Or What is a CFC anyway?

Toward the end of 2022, the South African Revenue Services (“SARS”) took Coronation Investment Management SA (Pty) Ltd (“Coronation SA”) to the Supreme Court of Appeal, arguing against the previous decision of the Tax Court that the net income of Coronation Global Fund Managers (Ireland) Limited (“Coronation Ireland”) was not subject to tax in SA for the 2012 tax year.  Coronation SA had taken the view, which had been upheld by the Tax Court, that the income of Coronation Ireland was carved out of South Africa’s controlled foreign company rules under the so-called foreign business establishment (“FBE”) exemption. SARS then won at the Supreme Court and Coronation now has a hefty tax bill which has caused tremors for other SA businesses with offshore subsidiaries, afraid SARS could attack them next.  So what actually happened in this convoluted case and what does it mean for SA businesses with international structures?


The Coronation Group is an SA headquartered group that set up an Irish subsidiary in 2012.  This subsidiary, as it was 100% held by an SA tax resident entity was what is called a “controlled foreign company” or a CFC under SA tax laws.  The SA CFC rules are contained in Section 9D of the Income Tax Act and are complex anti-avoidance rules which seek to tax any profits pushed outside SA via an offshore entity; incidentally great reading for insomniacs. Basically, the rules say that any CFC can be subject to full SA tax on its profits (via imputation to the SA resident shareholder) unless a specific exemption is met.  This is a big deal – non-SA profits, earned by a non-SA entity can actually be taxed in SA!  The exemptions and exclusions to those exemptions are extremely complex, but in simple terms, the main two exemptions are the high tax rate exemption (i.e. if your CFC pays high enough tax, generally 67,5% of the SA rate, or 18-odd% then SARS will assume you didn’t set it up to avoid tax) and the so-called foreign business establishment exemption (FBE).

The Coronation case hinged on the interpretation of the FBE. Basically, the FBE tries to say that if you have a real business overseas with real things happening on real premises and performed by real people then SARS will accept you didn’t set it up just to avoid SA tax.  Of course, exactly how these rules apply is complex but the pivotal requirement is that the primary business functions of the CFC need to be performed in the CFC’s country of incorporation. And the issue for Coronation was what a company’s primary functions and what happens if those functions are outsourced.

The judgements

Tax Court

SARS was arguing that Coronation Ireland did not have sufficient “economic substance” (how long is a piece of string etc) to meet the FBE exemption and thus wanted to impute the full Irish profits to the SA shareholder. However the Tax Court was satisfied that the string was long enough and ruled that the FBE exemption did apply, i.e. Coronation Ireland was doing enough stuff in Ireland to demonstrate it was actually carrying out its business there and thus the Irish profits were not subject to SA tax.  Big sigh of relief all around, til the Supreme Court entered the fray.

Supreme Court

Of course SARS was not satisfied with the Tax Court judgement and took it to the SA Supreme Court of Appeal, specifically looking at certain functions which were outsourced from the CFC back to SA.  Key to this was what the actual business of the CFC was, i.e. was it just to maintain the investment license (as had been argued at the Tax Court) or to actually perform the investment management function?  SARS argued the latter and further argued that these functions were outsourced back to Coronation SA, such that the FBE could not apply.

Well after lots of discussions, the Supreme Court found in favour of SARS.  With all the tax at stake, this case may well go to the Constitutional Court so we’ll keep an eye, but the case was important in terms of the functional analysis performed of the underlying business to determine the applicability of the FBE.  In our view, this may impact many other CFCs and should be considered carefully.

Key takeaway

The main lesson is that the CFC rules are really complex, and if you don’t understand them correctly, you can end up paying the SA taxman a fortune.  If you have any concerns, contact us today.

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How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.