1.introduction - web viewmr ayoba who is 40 years old bought shares in mtn plc, a foreign...

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CHAPTER 56CONTROLLED FOREIGN COMPANIES AND SECTION 9D

Table of Contents1.INTRODUCTION...........................................................................................................................2

1.1 WHY IS SECTION 9D NECESSARY...........................................................................................2

2.WHAT IS A CONTROLLED FOREIGN COMPANY.............................................................................5

3.DIAGRAMMATIC REPRESENTATION OF SECTION 9D AND FOREIGN DIVIDENDS RULES APPLICABILITY................................................................................................................................6

4.COMPLEX CONSIDERATIONS SECTION 9D....................................................................................7

5. DISCUSSION OF THE PERMANENT BUSINESS ESTABLISHMENT EXEMPTION.................................8

6. DETAILED ILLUSTRATIONS...........................................................................................................9

1CHAPTER 11 FOREIGN DIVIDENDS

STEVEN LEVER © FOR USE BY FLB STUDENTS ONLYUPDATED 05/2012

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1.INTRODUCTION

Prior to doing this chapter, the chapter on taxation of foreign dividends should be done.

In terms of that chapter, any foreign dividend paid to a SA resident where such SA resident owned at least 10% of the shares in the foreign company was exempt.

This chapter deals primarily with instances where shareholdings are at least 10% or more. In such instances, section 9D may bring various amounts not taxed in terms of the foreign dividend rules into SA taxable income.

1.1 WHY IS SECTION 9D NECESSARY

Foreign companies can be used by SA taxpayers to reduce tax paid.

SARS’s response has been to legislate a tax avoidance section which aims to put a stop to such tax avoidance. These anti avoidance provisions are housed primarily in section 9D of the Act.

Thus to understand foreign dividend rules, it is necessary to understand why section 9D of the Act has been promulgated..

ILLUSTRATION OF WHAT COULD HAPPEN IF SECTION 9D DID NOT EXIST

Mr A, a SA resident, has R1,200,000 in a bank in SA. He earns interest of R100,000 a year. He pays tax at the maximum marginal rate of 40% and has used up his interest exemption elsewhere.

Thus R40,000 tax is paid on the interest income. (40% tax rate X R100,000 interest earned)

Someone suggested to him to register a company in the Isle of Man, which is a tax haven where no tax is payable.

Mr A would then give his company an interest free loan of R1,200,000. The company in the Isle of Man would invest the money offshore and earn interest of R100,000.

Ignoring the provisions of section 9D of the Act, would the amount be taxable in South Africa?



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SUGGESTED SOLUTION

As the company is not a SA resident (not registered and not controlled in South Africa) , the company would be taxed on a source basis in South Africa.

The source of the interest earned is offshore and consequently the interest earned would not be taxable in SA.

The interest earned in the Isle of Man (a tax haven) is tax free and no taxation will be paid on the R100,000 interest earned.

The company could then declare a dividend of R100,000 to the SA resident. As the resident owns 10% or more of the offshore company, the foreign dividend so received is exempt.

R40,000 tax will be saved by Mr A. SA Revenue Services will lose R40,000 tax

To prevent this from happening, section 9D was introduced into the SA Income Tax Act, which is essentially an anti-avoidance section to prevent erosion of the SA tax collection base through schemes similar to the one discussed in the illustration above.

Section 9D works on the assumption that SARS wants to still tax the money taken offshore.

SARS recognises that there are two primary reasons for investing in offshore shares:1. To earn passive income in the form of dividends, interest and rentals, and2. To run a business offshore.

Section 9D is not meant to affect the running of a business from an offshore company. It is aimed to tax SA residents (such as the person shown in the previous illustration) on their passive investment income that has not yet been taxed in SA.

Section 9D tries to take foreign passive income earned by offshore companies into the gross income of the South African residents that own the offshore companies. Thus interest earned by a foreign company will be deemed to be included in the SA resident’s gross income. Redoing the illustration, the following would result.

ILLUSTRATION – WHAT HAPPENS AS SECTION 9D DOES EXIST

Mr A, a SA resident, has R1,200,000 in a bank in SA. He earns interest of R100,000 a year.

