THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case no: 1269/2021
In the matter between:
COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE SERVICE
APPELLANT

and

CORONATION INVESTMENT
MANAGEMENT SA (PTY) LTD
RESPONDENT

Neutral citation: Commissioner for the South African Revenue Service v
Coronation
Investment
Management
SA
(Pty)
Ltd
(1269/2021) [2023] ZASCA 10 (07 February 2023)
Coram:
MAKGOKA and NICHOLLS JJA and NHLANGULELA, SALIE
and MALI AJJA
Heard:
17 November 2022
Delivered: This judgment was handed down electronically by circulation to the
parties’ legal representatives by email, publication on the Supreme Court of
Appeal website and release to SAFLII. The date and time for hand-down is
deemed to be at 11h00 on 07 February 2023.

Summary: Revenue – income tax – Income Tax Act 58 of 1962 – section 9D
exemptions – whether a ‘controlled foreign company’ is a ‘foreign business
establishment’ as defined – Tax Administration Act 28 of 2011 – understatement
penalties.

________________________________________________________________
ORDER
________________________________________________________________
On appeal from: Tax Court, Cape Town (Hack AJ, with two assessors):
The appeal is upheld.
The order of the Tax Court is set aside and substituted with the following:
‘1
The appellant is directed to pay the additional tax imposed in respect
of the respondent’s additional assessment dated 23 March 2017, and the
interest imposed thereon in terms of section 89quat(2) of the Income Tax
Act 58 of 1962.
The appellant is to pay the respondent’s costs, including the costs of
two counsel.’
The respondent is to pay the appellant’s cost of appeal, including the costs
of two counsel.
________________________________________________________________
JUDGMENT
________________________________________________________________
Nicholls JA (Makgoka JA and Nhlangulela, Salie and Mali AJJA
concurring):
[1] The Coronation Group is one of South Africa’s most successful investment
companies. It has subsidiaries across the globe. Its ultimate holding company,
Coronation Fund Managers Limited, is listed on the Johannesburg Stock
Exchange (JSE) securities exchange in South Africa. It describes itself as ‘an
active investment manager following a long term valuation-driven investment
philosophy’.1

1 Coronation website, https://www.coronation.com.

[2] The respondent, Coronation Investment Management SA (Pty) Ltd
(CIMSA) is the holding company for the Coronation Group. It is registered and
tax resident in South Africa. During 2012, CIMSA was a 90% subsidiary of
Coronation Fund Managers Limited and the 100% holding company of
Coronation Management Company and Coronation Asset Management (Pty) Ltd
(CAM), both registered for tax in South Africa. CIMSA was also the 100%
holding company of CFM (Isle of Man) Ltd, tax resident in Isle of Man. CFM
(Isle of Man) Ltd, in turn, was the 100% owner of Coronation Global Fund
Managers (Ireland) Limited (CGFM) and Coronation International Ltd (CIL),
which were registered and tax resident in Ireland and the United Kingdom
respectively. CFM has since been de-registered in Isle of Man.

[3] The issue in this appeal is whether the net income of CGFM should be
included in the taxable income of its South African holding company, CIMSA,
or whether a tax exemption in terms of s 9D of the Income Tax Act 58 of 1962
(the Act) is applicable to the income earned by CGFM. This depends on what the
primary functions of CGFM in Dublin, Ireland are. If the primary operations are
conducted in Ireland, then the s 9D exemption applies. Of particular significance
is that CGFM has adopted an outsource business model and the attendant
ramifications that may have for its tax status. Aligned to this is whether the
primary business of CGFM is that of investment (which is not conducted in
Ireland), or that of maintaining its licence and managing its service providers
(which is conducted in Ireland).

