Section 9H to the Income Tax Act, No 58 of 1962 (“the Act”) was introduced into the Act with effect from 1 April 2012 to consolidate the exit charge rules applicable when a person ceases to be a resident for South African tax purposes.
A South African resident is defined in section 1 of the Act as a person (other than a natural person) which is incorporated, established or formed in the Republic or which has its place of “effective management” in the Republic, but does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any double tax agreement entered into by South Africa.
When, for example a company relocates its effective management and as a result changes its residence to another tax jurisdiction, the company will cease to be a South African resident (even if the taxpayer continues to have some or all its operations in South Africa). In terms of section 9H of the Act, the cessation of South African residence is deemed to be a disposal for income tax purposes. The taxpayer is treated as having disposed of its assets (subject to certain exclusions) for an amount received or accrued equal to the market value of the assets on the day before ceasing to be a South African resident and to have immediately reacquired the same assets at a cost equal to the same market value.
The exit charge does not apply to certain assets, including immovable property situated in South Africa, or any interest or right in movable property situated in South Africa (including interests or rights to an immovable property company); and any asset which is attributable to a permanent establishment in South Africa. The Taxation Laws Amendment Bill, No 34 of 2012, the latest version of which was introduced in the National Assembly on 25 October 2012, proposes amendments to section 9H of the Act to incorporate the exit charge provisions in the Eighth Schedule to the Act for, a controlled foreign company that ceases to be a controlled foreign company (otherwise than by becoming a resident).
Section 9H will apply to a person or company that ceases to be a resident, or a company which becomes a headquarter company and a controlled foreign company that ceases to be a controlled foreign company, subject to limited exclusions.
In the case of a resident company that ceases to be a resident or becomes a headquarter company it will be deemed to have distributed its assets as a dividend in specie in accordance with each shareholder’s effective interest. The company will therefore potentially be liable for dividends tax, depending on the availability of any dividends tax exemptions. The amount of the deemed dividend is deemed to be the market value of the shares in the company (i.e. the company’s gross value net of liabilities) less the sum of contributed tax capital.
Section 9H will not apply in respect of a company that ceases to be a resident as a result of an “amalgamation transaction” or a “liquidation distribution”.
Furthermore, where a company ceases to be a controlled foreign company as a result of the disposal by a person of shares in a foreign company and such disposal was disregarded for CGT purposes, section 9H provides that the exit charge will not apply to a company which ceases to be a CFC.
It is proposed that the amendments to section 9H will come into operation on 8 May 2012 and apply in respect of any person that ceases to be a resident, becomes a headquartered company or ceases to be a controlled foreign company on or after that date.