Someone suggested to him to register a company in the Isle of Man and to give that company an interest free loan of R1,200,000. The company in the Isle of Man invests the money offshore and earns interest. Mr A owns 100% of the company.

What amount would be taxable in South Africa?



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SUGGESTED SOLUTION

It should be noted that section 9D has not yet been covered. This illustration merely shows what the final effect of section 9D will be to such a scheme.

Section 9D will deem the income of the offshore company to be the gross income of the SA resident.

Section 9D deems that the R100,000 earned by the offshore company will be taxed in the hands of Mr A. Mr A will include R100,000 interest as his own gross income, and will pay tax of R40,000 on this interest earned.

As can be seen, the SA resident taxpayer is in the same position both before and after the transfer of money to the tax haven offshore. Section 9D is only applicable to controlled foreign companies.



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2.WHAT IS A CONTROLLED FOREIGN COMPANY



To determine the basis upon which a foreign dividend will be taxed in the hands of a SA residents, it should be ascertained whether the foreign company is a controlled foreign company as defined. Section 9D will apply only to foreign companies that are controlled foreign companies as defined.

A controlled foreign company is a foreign company that SA residents own > 50% of the voting rights or > 50% of the profits.

In examples where there are indirect holdings, the determination of voting rights is based on the number of voting rights that SA residents control, and not the effective holding. Thus if a SA company A owns 60% of foreign company B which owns 60% of foreign company C, the holding in foreign company C by SA company A would be deemed to be 60% voting rights. Section 9D may apply to SA company A’s holding in foreign company C as foreign company C is a controlled foreign company of SA Co A.

In determining whether the holding by SA residents is > 50%, a SA listed company, or SA unit trust (plus connected persons to the listed company or unit trust) that owns less than 5% of the shares in a foreign company will not have their voting percentage taken into account.

Foreign company 1

Owned 70% by SA

company 30% by non

resident

The company is a controlled foreign company as > 50% of the voting and

participation rights are owned by SA

residents

Foreign company 2

Owned 40% by SA

company 60% by non

resident

The company is not a controlled foreign company as < 50% of the voting and

participation rights are owned by SA

residents

Foreign company 3

Owned 49% by SA company A 49% by non resident 2% by SA listed company who is not a

connected person to SA company A

The company is not a controlled foreign company as < 50% of the voting and participation rights are owned by SA residents. SA listed companies are

ignored if less than 5% are held by them unless the listed company and a

connected person own > 50%

Foreign company 5

Owned 35% by SA company 1 12% by SA resident individual 49% by non resident 4% by SA company 2

None of the shareholders are connected persons to one another.

The company is a controlled foreign company as > 50% is held by SA residents. SA company 2 is

not listed

Foreign company 4

Owned 49% by SA company A 49% by non resident 2% by SA listed company who is a

connected person to SA company A

The company is a controlled foreign company as > 50% of the voting and participation rights are owned by SA

residents. SA listed companies are included in the calculation if the listed company and

a connected person together own > 50% directly or indirectly

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3.DIAGRAMMATIC REPRESENTATION OF SECTION 9D AND FOREIGN DIVIDENDS RULES APPLICABILITY



THE SA RESIDENT SHAREHOLDER (AND ANY CONNECTED PERSON TO THE SHAREHOLDER) OWNS AT LEAST 10% OF THE SHARES IN THE CFCSTEP 4

SECTION 9D APPLIES. THE SA RESIDENT OWNER OF THE SHARES INCLUDES A PROPORTIONAL SHARE OF THE NET INCOME BEFORE TAX OF THE CFC INTO THEIR OWN GROSS INCOME. AN EXAMPLE OF THIS IS WHERE A CFC IS OWNED 20% BY A SA RESIDENT, AND EARNS INTEREST

OF R100,000, 20% X R100,000 INTEREST WILL BE INCLUDED IN THE GROSS INCOME OF THE SA TAXPAYER.

