On 21 June 2024, South Africa's Constitutional Court handed down a landmark judgment in favour of Coronation Investment Management SA (Pty) Ltd ("CIMSA"). This decision overturns a judgment of the Supreme Court Appeal ("SCA") which found in favour of the South African Revenue Service ("SARS") in the long-running dispute between the parties.
Background
During the period in dispute, CIMSA, the South African tax resident holding company for the Coronation group, indirectly held 100% shares in Coronation Global Fund Managers (Ireland) Limited ("CGFM"), a company tax resident in Ireland. Under South African law, CGFM constituted a "controlled foreign company" ("CFC") in relation to CIMSA as contemplated in the Income Tax Act, 1962 ("Act").
For the 2012 tax year, SARS assessed CIMSA and included in its income an amount equal to the entire "net income" of CGFM in terms of the CFC provisions of the Act. This was on the basis that CGFM did not qualify for the "foreign business establishment" ("FBE") exemption, since it outsourced certain key business functions. CIMSA objected against this assessment and the Western Cape Tax Court found in its favour in a judgment handed down on 21 September 2021.
SARS then appealed this decision to the SCA, which ruled in SARS' favour (except as regards the imposition of understatement penalties) on 7 February 2023. CIMSA then appealed to the Constitutional Court and SARS cross-appealed in relation to the understatement penalties.
The Constitutional Court decision
In a unanimous judgment handed down on 21 June 2024, the Constitutional Court upheld CIMSA's appeal against the judgment of the SCA. The Constitutional Court held that, at all material times, CGFM conducted the business of fund manager and that its primary business operations were those of a fund manager operating in terms of the business model used by the majority of fund managers in Ireland. The Constitutional Court held that CIMSA's day-to-day operations in Ireland in terms of this business model met the economic substance requirements for the FBE definition and that it therefore qualified for the FBE exemption.
In particular, the Constitutional Court held that CGFM was a fund manager and not an investment manager. The fact that it did not perform the relevant investment management activities therefore did not mean that it had "outsourced" its key function and was left only with non-core ancillary functions. The Constitutional Court held that its primary operations were those of a fund manager operating in terms of a delegation business model and that it performed the relevant functions from Ireland.
In terms of this judgment, in determining whether a CFC complies with the requirements of the FBE exemption, it is necessary to determine what that CFC's business actually is and then to test whether the primary operations of such business are conducted in the jurisdiction of the CFC.
The Constitutional Court emphasised that the FBE definition is not an "anti-outsourcing enactment" and instead aims to ensure that the offshore business of the CFC has economic substance in the foreign country and remains competitive with its foreign rivals.
It was not necessary for the Constitutional Court to deal with SARS' cross-appeal regarding penalties since the court upheld CIMSA's appeal.
ENS' Tax practice advised Coronation in respect of its appeal to the Constitutional Court.
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