[4] The appellant, the Commissioner for the South African Revenue Service
(SARS), assessed the tax liability of CIMSA for the 2012 tax year to include in
its income an amount equal to the entire ‘net income’ of CGFM. The Tax Court,
Cape Town (the tax court) upheld CIMSA’s objection and found that CGFM was
a ‘foreign business establishment’ (FBE) as defined in s 9D(1) of the Act and,

accordingly, qualified for a tax exemption. It set aside SARS’s additional
assessment against CIMSA and ordered it to issue a reduced tax assessment, in
which no amount was included in CIMSA’s income under s 9D of the Act
pertaining to CGFM’s income. Consequently, SARS was not entitled to claim (a)
understatement penalties in terms of s 222 of the Tax Administration Act 28 of
2011 (the TAA); (b) understatement penalties for provisional tax under paragraph
20 of the Fourth Schedule to the Act; and (c) interest in terms of s 89(2) of the
Act. SARS appeals this decision with the leave of the tax court.

Section 9D of the Income Tax Act 58 of 1962
[5] Prior to 2001, the South African tax regime was a source-based one. The
Revenue Laws Amendment Act 59 of 2000 changed this to a resident-based
system. Section 9D was introduced to address how South African tax payers
should be taxed on their income earned abroad, especially income earned by
South African owned foreign entities. A pure anti-deferral regime would
immediately deem back all the South African owned foreign company income.
As a result, no foreign income would receive any advantage over domestic
income. However, international law only allows South Africa to tax foreign
residents on their South African source income, not on their foreign source
income, even if the entity is completely owned by South African residents. To
address this, s 9D imposes tax on South African owners on the income earned by
their foreign entities as if those entities immediately repatriated their foreign
income when earned.2

[6] The section also provides for exemptions which allow certain foreign
companies to operate free from tax to the extent that an objective rationale exists
for maintaining operations abroad, and when such operations pose no threat to

2 National Treasury’s Explanation to Section 9D of the Income Tax Act, June 2002.

the South African tax base. The purpose of the exemption was to balance the
desire for horizontal equity (equity among South Africans earning income at
home versus those earning income abroad) against international competitiveness
(allowing South African owned subsidiaries to operate on the same level tax
fields as foreign owned rivals operating in the same low-taxed foreign countries).
The s 9D exemptions were, therefore, introduced as a balancing mechanism
between two competing interests: tax avoidance and competitiveness.3

[7] The exemption only applies to foreign entities that qualify as a ‘controlled
foreign company’, which is defined as:
‘[A]ny foreign company where more than 50 per cent of the total participation rights in that
foreign company are directly or indirectly held, or more than 50 per cent of the voting rights in
that foreign company are directly or indirectly exercisable, by one or more persons that are
residents other than persons that are headquarter companies . . .’4

[8] Section 9D(2) of the Act provides for the imputation of the ‘net income’ of
a controlled foreign company to a South African resident company holding
participation rights in that controlled foreign company, unless it falls within the
ambit of the FBE exemption. This provides that in determining such net income,
any amount ‘which is attributable to a foreign business establishment’ of that
controlled foreign company must not be taken into account.

[9] It is common cause that in the 2012 tax year of assessment CGFM was a
controlled foreign company as envisaged. Therefore, the income of CGFM would
be imputable to CIMSA, unless it fell within the ambit of the FBE exemption.
This, in turn, depends on whether CGFM is an FBE as defined.

3 National Treasury’s Explanation to Section 9D of the Income Tax Act, June 2002.
4 Section 9D(1)(a) of the Income Tax Act 58 of 1962.

[10] Section 9D(1) of the Act sets out the requirements of a FBE:
‘[F]oreign business establishment, in relation to a controlled foreign company, means –
(a)
a fixed place of business located in a country other than the Republic that is used or
will continue to be used for the carrying on of the business of that controlled foreign company
for a period of not less than one year, where –
(i)
that business is conducted through one or more offices, shops, factories,
warehouses or other structures;
(ii)
that fixed place of business is suitably staffed with on-site managerial and
operational employees of that controlled foreign company who conduct primary
operations of that business;
(iii)
that fixed place of business is suitably equipped for conducting the primary
operations of that business;
(iv)
that fixed place of business has suitable facilities for conducting the primary
operations of that business; and
(v)
that fixed place of business is located outside the Republic solely or mainly for
a purpose other than the postponement or reduction of any tax imposed by any sphere
of government in the Republic:
Provided that for the purposes of determining whether there is a fixed place of business as
contemplated in this definition, a controlled foreign company may take into account the
utilisation of structures as contemplated in subparagraph (i), employees as contemplated in
subparagraph (ii), equipment as contemplated in subparagraph (iii), and facilities as
contemplated in subparagraph (iv) of any other company –
(aa)
if that other company is subject to tax in the country in which the fixed place of
business of the controlled foreign company is located by virtue of residence, place of
effective management or other criteria of a similar nature;
(bb)
if that other company forms part of the same group of companies as the
controlled foreign company; and
(cc)
to the extent that the structures, employees, equipment and facilities are located
in the same country as the fixed place of business of the controlled foreign company.’