THE FOLLOWING AMOUNTS ARE EXCLUDED FROM THIS NET INCOME INCLUSION IN TERMS OF SECTION 9D INCOME FROM A FOREIGN BUSINESS ESTABLISHMENT OVERSEAS INCOME HAS BEEN TAXED IN SA ALREADY INCOME THAT COMES FROM DIVIDENDS DECLARED FROM A SA COMPANY

STEP 1IS THE FOREIGN COMPANY A CONTROLLED FOREIGN COMPANY

IF THE FOREIGN COMPANY IS NOT A CONTROLLED FOREIGN COMPANY.

APPLY THE FOREIGN DIVIDENDS RULES TO INCOME THE COMPANY IS A CONTROLLED FOREIGN COMPANYSTEP 2

DOES ANY SA RESIDENT SHAREHOLDER (AND ANY CONNECTED PERSON TO THE SHAREHOLDER) OWN 10% OR MORE OF THE CONTROLLED FOREIGN COMPANY?IF THE SHAREHOLDING OF A TAXPAYER PLUS ANY

CONNECTED PERSON TO THAT TAXPAYER IS LESS THAN 10%, SECTION 9D DOES NOT APPLY FOR THAT

TAXPAYER. APPLY THE FOREIGN DIVIDENDS RULES TO INCOME.

THE DIVIDEND RECEIVED FROM A CFC IS TAXED IN TERMS OF THE FOREIGN DIVIDENDS RULES. HOWEVER THE AMOUNT ALREADY TAXED IN TERMS OF SECTION 9D IS EXEMPTED FROM THE FOREIGN DIVIDEND RECEIVED. IF THE FOREIGN DIVIDEND WAS 100 AND SECTION 9D

INCOME WAS 150, THE FULL DIVIDEND WOULD BE EXEMPT. SEE THE CHAPTER ON FOREIGN DIVIDENDS

STEP 3SECTION 9D INCOME IS NIL IF THE FOREIGN TAX RATE IS AT LEAST 75% OF THE SA TAX

RATE

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4.COMPLEX CONSIDERATIONS SECTION 9D



If section 9D applies (with shareholding equal or exceeding

10% in the CFC), the following steps should be followed

Step 1Calculate the total income earned by the controlled foreign company (CFC)

The financial year of the CFC will be used. Thus if the SA

resident has a February year end, and the CFC has a June year end, the profit for the year ended 30 June 2012 would be used for the SA resident’s February 2013

year end section 9D calculation.

If the SA resident acquires the CFC in the middle of the year, the income

included for the 9D calculation will be the lesser of actual income earned or

income earned for the year X time investment held/365 days.

Step 2Exclude from profit the following: income from a foreign business

establishment overseas. (10% passive income allowed there-in)

Income has been taxed in SA already

Income comes from dividends declared from a SA company

Passive income between

Step 3Determine the percentage holding

in the CFC held by the SA

If the company runs a factory, or shop with onsite management, such business will be a foreign business establishment. This is excluded from the application of section 9D.

Section 9D applies to passive income earned which includes but is not limited to interest, dividends, rent, annuities and royalties.

If an amount is shown in foreign currency, it is translated to rands using the average rate for the taxpayer’s tax year.

Step 4Multiply the percentage holding per step 3 with the net amount of (Step 1 –Step 2).

This will calculate the amount of the section 9D income that should be included in the taxable income of the SA resident.If the amount calculated is a loss, it is not included in the current year’s tax calculation and it is carried forward to the next

year

Step 5We have now taxed the income in the hands of the taxpayer. The taxpayer has also received a foreign dividend.

Include the gross foreign dividend received from the CFC into gross income. There is an exemption available for this dividend as the dividend cannot be taxed as well as profits.

The amount of dividend that has already been taxed as per section 9D will be exempt.

This calculation is a cumulative calculation.

Step 6If the CFC is sold, the carrying amount for the calculation of the base cost will be calculated as follows:

Original cost+ Profits recognized in terms of section 9D

-Foreign dividends declared that have been exempted from taxation.

Total exclusion from 9D

If the total of foreign taxes payable by the CFC is at least

75% of the South African taxes, then the net income is deemed to be nil and if not,

proceed to step 3.

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5. DISCUSSION OF THE PERMANENT BUSINESS ESTABLISHMENT EXEMPTION

The following discussion is an overview of the permanent business establishment exemption.

