Page 1124 - SAIT Compendium 2016 Volume2

EXPLANATORY MEMORANDUM ON THE TAXATION LAWS AMENDMENT BILL, 2015
v. any foreign capital gain that is attributable to the resident in terms of paragraphs 68 to 72 or paragraph 80 of the Eight Schedule;
vi. any of the amounts listed in the rst three items above that represents capital of any non- resident trust is included in the income of that resident in terms of section 25B(2A) of the Act or is taken into account in determining the resident’s aggregate capital gain or capital loss in terms of paragraph 80(3) of the Eighth Schedule.
However, in the case of a REIT or a controlled company which is a bene ciary of a foreign vesting trust, the income of the foreign vesting trust will automatically be included in the income of the REIT or a controlled company and the REIT or controlled company will not be entitled to tax credit or rebates.
II. Reasons for change
As stated above the REIT or controlled company is not entitled to a rebate or deduction applicable in section 6quat because the current provisions of section 25BB(2) does not make provision for a REIT or a controlled company to claim rebates or deduction in respect of foreign taxes on income.
III. Proposal
It is proposed that a REIT or controlled company will be entitled to claim a deduction equal to the section 6quat amount of tax paid by a foreign vesting trust to a foreign government which is in proportion to the interest of the REIT or controlled company in such foreign vesting trust. It is important that the claim for foreign tax credits in this regard only caters for circumstances where a REIT or a controlled company invests in a ow through foreign entity (foreign vesting trust) and does not cater for situations where the foreign entity is not a ow through entity.
Example:
A South African REIT invests in a foreign vesting trust situated in a foreign country (Country A) and holds property in country A. The foreign vesting trust earns rental income in country A on the properties it owns. The foreign vesting trust pays corporate tax in respect of rental income in country A. In terms of the proposed amendment, as the foreign vesting trust is a ow through entity, foreign taxes paid by the foreign vesting trust in Country A in respect of rental income will qualify for a deduction in terms of the new section 25BB(2A)(a).
IV. Effective date
The proposed amendments will come into operation on 1 January 2016 and will apply in respect of years of assessment commencing on or after that date.
3.4 ALLOWING REITS TO DEDUCT FOREIGN WITHHOLDING TAXES ON DISTRIBUTIONS MADE BY FOREIGN VESTING TRUSTS
[Applicable provision: Insertion of subsection (2A)(b) in section 25BB]
I. Background
Currently, a REIT or controlled company as de ned in section 25BB(1) is not allowed to claim a deduction in respect of foreign withholding taxes paid on distributions made by a foreign vesting trust to such REIT or controlled company. This is due to the fact that the REIT or controlled company is not directly carrying on a trade in respect of the distributions made by a foreign vesting trust to it. The REIT or a controlled company is receiving a passive income.
II. Reasons for change
The withholding taxes paid by a foreign vesting trust in respect of distributions made to a REIT or controlled company will have an impact on the REIT or controlled company taxable income as it will ultimately reduce the actual taxable income received by such REIT or a controlled company.
III. Proposal
It is proposed that changes be made to the legislation by inserting a new section 25BB(2A)(b) to allow a REIT or a controlled company to deduct foreign withholding tax paid in respect of distributions made to it by a foreign vesting trust situated in a foreign country.
Example
A South African REIT invests in a foreign vesting trust situated in a foreign country (Country A) and holds property in country A. The foreign vesting trust earns rental income in country A on the properties it owns. The foreign vesting trust pays corporate tax in respect of rental income in country A. On a six monthly basis, the foreign investment trust distributes income to the REIT in South Africa. The income distributed to the REIT in South Africa is subject to a15 per cent withholding tax in Country A and the foreign investment trust distributes the income to the REIT in South Africa net of Country A 15 per cent withholding tax rate.
In terms of the new section 25BB(2A)(a), corporate foreign taxes paid by the foreign vesting trust in Country A in respect of rental income will qualify for a deduction. In turn, according to the proposed amendment, foreign withholding taxes paid in the rate of 15 per cent by the foreign investment trust in respect of income distributed to a REIT in South Africa will qualify for a deduction in terms of the new section 25BB(2A)(b).
IV. Effective date
The proposed amendments will come into operation on 1 January 2016 and will apply in respect of years of assessment commencing on or after that date.
1116 SAIT CompendIum oF TAx LegISLATIon VoLume 2