Do you need to pay tax on exiting SA?

A recent court ruling by the Supreme Court of Appeal has raised questions on whether corporates or individuals changing their tax residence need to pay an exit charge.

The case between the South African Revenue Service (Sars) and Tradehold, an investment holding company, dealt with the deemed disposal of assets due to a change in the resident status of a taxpayer and the relevant Income Tax Actprovision.

Prof Osman Mollagee, PwC, partner: tax technical and Saica’s National Committee deputy chair, told MoneywebTax in this month’s Integritax podcast, that when a company or individual leave South Africa or move to another country we talk about a change in residence. According to South African tax law, there is a deemed exit charge on the day you change residence. “You have to ‘pretend’ you disposed/sold all your assets which triggers a capital gains tax charge,” says Mollagee.

In the Tradehold case you had a company moving from SA to Luxembourg, he adds

It raised the question about the double tax agreement (DTA) between the two countries, and more specifically whether the DTA prevents South Africa from charging South African tax on this “pretend disposal”, says Mollagee.

There was not much in the judgement about the extent to which Sars argued the technicalities of the exit charge or about the deemed time of disposal ie, when exactly does this exit charge hit you, he notes.

Instead the case ended up focusing on whether the DTA does cover actual sales and deemed disposals, in the end the judge said there is no distinction, says Mollagee.

The day after the judgement, Sars published a statement saying the judgement goes against what it intended for this legislation to do. It said it will be studying the judgement and could makesome changes to the law to make sure the tax charge applies when you leave SA, notes Mollagee.

He reckons that despite the judgement individuals and corporates leaving South Africa will still be hitwith an exit charge.
For those wanting to keep abreast of these and other developments, Saica recently launched a web-based Tax Suite available for an annual subscription fee of R1 499 to non-members and R899 for existing members.

TAXtalk: www.taxtalkblog.com

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