SARS wants to stop persons from taking their passive income in the form of interest, dividends, royalties and rentals offshore

However in certain instances, it may make sense to run a business offshore. Where a proper permanent business establishment is run offshore, the amounts earned will be exempt from section 9D.

Consider the following example

As can be seen from the above, Section 9D is designed to prevent SA residents from taking assets offshore into tax havens and trying to earn tax free passive income from within the tax haven.

THE PERMANENT BUSINESS ESTABLISHMENT EXEMPTION IS NOT EXAMINABLE.



MR A, A SOUTH AFRICAN RESIDENT, INVENTS A NEW TYPE OF CONDOM THAT WILL NOT SLIP OFF DURING SEX. HE IS FACED WITH 2 OPTIONS

1. OPTION 1 IS TO SET UP A COMPANY HE OWNS 100% IN THE ISLE OF MAN, GIVING HIS ROYALTY RIGHTS TO THE COMPANY OFFSHORE. THE COMPANY WILL RECEIVE ROYALTY PAYMENTS FROM PERSONS LICENSED TO MANUFACTURE THE CONDOM. IN THIS WAY, HE HOPES TO AVOID PAYING ANY TAX AS THE COMPANY IS IN A TAX HAVEN

2. OPTION 2 IS TO SET UP A COMPANY IN CHINA MANUFACTURING CONDOMS FOR THE WORLD. HE WILL OWN 100% OF THE COMPANY IN CHINA

OPTION 1THE COMPANY WILL PAY TAX IN THE TAX HAVEN,

BUT IT WILL BE A CFC AND TAXED IN TERMS OF

SECTION 9D. ALL ROYALTY INCOME WILL BE INCLUDED IN MR A’S SA

TAX RETURNTHERE IS NO EXEMPTION

OPTION 2THE COMPANY WILL PAY TAX IN CHINA. THE COMPANY

IS ALSO A CFC AND TAXED IN TERMS OF SECTION 9D.

ALL INCOME OF THE COMPANY WILL BE INCLUDED IN MR A’S SA TAX RETURN

HOWEVER ALL THE INCOME IS EXEMPT AS THE COMPANY IS A PERMANENT BUSINESS ESTABLISHMENT

OVERSEAS.

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6. DETAILED ILLUSTRATIONS

ILLUSTRATED EXAMPLE 1 – SECTION 9D COMPLEX INVESTMENT

Mr Ayoba who is 40 years old bought shares in MTN PLC, a foreign company, on 1 May 2008.

For the entire duration of the year of assessment, the shareholding in MTN PLC was as follows:

Mr Ayoba SA resident 40%Miss Vuvuzela SA resident 20%Miss Zuma SA resident 5%Jabulani PLC, a non resident company Non resident 35%

None of the parties mentioned above are connected persons. MTN PLC invested in various areas in SA and overseas. The company did not carry on business in South Africa.

You have completed the rest of Mr Ayoba’s tax return and the following is relevant:- Salary received R140,000- Interest received (SA) R10,000- Foreign dividends received R1,000

He has no other income in his own hands.

The following has been extracted from the trial balance of MTN PLC for the year ended 31 December 2012, which is MTN PLC’s year end.

Interest received from SA source 30,000Interest received overseas 18,000Dividends received from SA companies 20,000Dividends received from non SA companies, of which 15,000 has been taxed in SA already 45,000Rent received on properties located in SA 100,000Rent received on properties located offshore 50,000

Calculate the taxable income of My Ayoba, 35 years of age, for the 28 February 2013 year end.

Will section 9D apply to Miss Zuma? She is not a connected person to any other shareholder.



