Time running out for companies in South Africa to prove 'economic substance'

South African companies operating in low- or no-tax jurisdictions will soon have to demonstrate that they have staff, premises, expenses and activities aligned with the company's nature in said jurisdiction.

South Africa's 'economic substance' legislation came into force last year but gave companies some time to make sure they could comply with the requirements. As the reporting dates are now becoming due, companies are rushing to demonstrate that they are not artificially shifting  taxable profits away from where value is created.

Charl du Toit, partner in the Tax Advisory practice of Stonehage Fleming warned about the consequences for those companies that won't comply.

"Failure to meet the requirements can result in the exchange of information between the relevant jurisdiction and other countries' tax authorities, financial penalties and, ultimately, striking off the companies register," he told local media.

He added that there are sigs to suggest that a great number of companies, subject to the new rules have not fully dealt with it yet.

Du Toit South said African HNWI "love" their offshore trusts, and companies in places like Mauritius or the Bahamas. He mentioned one South African group that has well over 100 such companies.

The main aim was to prevent base erosion and profit-shifting from high-tax jurisdictions to low-tax jurisdictions.

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