Commissioner for the South African Revenue Service v Tradehold Limited – By Ntombentsha Odolo*

Minister of Finance Pravin Gordhan announced on 9 May 2012 that, if necessary, the National Treasury would propose amendments, clarifying that Double Tax Agreements (DTAs) do not exempt from tax the deemed capital gains that arise when a person ceases to qualify as a tax resident. This follows a recent judgment of the Supreme Court of Appeal (SCA), which the National Treasury will study prior to making amendments.

This statement by the Minister follows a decision in favour of the taxpayer in Commissioner for the South African Revenue Service v Tradehold Limited (132/11) [2012] ZA SCA. In the tax court, the taxpayer (Tradehold) successfully appealed against an additional assessment raised by the Commissioner imposing capital gains tax on a deemed disposal of its only asset, consisting of the entire share capital of Tradegro Holdings Ltd (Tradegro). On appeal by the Commissioner, the SCA upheld the decision of the tax court, confirming that DTAs modify and supersede domestic law to the extent that there is any conflict.

The SCA found that the term “alienation” as used in the DTA is not restricted to an actual alienation, but rather is a neutral term having a broader meaning, including a deemed disposal of an asset giving rise to taxable capital gains.

Tradehold is a South African investment holding company listed on the JSE. On 2 July 2002, during the year of assessment ended 28 February 2003, it was resolved that in future Tradehold’s board meetings would be held in Luxembourg. This had the effect that as from July 2002 Tradehold became effectively managed in Luxembourg.

Tradehold, however, remained a South African tax resident despite the relocation of the seat of its effective management to Luxembourg, by reason of the definition of the term “resident” in section 1 of the Income Tax Act, 1961 (Act) as it applied at that time, owing to the fact that it had been incorporated in South Africa. The definition was amended with effect from 26 February 2003 by the addition of a proviso to the effect that any DTA would supersede the provision of the definition. The DTA between South Africa and Luxembourg provides that a corporate entity is resident where its place of effective business management is situated. The result was that Tradehold ceased to be a resident as envisaged in the definition. The DTA also provides that capital gains on the alienation of assets are taxable in the country of which the taxpayer is a resident.

Relying on the provisions of paragraph 12 of the Eighth Schedule to the Act, the Commissioner contended that when the respondent relocated its effective management to Luxembourg on 2 July 2002, or when it ceased to be resident on 26 February 2003, it was deemed to have disposed of its only, namely its 100% shareholding in Tradegro. The Commissioner argued that this resulted in a taxable capital gain (commonly referred to as an exit charge) being realised in the 2003 year of assessment. Tradehold successfully appealed to the tax court against the assessment.

Thus the question which the SCA was called to adjudicate upon was whether the term “alienation” as used in the DTA includes within its ambit gains arising from deemed, in addition to actual, disposals of assets.[NO1][PGS2]

Based on its interpretation of the definition of “alienation”, which was that it encompassed both actual and deemed disposals, the SCA held that from 2 July 2002 when Tradehold relocated its seat of effective management, the provisions of the DTA became applicable and Luxembourg accordingly had effective taxing rights to Tradehold’s capital gains.

Minister Pravin Gordhan’s statement indicates that the capital gains system has, since its inception in 2001, been based on the principle that South African residents are taxed on all their, assets, irrespective of where the assets are located. Therefore, whilst it would be unfair to tax a resident’s capital gains accumulated before the taxpayer became a resident, equally it would be unfair not to tax capital gains accumulated while the taxpayer was resident. In government’s view, the Tradehold finding that DTAs apply to a disposal, and thus does not allow for exit charges, appears to disturb the balance. In order to maintain stability in the tax system, the Minister confirmed that he would propose that any amendments take effect from 9 May 2012, that is, immediately after the Tradehold judgment.

*Ntombentsha Odolo is a candidate attorney at Norton Rose SA. Article was drafted under the supervision of Prof Peter Surtees, director at Norton Rose SA.


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