Implications of ceasing to be a controlled foreign company: a comparative study on total exit tax

Abstract

The Controlled Foreign Company (CFC) rules were introduced in South Africa in 1997 under section 9D of the Income Tax Act (58 of 1962) to protect the South African taxation base. The CFC rules are supported by the Organization for Economic Co-operation and Development (OECD) in order to avoid profit shifting as Base Erosion and Profit Shifting (BEPS) Action 3. CFC rules tax the income of controlled foreign subsidiaries in the hands of resident shareholders. For most countries, these rules are used to prevent shifting of income either from the parent jurisdiction or from the parent and other tax jurisdictions. This study focuses on the tax consequences when a corporation ceases to be a CFC in South Africa. South Africa joined many countries around the world in using the CFC rules as part of their tax legislation. For the purpose of this study, two countries were selected to compare to South African tax legislation in order to determine if South Africa conforms to the international norms when a corporation ceases to be a CFC.