On June 21, 2024, the Constitutional Court of South Africa delivered a landmark judgment in favour of Coronation Fund Managers Limited ("Coronation"), a decision with significant implications for corporate taxation in South Africa, particularly regarding controlled foreign companies (CFCs). This ruling marks the culmination of a protracted nine-year tax dispute between Coronation and the South African Revenue Service (SARS).
The Case
The Constitutional Court has ruled in favour of Coronation in a long-standing dispute with the SARS regarding the taxation of income earned by its foreign subsidiary Coronation Global Fund Managers (Ireland) Ltd ("CGFM").
Key Issue
The central question revolved around whether CGFM qualified as a Foreign Business Establishment ("FBE") under Section 9D of the Income Tax Act. As an FBE, CGFM's net income would, as a result, be exempt from SA taxation.
The Dispute
Tax Court Ruling: Initially, the Tax Court sided with Coronation, recognising CGFM as an FBE, since its core business function (being that of fund management) and its primary business operations were located in Ireland.
Supreme Court of Appeal Overturns Tax Court Ruling: SARS took the matter on appeal to the Supreme Court of Appeal (SCA) who overturned the Tax Court's ruling. The SCA held that that because CFMG had outsourced certain of its functions, it followed that it did not conduct its primary operations in Ireland and, on this basis, disqualified CGFM from the FBE exemption.
Constitutional Court Ruling
Coronation chose to take the decision of the SCA on appeal, to the Constitutional Court. The Constitutional Court unanimously ruled in favour of Coronation, upholding the Tax Court's decision. Here are the key takeaways:
- FBE Exemption Upheld: CGFM's delegated business model, with fund management as its core function conducted in Ireland, met the FBE requirements.
- "Actual Business" Interpretation: The Court emphasised the importance of a company's "actual business" rather than a theoretical or "notional business" approach in determining FBE eligibility.
- Delegation and Economic Substance: Outsourcing activities don't automatically disqualify a company from the FBE exemption if it maintains economic substance and oversight.
- Tax Court Decision Validated: The Court found CGFM's day-to-day operations in Ireland satisfied the "economic substance" requirement for FBEs.
- Clarity for Offshore Operations: This judgment provides much-needed clarity for South African companies with offshore subsidiaries engaged in similar business models.
Implications for SA Multinational Companies
The Coronation case offers reassurance to SA CFC holding companies with FBE subsidiaries. It confirms the tax position and the relevant qualifying criteria of economic substance as being the jurisdiction of the CFC actual operations.
The judgment provides a much more predictable tax environment for SA multinational companies with a similar business model where it outsources or subcontracts certain of its business activities.
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