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Sunday, February 1, 2004
Tricky foundation

Property transactions with foreign customers in the Western Cape are becoming more the norm than the exception, and it is therefore important for all concerned to keep abreast of the taxation and immigration legislation, says Linda Lamprecht, immigration expert at PricewaterhouseCoopers.

Due to the previous advantages of holding property in companies, potential purchasers are often faced with a decision as to whether to take ownership of a company that owns a particular property, or to buy that property from the company. The seller is likely to want to sell the shares in the company due to the lower taxation levels. Capital gains made by an individual are taxed at a maximum rate of 10%, whereas companies are taxed at 15% plus secondary tax on companies when the capital gain is distributed by way of dividend. However, is this the right decision for the purchaser?
A company will provide limited liability, and depending on the acquisition structure, it may provide a mechanism for the foreign purchaser to extract funds from South Africa and avoid estate duty on death. However, there are significant downsides. In particular, the purchaser will obtain a tax basis in the shares of the company for the price paid, but the company will only have the historic tax basis. A subsequent sale of the property by the company will result in a higher gain arising than if the shares were sold. The gain made by the company will also be taxed at a higher rate. Due to recent legislation amendments, there is no transfer duty saving to be made by purchasing shares or loan accounts of a company as the duty will be same as purchasing the property itself. A property held in a company cannot be a primary residence for tax purposes and the possible exemption of R1 million of the gain cannot be claimed.
There are also ongoing costs associated with maintaining a company, such as audit/accounting fees. Directors of companies and members of CCs must register for taxation and are required to provide asset and liability statements with their tax returns. This may not be an attractive result for a foreign national that has no other reason to register for tax in South Africa.
It is not just South African tax matters that need to be considered. UK tax resident purchasers should be aware that there could be adverse implications of purchasing property in a foreign company. A UK resident could be taxed in the UK on the ‘fringe benefit’ arising from the occupation of the property, and any gains realised by the company will be taxed in the hands of the UK resident (using historic acquisition cost by the company), without any reduction in the gain that would have been applicable had the property been held directly.
Generally speaking, acquisition of a property in a company structure is not recommended, although the circumstances of the purchaser need to be considered before coming to a decision.
Homeownership in South Africa does not entitle a foreign national purchaser the right of residence or the right to conduct a business. A foreign national must first obtain the correct permit. Whilst the recently enacted Immigration Act was seen as a barrier to foreign acquisition and occupation of property in South Africa, this should not be the case. Whilst there are changes, and some nationalities may now require a visa for stays of more than three months, and certain financial resources may need to be evidenced, the vast majority of foreign homeowners will not experience any difficulty obtaining the necessary permits, and in many cases, the permits should be valid for longer periods.
Care should be exercised by the foreign investor and any South African residents contracting with him to ensure that he has the correct permit for the activities being undertaken.
Should a foreign investor, for example, acquire a guest house and run the business himself from within South Africa, he will require a business permit. A temporary permit for holiday/retirement purposes will not suffice.
Foreigners wishing to establish a business in South Africa, which will be operated by them, are required to invest R2,5 million. This amount may be decreased if supported by the Department of Trade and Industry, and may be made up of capital (machinery etc) and cash investment in the business. A sound business plan, and certification by a chartered accountant are essential for the success of the application, she says.
Similar to many other countries, South Africa requires foreign nationals wishing to conduct business in this country either: to offer jobs to locals, be situated in an area of high unemployment or have export potential. There are also certain business sectors that will receive preference. This includes tourism related businesses.
Should the foreign investor appoint a local manager to attend to the running of his business, he would likely not require a permit. In such a case, the foreign national need only ensure that his temporary permit remains valid at all times. He would, of course, be taxable on his South African source income on the profits of the business.
It is important to be aware that, if a foreign investor’s temporary permit has expired, he is unable to enter into any contract legally. Any individual or company who contracts with a foreign national illegally residing in South Africa, may be charged with Aiding and Abetting, and possibly face hefty fines. It is recommended that proof of the residential status of the foreigner be obtained before signing any legal agreements or providing any services.
In summary, the purchase of property in South Africa is not as straight forward as previously and both local and foreign purchasers should ensure that the appropriate advice is taken before making such a significant investment. South Africans should ensure that they know the immigration status of any foreign nationals with whom they are doing business.
 

Copyright © Insurance Times and Investments® Vol:17.1 1st February, 2004
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