The South African Revenue Service (“SARS”) recently published in a binding ruling its consent that UK investors in a UK Authorized Contractual Scheme (“ACS”) can claim treaty benefits on income from South African equity and debt instruments on their proportionate share in the ACS.
After reviewing some of the key (tax) characteristics of the ACS under UK law (i.e. not a corporation, not subject to tax, its income being directly attributed to its participants when received, no reclassification of the income in the hands of the participants), the SARS first concludes that under South African law the ACS should be considered a foreign company (even though it is not incorporated under UK law) for South African income tax purposes and not a foreign partnership – the former being opaque and the latter being considered tax transparent.
This is explained by reference to the definition of company under South African income tax legislation, which includes among others certain collective investment schemes in securities.
Subsequently SARS concludes that as the ACS is considered a foreign company, it should be seen as the beneficial owner of the income, which under South African income tax rules means ‘the person entitled to the benefit of the dividend attaching to a share’.
What is interesting is that SARS then concludes without much further explanation that each class member is a beneficial owner of its proportionate share of dividends [..] that will be received by or accrue to the ACS, and will be entitled to claim relief [..].
On the basis of the ruling it seems that the SARS have done their best to take a fairly practical approach to get to a result where the investors in the ACS are considered to be beneficial owners even though the investment vehicle itself is not considered fiscally transparent by reference to local legislation. Of course the underlying fact pattern where all of the income under UK law is attributed directly to the investors in the scheme helps to jump to this conclusion but it cannot be derived directly from the arguments in the ruling.
As South African income tax law forces South African companies that pay dividends to apply relief at source when beneficial owners provide certain declarations, this ruling can in practice become complicated to execute when investors are entitled to different (tax treaty) benefits. Or when some do and some don’t deliver the requested information to the fund manager in order to be able to apply for relief at source.
Although South African treaties do not seem to differentiate between withholding tax rates for different portfolio investor types as much as most other countries, with the many “most favored nation clauses” in its treaties and its many funds with cross-border participants it is something to keep in mind.
The ruling can be found here
The income tax act can be found here