connected person in relation to such a partner. Treasury acknowledges that the wide definition has an unintended impact on limited partners in an en commandite partnership.

For example, the transfer pricing rules apply in respect of cross-border transactions between connected persons. If a non-resident limited partner (or a connected person in relation to such a partner) should thus enter into a transaction with one of the underlying South African resident investee companies of the PE fund, that transaction could be subject to the transfer pricing rules if the PE fund held 20% of the shares in that company.

Furthermore, if the PE Fund should make a foreign investment and holds more than 50% of the shares or voting rights in the foreign company, the tax resident limited partners will be exposed to the controlled foreign company (CFC) attribution rules even if each of the limited partners held an interest of less than 10% of the shares (which would otherwise be an excluded interest in the CFC). These implications were not envisaged by the Legislature.

Treasury proposes that where the limited partner is a ’qualifying investor’ (a defined term in the Income Tax Act which essentially refers to the limited partners), the definition of ‘connected person’ will be reviewed to temper the impact.