Cross Border Transactions and Tax Implications

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Cross Border Transactions and Tax Implications

• 28 August 2026
• International Tax
• Fathima Dawood

Cross border transactions can be complex with the difference between the accounting and tax treatment, if overlooked, having unintended consequences. Foreign holding companies having become more common place, whether domiciled in Mauritius or elsewhere, with inter-company loans between the foreign Hold Co and local Subsidiary used to fund the local operations and providing a mechanism to shift profits offshore through interest payable to the foreign Hold Co.

Example:

Company A, a foreign holding company based in Mauritius, advances a loan to its local subsidiary (100% shareholding) Company B, denominated in USD. The foreign Hold Co obtained the loan advanced to its local subsidiary from a connected person. The loan balance is $100, incurs interest on a 6 monthly basis and the loan is repayable at the end of 5 years. The loan was advanced on 1 July 2024, and the financial year end of the resident company is 30 June. For simplicity, we will assume that the resident company paid interest of R10 on 31 December 2025 and 30 June 2026.

USD rate on 30 June 2025 = R15,50

USD rate on 30 June 2026 = R17,50

IAS 21 – unrealised exchange difference

The resident company applies IAS 21 and translates the unsettled loan balance at the end of the reporting period at spot rate.

Calculation

• Loan balance at spot rate, 30 June 2025 = $100 x R15,50 = R1,550
• Loan balance at spot rate, 30 June 2026 = $100 x R17.50 = R1,750
• Unrealised foreign exchange difference, 30 June 2026 = R200 (loss)

The SA resident company has an unrealised foreign exchange loss of R200 on the translation of the loan balance at the end of the 2026 financial year, which it must recognise in P/L for accounting purposes.

Tax treatment – S24I(10A)

In terms of section 24I(3)(a), the resident subsidiary, Company B, would ordinarily be entitled to a deduction of the unrealised foreign exchange loss for income tax purposes.

However, S24I(10A) (a), applies as the following factors are present:

• the Hold Co and Sub form part of the same group of companies;
• are connected persons (100% shareholding);
• no FEC or foreign option contract has been entered into;
• the loan is a non-current liability, not repayable within1 year; and
• the loan is funded by a person that is part of the same group of companies or is a connected person in relation to Hold Co or Sub.

Therefore, no foreign exchange difference shall be included in or deducted from the taxable income of the Sub. The foreign exchange loss is not deductible for income tax purposes and must be added back in the tax computation of the Sub (equally any gain is not taxable).   

In terms of section 24I(10A) (b), in the year that:

• the loan is realised i.e there is a repayment; or
• the factors listed above no longer apply, i.e the loan becomes current

the foreign exchange difference must be included in (gain) or deducted from (loss) taxable income.

• In simple terms, where S24I(10A) (a) applies, the forex loss/ gain is deferred until there is a repayment or the loan becomes current.
• This example illustrates how the difference between accounting and tax treatments can have significant tax implications, if not considered at the onset i.e when drafting the loana agreement.

Other tax implications

• The payment of interest by the local Sub to the foreign Hold Co, will be subject to interest withholding tax. The local Sub is liable to withhold and pay the interest withholding tax to SARS and to complete and submit the returns/ declarations due.
• The standard rate of withholding tax is 15% but maybe reduced per the relevant DTA.
• Where a lower rate of WHT is paid or the interest is not subject to the WHT, the interest deduction maybe limited in terms of S23M.
• As the Sub had obtained the loan from a foreign connected person it is likely to be an “affected transaction” for transfer pricing purposes. Consider whether the transaction is at arm’s length i.e is the interest rate market related? to ensure compliance with section 3.

Practitioner Checklist

• Confirm whether s24I(10A) applies (group loan, non‑current liability).
• Assess WHT obligations and check DTA relief.
• Benchmark interest rates for transfer pricing compliance.
• Consider s23M limitations on interest deductions.
• Reflect tax treatment in loan agreements at the outset.

Conclusion

A simple inter‑company loan can trigger forex, withholding tax, and transfer pricing issues. Identifying these upfront avoids costly surprises and ensures compliance with tax legislation.

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Practitioners who wish to explore these considerations in greater depth may register for the upcoming CPD webinar, Cross-Border Transactions and Tax Implications, presented by Fathima Dawood CA(SA) on 7 September 2026.

 

 

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