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SUGGESTED SOLUTION TO ILLUSTRATIVE EXAMPLE 1

Salary 140,000Foreign dividends Received by Mr Ayoba 1,000Foreign dividend exemption

30/40 X R1,000 (750)

MTN PLC foreign dividends

Foreign dividends received by MTN PLC – Mr Ayoba’s share 45,000 X 40% 18,000

Foreign dividends already taxed in SA– Mr Ayoba’s share 15,000 X 40% (6,000)

Exemption 30/40 X 12,000 (9,000)Interest received SA in own hands 10,000Interest exemption (10,000)Interest overseas MTN PLC is a non resident. Non residents do not

pay tax on foreign interest in SA, thus include Mr Ayoba’s share of 18,000 X 40%

7,200There is no exemption as the R22,800 exemption

applies only to SA source interestInterest received SA source

MTN PLC did not pay tax on this in SA as local interest received by a non resident is exempt as long as they do not carry on business in SA and are outside SA for > 183 days thus include in Mr

Ayoba’s income. Include 40% X 30,00012,000

Interest and foreign dividend exemption

Mr Ayoba is 35 years old and as such has 22,800 exemption available to him. R10,000 has already been

used. (12,000)Dividends SA companies

No tax paid by MTN PLC on this in SA, thus include Mr Ayoba’s share of 20,000 X 40%

8,000Local dividend exemption

Local dividends are exempt(8,000)

Local rent As these properties are located in SA, the rent has been taxed in MTN PLC’s hands in SA. Thus not

subject to 9D. 0Offshore rent This is not sourced in SA thus SA tax has not been

paid on these properties. Include Mr Ayoba’s share 40% X 50,000 20,000

Taxable income 197,900

Note that section 9D would not apply to Miss Zuma as she owns less than 10% of the foreign company and is not a connected person to any of the shareholders.



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ILLUSTRATED EXAMPLE 2 - FOREIGN DIVIDENDS AND CFC COMBINED

Before doing this example, the chapter on foreign dividends must be understood. Foreign dividends are integrated into this example as it is necessary to determine whether you understand what is a CFC or not.

Mr Zakumi is a SA resident who does not work. He only owns shares in foreign companies. He has requested that you help him to complete his tax return. He received the following dividends during the tax year.

1. Mr Zakumi owned 30% of the shares in A PLC, a foreign company. He is the only SA resident that owns shares in A PLC. A PLC had a profit of R1,000,000 for the year, paid tax in the foreign country of R250,000. A PLC paid a dividend of R200,000. 10% of the dividend was withheld as withholding tax. A PLC does not trade in SA.

2. Mr Zakumi owned 8% of the shares in B PLC, a foreign company. He is the only SA resident that owns shares in B PLC. B PLC had a profit of R1,200,000 for the year, paid tax in the foreign country of R360,000. B PLC paid a dividend of R400,000. 20% of the dividend was withheld as withholding tax. B PLC does not trade in SA. (Mr Zakumi has indicated that he would prefer to tax this company in terms of section 9D if possible)

3. Mr Zakumi owned 15% of the shares in C PLC, a foreign company. He is the one of 2 SA residents that owns shares in C PLC. The other SA resident owns 35% of the shares in C PLC. C PLC had a profit of R1,500,000 for the year, paid tax in the foreign country of R500,000. Mr Zakumi received a dividend of R45,000 from C PLC. 10% of the dividend was withheld as withholding tax. C PLC does not trade in SA.

4. Mr Zakumi owns 5% of the shares in D Inc, a foreign company. The company is not a controlled foreign company as defined. He received a dividend of R12,000 after a 20% withholding tax had been withheld. 40% of the profits of D Inc have already been taxed in SA.

5. Mr Zakumi owns 3% of the shares in E Inc, a foreign company. The company is a controlled foreign company as defined. His brother owns 11% of the company. The company made a profit of R5,000,000 and paid tax of R1,300,000. The company declared a dividend of R1,000,000. No withholding tax was withheld by the company. 30% of the profits of E Inc are made up of dividends that have been received from SA resident companies.

6. Mr Zakumi owns 0,6% of the shares in Anglo PLC, a company that is dual listed on the London and Johannesburg stock exchanges. He received an interim dividend of R230,000 from the company.

7. Mr Zakumi owns 18% of the shares in an overseas company, G Ltd. He is the only SA resident that owns shares in this company. He received a dividend of R65,000 from this company. In terms of the laws of the foreign company, the dividend is treated as a deduction for the company paying the dividend.

8. Mr Zakumi and his brother each owns 6% of the shares in a foreign company H Ltd. H Ltd is not a CFC. The company declared a dividend of R50,000 to each of the brothers.

