Page 143 - SAIT Compendium 2016 Volume2

PN 7/1999
Income Tax acT: PracTIce noTes PN 7/1999
In terms of the Companies Act a company is deemed a subsidiary of another company (the holding company) if—
• the other company is a member thereof, and
- holds the majority of the voting rights therein;
- has the right to appoint or remove directors holding a majority of the voting rights at meetings of the board; or
- has the sole control of a majority of the voting rights therein, whether pursuant to an agreement with other members or otherwise;
• it is a subsidiary of any company which is a subsidiary of that other company; or
• subsidiaries of that other company, or that other company and its subsidiaries, together hold the rights referred to in the rst bullet above.
A body corporate or other undertaking which would have been a subsidiary of a company, had the body corporate or other undertaking been a company for purposes of the Companies Act, is deemed to be a subsidiary of that other company.
(iii) (iv)
(v) (vi)
any other company, where both such companies are subsidiaries (as de ned) of the same holding company;
any person, other than a company as de ned in section 1 of the Companies Act, who individually or jointly with any connected person in relation to such person, holds (directly or indirectly) at least 20 per cent of the company’s equity share capital or voting rights. The person so contemplated, could be a natural person, trust, close corporation or any entity which is not a company for purposes of the Companies Act;
any other company, if at least 20 per cent of the equity share capital of such company is held by such other company, and no shareholder holds the majority voting rights of such company. This will be the case where companies B and C each hold 50 per cent of the equity share capital of company A; both companies, B and C, will be connected persons in relation to company A.
any other company, if such other company is managed or controlled by—
(aa) any person (a) who or which is a connected person in relation to such company; or
(bb) any person who or which is a connected person in relation to A.
Two companies will be connected persons in the event of one company being managed or controlled by a connected person in relation to the other company, as well as where the companies are managed or controlled by persons who are connected persons in relation to each other. For example, two companies, one whose shares are held by a trust and the other, whose shares are held by the bene ciary of such trust, will be connected persons in relation to each other.
In this context, references to a company in the de nition are not limited to a company, as de ned in section 1 of the Act. Company also refers to entities which are companies or corporations according to the ordinary meaning of the word. For example, a company incorporated under the law of any country other than the Republic, which does not carry on business in the Republic and which is not a shareholder of a South African company could also be a connected person, for the purposes of the application of the connected person provisions.
1.1.4.6 In relation to a company which is a close corporation: (i) any member of such close corporation;
(ii) any relative of such member, or any trust which is a connected person in relation to such member; and (iii) any other close corporation or company which is a connected person in relation to any member or relative or trust contemplated in (i) and (ii) above.
1.1.4.7 In relation to a person who is a connected person in relation to any other person in terms of the foregoing provisions of this de nition, such other person. This paragraph provides for the converse situation of all the above paragraphs. If A is, for example, a connected person in relation to B, B is a connected person in relation to A.
1.2 For purposes of this Practice Note, the words below are de ned as follows:
1.2.1 Controlled transaction: A transaction in terms of which the ownership or control relationship is able to
in uence the transfer price set. In relation to section 31, a controlled transaction will be any transaction between
connected persons, as de ned in section 1 of the Act.
1.2.2 Uncontrolled transaction: A transaction which is concluded at arm’s length between enterprises that are not
connected persons in relation to each other. This could, for example, include transactions at arm’s length between a member of a multinational and an unconnected person. Uncontrolled transactions form the benchmark against which a multinational’s transfer pricing is appraised in determining whether its prices are arm’s length
1.2.3 Multinational: The term multinational is used to refer to any group of connected persons with members or business activities in more than one country. The term ‘members’ refers to constituent parts (including natural persons) of that multinational, each having a separate legal existence.
1.2.4 OECD Guidelines: The Organisation for Economic Co-operation and Development (OECD) Report on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published in July 1995 and supplemented with additional chapters and revisions to the contents thereof.
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