Introduction

Taxpayers often find themselves on the wrong end of the tax law in South Africa. A constant effort is made by taxpayers to restructure their finances for tax reasons and often increasingly sophisticated tax avoidance schemes are used to reduce their tax liability. The South African Revenue Services (“SARS”) continuously investigate and identify “loopholes” in relation to the Tax Act No. 58 of 1962 (“Income Tax Act”), to prevent taxpayers from exploiting these “loopholes” to avoid paying tax. SARS attempts to develop and implement new provisions in relation to the Income Tax Act to improve the tax compliance of taxpayers and to eliminate the opportunities for tax to be avoided.

There is a distinct difference between tax avoidance and tax evasion. Many taxpayers do not know the difference and therefore run the risk of incriminating themselves by trying to avoid tax and then unintentionally become liable to the consequences of tax evasion. Complex tax avoidance schemes are used daily and it is important for directors and shareholders of companies in South Africa to take note of how SARS can pierce the corporate veil in order to protect their personal liability.

Tax avoidance can be described as the act of planning your tax affairs in an effective manner to obtain a tax benefit which is in accordance with the Income Tax Act, even though it is legal, tax avoidance is still a distinct grey area and there is a very fine line separating the act of tax avoidance versus tax evasion. Evasion is illegal and it involves the use of illegal means of paying the least amount of tax, this is often done by not declaring income or profits and overstating deductions.

Therefore, all taxpayers must take note that the corporate veil can be pierced by the SARS commissioner and careful consideration must be given to the manner in which taxpayers avoid tax, noting the difference between tax avoidance and tax evasion, when planning their tax affairs.

Piercing the Corporate Veil

In terms of the Companies Act No. 71 of 2008 (“Companies Act”), companies in South Africa have a separate legal existence awarding shareholders and directors to such a company limited liability, this is known as the corporate veil (“Corporate Veil”). It is common practice for taxpayers to utilise company and corporate structures to ensure better tax benefits, an example is the use of transferring shares held by an individual or a trust to a company of which the individual or trust is a shareholder. This allows shareholders to avoid dividend tax since the default position in terms of the Income Tax Act, provides that companies and shareholders are exempt from dividend tax on any dividends declared to them. Dividends tax is a withholding tax and it is the obligation of the company paying the dividend to withhold the tax and pay it over to SARS. Companies who are shareholders are exempt from dividend tax altogether and therefore tax can be avoided in this manner.

Section 20(9) is one of the most underrated provisions of the Companies Act, it provides the SARS commissioner with the authority to pierce the Corporate Veil, by disregarding the separate legal personality of a company. If on application by an interested person or any proceedings in which a company is involved, a court finds that the incorporation of a company or any use or act of a company constitutes abuse of the juristic personality of the company, the court may declare the company to be deemed not to be a juristic person for purposes of avoiding tax liability. This serves as a remedy against impermissible tax avoidance used by taxpayers as the sole purpose to engage in tax avoidance schemes and to obtain tax benefits. It is important to take note that when SARS pierces the Corporate Veil, it does not affect the existence of the company, the use of the company for that specific tax benefit is only ignored. This will result in the taxpayer being liable for the tax that they were trying to avoid.

12 August 2019