A number of proposed amendments to the Income Tax Act No. 58 of 1962 (“Act”) in the 2015 Draft Taxation Laws Amendment Bill, published for public comment on 22 July 2015 (“2015 Bill”), have certainly raised a few eyebrows amongst South African resident multinational corporate taxpayers. The amendments seek to retrospectively reverse a 2013 amendment to the Act, which resulted in the levying of capital gains tax on transactions involving the cross issue of shares by South African resident companies acquiring shares in foreign companies. Apart from the total reversal of the 2013 amendment, the 2015 Bill also proposes further amendments to counter tax free corporate migrations out of South Africa.

Owing to the increase in global initiatives against exploitative cross border corporate tax evasion and aggressive tax avoidance strategies, the National Treasury (“Treasury”) has endeavoured to follow suit by treating certain cross border transactions with even greater vigilance to preserve the South African tax base.

Transactions in which non-resident companies gained control of South African resident companies through the tax free issue of shares by a resident company to a non-resident, in exchange for shares in the latter (“cross issue of shares”) were of particular concern to the Treasury up to 2013. The Treasury perceives such transactions as resulting in the tax free migration of resident companies and with the participation exemption on the disposal by a resident of its shares in its foreign operations. As contemplated in paragraph 64B of the Eighth Schedule to the Act, this could potentially result in a resident company being stripped of its foreign operations, free of tax. Moreover, the Treasury has expressed a concern that a resident company’s tax residence could be shifted offshore by the change of a company’s place of effective management, potentially resulting in a lower exit charge, due to the asset realisation and a low level of unrealised gains in such assets.

Such transactions are further viewed by Treasury as exploitative of international tax rules, particularly where profits are shifted to locations with little or no tax obligations, often resulting in instances of double non taxation, or instances where little or no overall corporate tax is paid by South African resident companies. Even more disconcerting to the Treasury, however, is that such “exploitative” profit shifting transactions would, in its view, ultimately lead to the erosion of the South African tax base.

In order to offset the perceived base erosion and other effects of tax free corporate migrations, in 2013, amendments were effected to paragraph 11(2)(b) of the Eighth Schedule to the Act (“the 2013 amendments”). Owing to the nature of the 2013 amendments, as of 1 April 2014, any transaction of a South African resident company involving the cross issue of shares would be considered to be a disposal for capital gains purposes.


Despite the Treasury’s best intentions to ward off the negative consequences of tax free corporate migrations, the 2013 amendments have brought with them certain commercial difficulties, primarily in respect of legitimate cross border commercial transactions that have neither a corporate migration nor profit shifting effect.

Secondly, the Treasury has observed that the 2013 amendments have led to non-resident controlled groups manipulating the participation exemption as contemplated in paragraph 64B of the Eighth Schedule to the Act, particularly with regard to the tax free repatriation of foreign dividends back to South Africa. The participation exemption was introduced with a view to facilitating the tax free sale of foreign shares, as profits from the sale of shares in non-resident companies may represent nothing more than retained dividends. In what is viewed as a further base erosion and profit shifting strategy, the Treasury has expressed the concern that non-resident controlled groups may use the participation exemption in order to strip resident companies of their holdings in foreign operations whilst keeping resident companies tax resident in South Africa.

Finally, the Treasury considers the wording of the 2013 amendments, in their current form, as inadvertently precluding taxpayers from the capital gains tax relief offered in respect of asset for share transactions, as provided for in the roll over provisions of section 42 of the Act.


The 2015 Bill was published for public comment on 22 July 2015. Prior to the publication of the 2015 Bill, certain proposed amendments, including those relating to tax free corporate migrations, were afforded a period of further public consultation after a Media Statement to this effect was published on 5 June 2015. In light of what the Treasury has identified as adverse base erosion and profit shifting strategies, together with other adverse consequences that have come about due to the 2013 amendments, it has proposed the following amendments

  1. the 2013 amendments to paragraph 11(2)(b) of the Eighth Schedule to the Act will be reversed, with the result that the issue of shares by South African resident companies as consideration for shares in foreign companies will no longer be subject to capital gains tax. This reversal is to apply retrospectively in respect of shares issued on or after 1 April 2014, being the date that the 2013 amendments were introduced;
  2. as of 5 June 2014, transactions in terms of which foreign shares are disposed of by South African residents to connected persons, as defined in section 1 of the Act, will not be eligible for the participation exemption in paragraph 64B and will now be subject to capital gains tax; and
  3. in instances where a South African tax resident changes tax residence in terms of section 9H of the Act, any benefits enjoyed by such a tax resident during the three year period before the cessation of that taxpayer’s residence will be subjected to tax. In this regard, the following amendments in respect of this three year period shall be deemed to have come into retrospective operation, as of 5 June 2015 –
    1. any disregarded capital gains in terms of paragraph 64B of the Eighth Schedule to the Act that were calculated in respect of a disposal by a tax resident of its shares in a foreign company will be subjected to tax. The Treasury advises that the aggregate of such disregarded capital gains will not be taken into account in determining the net capital gain or assessed capital loss of the resident. The disregarded gains will, however, be included in the taxable income of the resident at the companies’ inclusion rate; and
    2. any participation exemption on foreign dividends enjoyed by a South African resident will be subjected to tax upon exit. Foreign dividends that were exempt in terms of section 10B(2)(a) during the three year period will be subject to tax at an effective rate of 15 per cent.


With the ever-varying international commercial climate, whether or not these proposed amendments will achieve Treasury’s policy objectives of preventing base erosion and profit shifting, together with the other adverse effects of tax free corporate migrations in South Africa, whilst simultaneously promoting the growth of the South African economy and tax base, remains to be seen. To the extent that taxpayers regard the recent changes in South African tax legislation as anything by which to predict this, however, multinational corporate taxpayers can certainly expect to see further amendments concerning tax free corporate migrations and cross border transactions in the near future.