On 16 March 2021, the South African Revenue Service (SARS) issued a binding private ruling (BPR 359) on the tax consequences for a resident company that conducted reinsurance business, of the transfer of its business as a going concern to a local branch of a foreign holding company.
The main provision referred to by the SARS is Section 1 (1) of the Income Tax Act 58 of 1962 – definition of gross income.
Parties in this transaction will be called as:
“Applicant” – A resident public company that is a wholly-owned subsidiary of a foreign company
“Co-applicant” – A foreign company acting through a permanent establishment registered as an external company in South Africa
It recently became lawful for a non-resident reinsurer to operate via a branch in South Africa. The Applicant proposes to transfer its reinsurance businesses to the Co-applicant once a branch license has been granted to the Co-applicant by the Prudential Authority. After the transfer of the reinsurance businesses, the activities of the Co-applicant will be identical to the former activities of the Applicant.
4 issues were presented to SARS for a ruling:
1. When transferring its existing short-term reinsurance business to the Co-applicant. There will be a payment of a cash amount by the Applicant in exchange for the assumption by the Co-applicant of the net underlying liabilities owing to short-term reinsurance policyholders.
Whether this payment is deductible? Will this payment constitute gross income?
2. On transfer its existing long-term reinsurance business to the Co-applicant. The Applicant will pay a cash amount in exchange for the assumption by the Co-applicant of the Applicant’s liabilities owing to its long-term reinsurance policyholders.
Will this payment constitute gross income?
3. The Co-applicant will be required to transfer cash to a South African trust, formed to provide and maintain local security for policyholders. The Co-applicant will be the vested income beneficiary of the trust.
Is this transfer of cash/payment deductible?
4. After the Co-applicant will be the vested income beneficiary of the trust. Policyholders will have rights against the trustees in respect of the trust assets. The trustees will settle qualifying claims directly with policyholders. Quarterly, the assets of the trust will be reconciled with the value of the liabilities covered by the trust assets. Whenever a surplus arises, this amount will vest in the Co-applicant. Similarly, upon the termination of the trust, any surplus assets will vest in the Co-applicant.
Whether the surplus received will constitute gross income?
1. The payment for the transfer of the net short term policyholder liabilities to the Co-applicant is not deductible by the Applicant. The receipt of the payment by the Co-applicant will not constitute “gross income” as defined in section 1(1).
2. The receipt of the payment in step 1b by the Co-applicant will not constitute “gross income” as defined in section 1(1).
3. The Co-applicant may not deduct the contribution to the South African trust.
4. The receipts from the South African trust (excluding any investment income thereon) will not constitute “gross income” as defined in section 1(1) for the Co-applicant.