Controlled Foreign Companies - Filing requirements

by Leani Nortje, Senior Associate, Webber Wentzel

Where a South African taxpayer owns directly or indirectly more than 50% of the shares in a foreign company, the foreign company will generally qualify as a so-called "controlled foreign company" (CFC) under South African tax law.

It is generally well-known amongst taxpayers that where a foreign company is a CFC the SA taxpayer must complete an IT 10B form in respect of the foreign company's income, and if necessary, even include some of the CFC's income in its own taxable income. However, taxpayers are often unaware of the rules around when the IT 10B form must be prepared and when it must be submitted to SARS.

Different rules apply depending on the number of CFCs in relation to the particular taxpayer. If the number of CFCs in relation to a taxpayer is 10 or less, the relevant IT 10B forms are required to be submitted to SARS together with the taxpayer's annual tax return. SARS also allows for the information to be submitted in a consolidated schedule, which is obtainable from the SARS website, provided that all the required information on the IT10B form has been incorporated in the schedule. If the number of CFCs in relation to a taxpayer exceeds 10, however, the taxpayer is not required to submit the IT10B forms together with its annual tax return, but is required to retain the forms for a period of five years after the date of submission of the tax return.

As a result, where the number of CFCs in relation to a taxpayer exceeds 10, some SA taxpayers are following the approach of not preparing the IT10B forms unless and until they are called for by SARS, for example in the context of a tax audit. This can be dangerous in practice as the availability of reliable information needed to populate the IT10B forms will almost certainly reduce over time, increasing the chance of errors if the forms are only compiled several years after the year to which they relate. It is therefore in taxpayers' best interest to prepare the IT10B forms on an annual basis as even though they may not need to be submitted with the annual tax return SARS could still call for it.