On 24 February 2023, the Financial Action Task Force (“FATF”) announced that South Africa has been placed on the FATF grey list[1] (Greylisting) after non complying with certain components of the FATF’s compliance regulations (read: state capture, corruption, disclosure failures for public officials and failure to act and convict those found guilty of offences, non-recovery of state assets and proceeds of crime etc) falling short of requirements, finding deficiencies in its Anti-Money Laundering (“AML”) and counter terrorism financing (“CTF”) regulations. Greylisting increases the difficulty of the country’s access to international finance as foreign institutions will be more hesitant enter into transactions with greylisted countries and will lead to increased scrutiny and monitoring by the FATF.
Over the past few years many clients may have been required to declare their tax residency status or Tax Identification Number (“TIN”) and other forms of increased scrutiny from financial and other fiduciary institutions, such as source of funds and income declarations. This is because of the Organisation for Economic Cooperation and Development (“OECD”) legislation known as the Common Reporting Standard[2] (“CRS”) in (short) requires participative countries (of South Africa is one) to share certain financial and tax information with authorities. The CRS is also an AML and CTF counter measure aiming to increase financial flow and tax transparency. However there has not been a measured focus on the various ownership structures of individuals’ legal structures in South Africa although in many countries the requirements for beneficial ownership are in place. Many countries, for example the United States, Switzerland and Singapore[3], still have high barriers to ownership information.
It is a widely accepted fact that many business owners and, especially high net worth individuals and families, structure their affairs via complex ownership structures or vehicles such as holding companies and trusts, both local and foreign. This serves many purposes; tax planning, ownership obfuscation, asset protection, business succession and longevity, estate planning and the many other “benefits” such structures come with. Remember the Panama Papers[4]….?
Recent updates to the Companies Act, 71 of 2008 and Regulations[5] (“the Act”), requires all companies and close corporations to submit declarations of Beneficial Ownership (“BI”) with the Companies and Intellectual Property Commission (“CIPC”) prior to October 2023. Section 56 of the Act places onerous requirements on owners of companies (inclusive of close corporations) to maintain and disclose their beneficial ownership. Section 56 (5) places even further expansion on this matter for companies to disclose the true owner of the interest, in other words the ultimate owner who can or has the right (amongst others) to[6];
- control voting or voting rights,
- influence material decisions and management,
- remove or appoint board members,
The submission practically requires the following:
- A mandate authorizing the person submitting the BI to submit such on behalf of the company.
- Certified copies of Identity Documents or passports (foreign persons).
- Securities registers indicating the registered shareholders with certain specified information as per Section 50 of the Act.
- Beneficial Interest register – this is only applicable to affected companies and the majority of simple structure entities will not be liable to have this in place.
- Beneficial ownership disclosure form disclosing complex ownership structures and their ultimate owners.
Failure to adhere to this requirement could lead to the legal entity being listed as non-compliant with CIPC, penalties and fines, investigations, and the like.
On another serious note this information will allow the South African Revenue Service (“SARS”) access to such information in their continued search for additional tax revenue from those seeking to aggressively plan and structure their tax affairs.
A simple example would be a company qualifying for the Small Business Corporation (“SBC”) tax rate, a more favorable tax rate than the flat general rate. One of the requirements for the SBC qualification is that the holders of the shares of the company may only be natural persons and very specific vesting trusts and that these natural persons may not hold any other shares in other companies (other than listed investments). Previously SARS could access CIPC and confirm who are members of close corporations to determine compliance with this when filing a tax return and declaring it compliant with the SBC requirements, but it (SARS) did not have access to proprietary limited ((Pty) Ltd) or private company shareholdings to determine this. Now they do.
Whilst the above is a positive move to combat money laundering, purposeful tax evasion and asset ownership and control obfuscation it will no doubt add yet another layer of compliance for the average compliant taxpayer.
PFG and Associates (Pty) Ltd
[1] Implications and consequences of SA’s FATF ‘greylisting’ explained (biznews.com)
[2] Common Reporting Standard (CRS) – Organisation for Economic Co-operation and Development (oecd.org)
[3] Financial Secrecy Index – Tax Justice Network
[4] The Panama Papers: Exposing the Rogue Offshore Finance Industry – ICIJ
[5] Companies Act, 71 of 2008 and Regulations, Chapter 2, Part C, Section 33 (1)
[6] Companies Act, 71 of 2008 and Regulations, Chapter 1, Part A, 1. Definitions.