capetown south africa

These are really busy days for South Africa on both the international and domestic tax and regulatory fronts.

At a plenary meeting of the AML standard-setting body on 24 February 2023, the “Financial Action Task Force” (FAFT) has added the African country to its list of jurisdictions under increased monitoring for anti-money laundering weaknesses, despite the enactment of major legislative amendments in December 2022.

While acknowledging that the country has made progress, the FAFT pointed out that improvements are still needed in the area of financial intelligence.

South Africa was notified of eight areas of strategic deficiency which the country must address by the end of January 2025. The FATF specifically requested to:

  • improve processes to identify, seize and confiscate the proceeds of a wider range of crimes and implement comprehensive strategies on terrorist financing;
  • increase mutual legal assistance requests to other countries;
  • improve risk supervision of certain non-financial businesses and professions;
  • demonstrate that all AML supervisors apply appropriate sanctions for non-compliance;
  • demonstrate that rules are enforced to provide accurate and up-to-date beneficial ownership information to the relevant authorities in a timely manner.

Substantial changes for beneficial ownership are expected within a few weeks. South Africa’s Companies and Intellectual Property Commission (CIPC) has announced that mandatory registration of trust and company beneficial ownership will take effect on April 1, 2023.

This is just the latest consequence of a number of recent legislative and regulatory changes. Specifically, the “General Laws Amendment Act No. 22 of 2022” was assented to on 29 December 2022 to address deficiencies identified in FATF’s “Mutual evaluation report”.

The new Act amends the regulation of BO in terms of:

  • the Companies Act 71 of 2008
  • the Trust Property Control Act 57 of 1988
  • the Financial Sector Regulation Act 9 of 2017.

The changes affecting Sections 50 and 56 of the Companies Act mean that all unregulated companies will have to record and update beneficial ownership information in their securities records. Regulated companies will instead have to file the information directly with the CIPC (as well as maintaining their own records).

The penalty for non-compliance could be the greater of 10 per cent of the company’s turnover or ZAR 1 million (approximately USD 55,000).

The amendment to the “Trust Property Control Act” requires trustees to keep a register of the beneficiaries, agents and advisers of the trust and report it to the Master of the High Court’s office of the trust. The Master will keep a record of this information and make it available «to any person as prescribed». The requirements of the individuals who will have access will then be determined by the Minister of Finance.

Again, the penalties for trustees who fail to comply are really severe: up to ZAR 10 million (over USD 500,000) or imprisonment for 5 years. The Act also gives the Master the power to remove trustees in such cases:

  • are judged to have performed unsatisfactorily;
  • have refused a lawful request;
  • have been convicted of dishonesty;
  • become bankrupt;
  • have been declared mentally incapable;
  • have failed to provide adequate security.

These days trusts have also been affected by another change concerning their tax treatment.

In “Budget 2023” the Ministry of Finance announced a number of economic and tax measures affecting domestic and international corporate taxation in particular. One of the decisions taken by the government was to abolish the income tax exemption for non-resident beneficiaries of a trust resident in South Africa.

This change will align the income tax treatment with the existing capital gains tax treatment.

It is the latest in a series of measures affecting foreigners and South Africans living abroad that have taken place over the past few years, such as changes to the expatriate work exemption.

Currently, the Income Tax Act provides that capital gains realised by South African trusts – where a non-resident beneficiary is entitled to the gain – are taxed in the hands of the trust. However, the Act allows such income to flow through to the non-resident beneficiary, who is not subject to South African jurisdiction. On the contrary, the South African government’s objective is to limit the flow of income to non-resident beneficiaries for tax purposes and to tax the resident trust on these amounts instead.

Among the amendments to the “Budget 2023 Taxation Bill” there is also a proposal to exclude both tax avoidance schemes that use shares guaranteed by third parties and those where intermediary foreign holding companies become South African tax residents in order to receive tax-free capital distributions. A capital gains tax exemption applies when a South African tax resident disposes of shares in a foreign company.

Again, the policy objective of the local government is to encourage the repatriation of the proceeds of such a disposal from abroad.  The application of the participation exemption will only be limited to cases where there is a substantial change in the shareholding of the foreign company, or where the disposal is to another company in the same group.