9. Mr Zakumi owns 14% of the shares in H PLC, a company that is 60% owned by SA residents. This company runs a condom factory overseas. H PLC had a profit of R600,000 for the year, paid tax in the foreign country of R150,000. H PLC paid a dividend of R148,750 after a 15% withholding tax. H PLC does not trade in SA.

10. I PLC is a UK company that owns 60% of a SA listed company. Mr Zakumi owns a 200 shares (out of 20,000,000 issued shares) in the company.15% of the income from I PLC is in the form of the dividend from the SA listed company. Mr Zakumi received R70,000 in dividends from this foreign listed company.



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11. Mr Zakumi owns 25% of the shares in J Inc, a company that is a controlled foreign company. J Inc earns all its income from rental of 3 properties plus interest earned overseas. Profit of J Inc is $30,000. The average exchange rate for the year was $1 = R8. The exchange rate at year end is $1=R7.80. No tax was paid overseas as the J PLC is in a tax haven. A dividend of R15,000 was received by Mr Zakumi.

12. Mr Zakumi owns 18% of the shares in L Inc, a company that is a controlled foreign company. L Inc earns all its income from a royalties overseas. Profit of L Inc is R250,000. No tax was paid overseas as the L Inc is in a tax haven. A dividend of R94,000 was received by Mr Zakumi. In the past section 9D income has exceeded foreign dividends by R12,000.

13. Mr Zakumi owned 40% of the shares in M PLC. M PLC is a controlled foreign company. Total income of the M PLC was 2,000,000 of which 20% was from a foreign business establishment and 15% was from profits already taxed in SA.

14. Mr Zakumi owned 30% of the shares in N Inc, a controlled foreign company. The controlled foreign company had a 31 August year end. The profit for the year ended 31 August was R180,000. Mr Zakumi has a 28 February year end as he is an individual. Mr Zakumi has calculated that profit from March to February is R200,000. N Inc did not declare any dividends.

15. Mr Zakumi bought 10% of the shares in P Inc, a controlled foreign company in September. The company had a profit of R500,000 for the year ended 31 December. Mr Zakumi had owned shares in P Inc for 90 days prior to P Inc’s year end. Actual profit earned by P Inc since Mr Zakumi acquired the shares was R200,000.

16. Q Inc, a CFC owned 60% by Mr Zakumi had a trading loss of 5,000,000 for the year.17. R PLC is owned 15% by Mr Zakumi. Last year it had a loss of 200,000. This year the profit is

R360,000. 18. 20% of S PLC was bought in the 2008 tax year by Mr Zakumi for R100,000. In the 2008 tax

year, 9D income was 40,000 and foreign dividends received was R25,000. In the 2009 tax year, 9D income was R30,000 and foreign dividends received was R10,000. The company was sold in the current year when overseas income of R60,000 had been earned. The shares in the company were sold for R200,000.

Calculate the amounts that would be included in the taxable income of Mr Zakumi for the 2010 tax year. Assume Mr Zakumi has no other income or capital gains other than what has been mentioned above.



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SUGGESTED SOLUTION TO ILLUSTRATED EXAMPLE 2

1 A PLC A PLC is not a controlled foreign company as SA residents own less than 50% of the shares in the company. Thus section 9D does not apply.

Include gross foreign dividend in gross income30% X 200,000 60,000

1 A PLC Mr Zakumi owns 10% or more in the company and as such the full foreign dividend is exempt (60,000)

2 B PLC B PLC is not a controlled foreign company as SA residents own less than 50% of the shares in the company. Thus section 9D does not apply.

2 B PLC Foreign dividend included in gross income 32,000 X 100/8040,000

2 B PLC 30.40 X 40,000 is exempted from income (30,000)3 C PLC C PLC is not a controlled foreign company as SA residents

own 50% of the shares in the company (SA residents own exactly 50% thus not more than 50%) Thus section 9D does not apply.