[11] The location of the ‘primary operations’, referred to in s 9D(1)(a)(ii)–(iv),
is pivotal in determining whether CGFM is an FBE as defined. This requires a
determination as to the nature of CGFM’s business in Ireland, and in particular,

whether the primary operations have been outsourced, and if so, whether an
exemption in terms of s 9D is applicable.

Pleadings and Evidence
[12] The undisputed evidence on behalf of CGFM was that it was incorporated
in Ireland during 1997 to provide opportunities for clients to invest in
South African and Irish domiciled collective investment funds (CIS). On
23 October 2007, CGFM applied to the Irish Financial Services Regulatory
Authority for authorisation of an Undertakings for Collective Investment and
Transferable Securities (UCITS). On 25 October 2007, it received its licence from
the Central Bank of Ireland (CBI) as a ‘management company’ in accordance
with the European Communities Regulations under Investment Services
Directive 93/22/EEC 2125.

[13] In its business plan, attached to its licence application, CGFM presented an
outsource business model where CGFM concentrates on being a ‘product
provider’. All non-core functions, such as investment, administration and
custodial functions, are outsourced. The provision of investment management
services and trading functions is outsourced to specialist investment managers,
CAM in South Africa and CIL in the United Kingdom. The fund administration
has been sub-contracted to JP Morgan Hedge Fund Services (Ireland) Limited
and JP Morgan Administration Services (Ireland) Limited. CGFM has outsourced
its distribution function to CIL and CAM, and its custodian function to JP Morgan
Bank (Ireland) Plc. According to the business plan, because these functions are
outsourced to independent third party service providers, CGFM is not subject to
South African Transfer Pricing rules.5

5 Transfer pricing refers to the prices of goods and services which are exchanged between companies under
common control. South African transfer rules are found in s 31 of the Act and practice note 7.

[14] CIMSA asserts that CGFM is not approved to perform investment
management, which it sub-contracts to service providers. These are conducted
under the oversight, direction and supervision of CGFM as the fund manager. It
does not abdicate responsibility for those functions, but exercises oversight and
supervision over the conduct of its service providers from Dublin. All this,
contends CIMSA, is consistent with the terms of its licence issued by the CBI.
Since the actual performance of investment trading functions is not envisaged as
part of CGFM’s business, nor has the CBI approved CGFM to perform these
functions, they cannot be ‘primary operations’ as contemplated in the FBE
definition. The primary business of CGFM, according to CIMSA is, therefore,
not the actual performance of investment management, but ‘the managed
outsourcing of the investment management functions in accordance with the
terms of the licence’.

[15] CIMSA’s primary functions, as pleaded, are:
‘26.1. ensuring compliance with all regulatory requirements of CBI and any other regulators
under any licence, including reporting to and responding to communications from the
regulator/s;
26.2. ensuring compliance by UCITS and other funds with all regulatory and constitutional
document (e.g. trust deed) requirements;
26.3. the appointment and ongoing supervision and monitoring of service providers,
including investment management service providers;
26.4. communication and reporting to investors in UCITS and other funds, including
management of complaints, disputes and investment reporting;
26.5. overall risk management of the business of CGFM and all funds for which it is
responsible;
26.6. compliance with all legal corporate requirements of the Republic of Ireland, including
corporate governance;
26.7. financial control and reporting for CGFM and all funds for which it is responsible; and

26.8. investment change management, i.e. informing the investment manager of relevant
changes to the investment objectives, policies and restrictions of any of the portfolios and
constitutional documents.’

