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Rupert Worsdale, partner, Maitland

SA budget commits to a broad investment manager exemption


A welcome inclusion in South Africa’s national budget on Wednesday was a further commitment to a broad-based investment manager exemption, says Rupert Worsdale (pictured), partner with Maitland, London…

It was proposed that a legislative carve-out be created for foreign investment funds so that these funds are not inadvertently subject to worldwide taxation by virtue of the activities of South African based investment managers.

A year ago, a very narrow investment manager exemption was introduced removing liability in relation to limited partnership structures where the general partner was South African based.  Very few international structures are structured in this way.

However, an almost unnoticed amendment in 2011 effectively introduced an investment manager exemption in relation to trading gains.  This was brought about by the codification of the rules on source and the particular provision that amounts received by a non-resident from the disposal of an asset (other than South African real estate) are foreign source unless the asset is attributable to a permanent establishment of that non-resident situated in the Republic.  In this very simple way, the independent agent exemption was introduced into the South African income tax regime, thus providing an investment manager exemption in relation to any trading gains from the sale of an asset.   The concept of asset is wide enough to cover most types of investments, although there are some doubts as to contracts for differences (although, contracts for differences are only of interest when they are “in the money”, at which stage, they constitute an asset).

This back-door introduction of an investment management exemption for source liability goes further than the equivalent exemption in the UK, as it is not subject to all sorts of tortuous conditions.   What is strange though is that its introduction has gone largely unnoticed. 

The budget announcement proposes to take the exemption one step further, by removing any potential liability that could arise on the fund on a worldwide basis by virtue of the fund being held to have its place of effective management in South Africa.  This goes much further than the UK investment manager exemption, but is necessary because the “place of effective management” concept is much more difficult to deal with than the UK concept of “management and control” in the context of a fund. 

This would be the final building block for a broad-based investment manager exemption and should help to persuade fund managers not only not to leave South Africa, but also to relocate to South Africa.  It is to be welcomed.

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