Group taxation is generally not permitted in South Africa. However, relief is given for transactions between group companies to allow for reorganisations, provided certain requirements are met.
In general, the relief will only apply to transactions between companies within the same group. A group of companies is defined as a controlling company and one or more controlled companies in relation to that controlling company. A controlling company means a company holding, directly or indirectly, at least 70% of the equity shares of any other company. Foreign-incorporated companies do not form part of a group of companies for the purposes of this relief unless effectively managed in South Africa, although relief is extended to controlled foreign companies (CFCs) in certain circumstances.
Corporate rollover relief is available for asset-for-share transactions, amalgamation transactions, intra-group transactions, unbundling transactions, and transactions relating to liquidation, winding-up, and deregistration.
The relief may cover the capital gains tax arising from the disposal of capital assets, income tax arising from the disposal of a depreciable asset, income tax arising from the disposal of trading stock, donations tax arising from the disposal of an asset, dividends tax, VAT, securities transfer tax, and transfer duty.
Transfer pricing and thin capitalisation
South Africa has transfer pricing legislation applying to cross-border transactions involving connected persons. The transfer pricing legislation applies the arm’s-length standard.
The transfer pricing legislation does not separately address transfer pricing and thin capitalisation. Rather, thin capitalisation is simply treated as a potential breach of the general arm's-length standard (i.e. in relation to the level of funding).
Where a transfer pricing adjustment is required to be made, that adjustment is subject to a secondary adjustment where it is deemed to be either a dividend or a donation.
In addition, South Africa has formally adopted the OECD’s three-tiered documentation approach, and certain taxpayers are required to electronically submit Country-by-Country Reports, Master File, and/or Local File returns within 12 months of the end of their financial year.
The SARS has also, in recent years, expanded the transfer pricing questions contained in the CIT returns. In answering these questions, taxpayers are required to make a full disclosure of all requested information, as well as any information that may be relevant.
Controlled foreign companies (CFCs)
If one or more residents together, directly or indirectly, hold more than 50% of the voting or participation rights in a foreign company, then it is a CFC in relation to those residents. The income of a CFC is imputed to the residents in proportion to their holdings, subject to certain exclusions and tax credits, where applicable. The most notable exclusions are for high-taxed CFCs and for income attributable to ‘foreign business establishments’.