The forein business establishment exemption is not for outsourced services

Abstract

Controlled foreign company (CFC) provisions in the Income Tax Act provide for the imputation of the net income of a foreign company to its resident participants in proportion to their participation in the foreign company. However, income that is attributed to a foreign business establishment of the CFC is exempted from the imputation. In Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd [2023] ZASCA 10, a South African tax resident had a CFC in Ireland that outsourced some of its operations to third parties outside of Ireland. The resident sought to claim the foreign business establishment exemption in respect of all its CFC income. The South African Revenue Service disallowed the exemption in respect of all CFC income. The Tax Court allowed the exemption, and the Supreme Court of Appeal disallowed the exemption on the basis that the CFC outsourced its primary operations as contained in the CFC’s operating license. This note concludes that the Supreme Court of Appeal erred in focusing on the operations that the CFC was licensed to conduct, as opposed to what it actually conducted. It also finds that the outsourcing of some of the operations should not disqualify the entire operations of the CFC from the exemption. It further canvasses the future of the exemption in light of the introduction of the global minimum tax.