A South African resident has participation rights in a controlled foreign entity obtained through Rand denominated preference shares which has been classified as equity for accounting purposes. The controlled foreign company's reporting currency is in USD and the equity is reported at the historical cost. When calculating the participation rights for the individual's tax purposes, should we revalue the Rand denominated preference shares to the year-end USD exchange rate before calculating the participation right percentage? Do you agree that in a devaluating Rand environment, the effective participation rights of the taxpayer will decline as the Rand looses value?
Important:
This answer is based on tax law year ending 28 February 2021.
Answer:
We don't agree that the preference shares must be valued annually and that a change in the value of these shares would have an impact on the participation rights. The definition of participation rights, see section 9D(1), looks at the rights to benefit in the benefits of the rights attaching to the share. In the case of a preference share, this would normally be determined with reference to its issue price and not to its market value. It is unlikely that it would be different in your case, but you are welcome to send a follow-up request if the rights are determined in a unique or different way.