Include gross foreign dividend of 45,000 X 100/90 in gross income 50,000

3 C PLC Foreign dividend exemption as owns at least 10% of the shares in the company

(50,000)

4 D Inc D Inc is not a controlled foreign company. Include 12,000 X 100/80 into gross income 15,000

4 D Inc 30/40 X 15,000 (9,000)4 E Inc E Inc is a controlled foreign company. Section 9D does apply

as Mr Zakumi and connected persons to him (his brother) own at least 10% of the company. However the tax payable in the foeign country averages 26% (1,3M / 5M). This is 93% of the SA tax rate. As the foreign tax is greater than 75% of SA rate, the section 9D inclusion is Nil 0

5 E Inc E Inc is not a controlled foreign company. Include 100,000 X 3% into gross income 30,000

5 E Inc Exempt 30/40 X 30,000 (22,500)6 Anglo PLC Received dividend from a company that was dual listed, one

of the exchanges being the JSE. Include the dividend received into gross income 230,000

6 Anglo PLC Dividend from dual listed company is exempt (230,000)

7 F Ltd Dividend received 65,0007 F Ltd As the amount is treated as a deduction in the country

paying the dividend, it is not treated as a dividend that is exempt in terms of any dividend exemption.

8 G Ltd Dividend received 50,0008 G Ltd Connected persons owning at least 10% of the company (50,000)



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9 H PLC H PLC is a controlled foreign company. Mr Zakumi owns 10% or more in the company. Thus section 9D will be applied.

Include 14% X 600,000 = 84,000 for 9D. However H PLC is a foreign business establishment. Thus amount is excluded from section 9D application

09 H PLC Foreign dividend received by Mr Zakumi was 148,750 X

100/85 X 14% 24,50010 I PLC Dividend received 70,00010 I PLC 15% taxed in SA already (10,500)11 I PLC Exempt 30/40 X (70,000 – 10,500) (44,625)11 J Inc J Inc is a controlled foreign company. Mr Zakumi owns 10%

or more in the company. Thus section 9D will be applied.

Include 25% X 30,000 X 8 = R60,000 for 9D. Note that J Inc is a not a foreign business establishment as the company earns passive income and not trading operations income. (Rent and interest are passive income) Thus there are no amounts excluded for foreign business establishments.

60,00011 J Inc Foreign dividend received by Mr Zakumi was 15,00011 J Inc Exempt as R60,000 included in gross income for 9D. R15,000

less than 60,000 thus all exempt (15,000)

12 L Inc L Inc is a controlled foreign company. Mr Zakumi owns 10% or more in the company. Thus section 9D will be applied.

Include 18% X 250,000 per 9D. J Inc is a not a foreign business establishment as the company earns passive income and not trading operations income. (Royalty income is passive income) Thus no amounts are excluded.

45,00012 L Inc Foreign dividend received by Mr Zakumi was 94,00012 L Inc Portion exempt. Current 9D income is R45,000. Previous 9D

income as exceeds foreign dividends received is R12,000. Thus the first R57,000 of the foreign dividend is exempt.

(57,000)

13 M PLC 9D income is 40% X 2,000,000 = 800,00013 M PLC Foreign business establishment exclusion is 20% X 800,000 =

160,00013 M PLC Portion taxed in SA already exempt

15% X 800,000 = 120,0009D inclusion = 800,000 – 160,000 – 120,000 520,000



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14 N Inc Use the financial year of the CFC. Include 30% X 180,00054,000

15 P Inc Use the lesser of 200,000 or 90/365 X 500,000 = 123,288.Thus use 123,288 X 10%

12,32916 Q Inc Losses not accounted for in 9D calculation. Loss is carried

forward to the next year.

17 R Inc 9D inclusion in income 15% X (360,000 – 200,000) 24,00018 S PLC 9D income is 20% X 60,000 12,00018 S PLC Proceeds on sale for CGT is R200,00018 S PLC Base cost is 100,000 + 40,000 – 25,000 + 30,000 – 10,000 +

12,000 (60,000 X 20%) = 147,00018 S PLC Thus capital gain is 53,000. This would be part of the capital gain

calculation. Assuming there are no other capital gains, 30,000 would be exempt and the remaining 23,000 would be included in taxable income at an inclusion rate of 33,3333%

8,875



1.introduction - web viewmr ayoba who is 40 years old bought shares in mtn plc, a foreign...

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