Certain foreign jurisdictions cater for so-called hybrid entities; entities that offer limited liability like a company but which are taxed in their home country as a partnership. Common examples include the United Kingdom’s limited liability partnerships and the United States’ limited liability companies.

In the past, such entities may have constituted a “company” as defined for South African income tax purposes, resulting in the entity being liable for tax in its own capacity (assuming it earns South African sourced income), as opposed to the partners being the taxpayers.  

Specific rules have now been introduced which deal with the tax status of these entities from a South African tax perspective. Essentially, if the foreign partnership is treated as a conduit abroad for tax purposes (i.e. the partners/members are required to take into account their interest in amounts received by or accrued to the partnership when such amounts are received by or accrues to the partnership), the South African tax system will also treat it as a conduit. Accordingly, the foreign partnership will not be treated as a company for South African income tax purposes.

The result is that the partners or members of the foreign partnership will be liable for South African tax in their own capacity if they earn South African sourced income. Although this may sound like a simple solution for the foreign partners or members, it remains to be considered whether the activities of the partner/member who earns South African sourced income (presumably by virtue of activities performed in South Africa) create a permanent establishment for the other partners or members in South Africa.

Whilst this treatment will apply with immediate effect in respect of new foreign partnerships, the effective date will be delayed until 1 October 2011 in respect of existing entities to resolve possible transitional tax issues.

Furthermore, it should be noted that no changes were made to the VAT Act with regard to the treatment of foreign partnerships. Accordingly, it should be considered whether the foreign partnership constitutes a VAT vendor separate from its members.