[16] CIMSA denies that CGFM outsourced functions of ‘its business’ as
referred to in the FBE definition and contends that investment management
services are not a necessary part of a fund manager’s business. CIMSA states that
its position is bolstered by the fact that the outsourcing of investment functions is
common practice for fund managers in Ireland, Europe and South Africa. It is
also recognised as a legitimate practice for fund managers by the CBI.

[17] SARS accepts that CGFM met the FBE definition, in all respects but one:
economic substance.6 As at 2012, CGFM had offices in Dublin with a staff
component of four people, consisting of a managing director, two accounting
officers and a compliance officer. All the staff were resident in Ireland. It is not
disputed that CGFM had conducted its business for more than a year through one
or more offices in Dublin (s 9D(1)(a)(i)), or that it had ‘a fixed place of business’
in Ireland (s 9D(1)(a)(ii)) which was suitably staffed and equipped with suitable
facilities (s 9D(1)(a)(ii), (iii) and (iv)). SARS also accepts that the business was
located in Ireland for a reason other than the postponement or reduction of
South African tax (s 9D(1)(a)(iv)). However, it contends that CGFM does not
meet the economic substance requirements, as ‘the primary operations’ referred
to in s 9D(1)(a)(ii),(iii) and (iv) were not based in Ireland. Accordingly, the
Dublin office was not suitably staffed with employees, not suitably equipped, nor
did it have the suitable facilities to conduct ‘the primary operations’ of CGFM’s
business.

6 National Treasury’s Explanation to Section 9D of the Income Tax Act, June 2002 explains that the economic
substance must be demonstrated in terms of operations and in terms of its business purpose.

[18] SARS submits that the FBE definition requires each of the requirements
set out in s 9D(1)(a)(i) to (v) to be present in a fixed place of business in order
for a controlled foreign company to qualify as a FBE. If not, the business is not
entitled to a tax exemption under s 9D(1)(a). While it is permissible for a
controlled foreign company to outsource locational permanence and economic
substance, it must then comply with the proviso set out in s 9D, and each of the
discreet requirements in the subsections (aa), (bb) and (cc) of the proviso have to
be met. Whether CGFM qualifies as a FBE, notwithstanding the outsourcing of
these primary functions, must be answered with reference to the proviso.

[19] In this regard, SARS contends that CGFM does not meet the requirements
set out in the proviso. Had the investment functions been outsourced to a
company which is subject to tax in Ireland – where CGFM is located (subsec
(aa)), within the same group of companies (subsec (bb)), and to the extent that
the structures, employees and facilities are located in Ireland (subsec (cc)) – it
would have qualified as a FBE. But, because CGFM outsources its investment
management functions to CAM and CIL, neither of whom are subject to tax in
Ireland, the requirements of subsec (aa) and subsec (cc) have not been met.

[20] CIMSA places no reliance whatsoever on the proviso and denies that
outsourcing may only take place in accordance with the proviso. While CGFM
does not dispute that it did not have sufficient staff to conduct investment trading,
it states that its staff complement was sufficient to maintain the licence which is
a function of its primary business of a fund management.

[21] SARS’s position on the CBI licence is that CGFM elected to apply for a
licence whereby its investment functions are outsourced, as opposed to an in-
source model. This election, however, does not alter the nature of its business,
which remains that of investment. SARS points out that the revenue generated by

CGFM (as per its transfer pricing report) is percentage based and calculated on
the market value of the assets of the Irish fund. Other service costs, such as those
in respect of administration, custodial and distribution, are paid out of the fees
earned by CGFM.

Tax Court
[22] The distinction between investment management and fund management
found favour with the tax court, which held that fund management is multi-
faceted requiring the securing of the correct licences; ensuring compliance with
statutory, regulatory and other laws; making ‘broad’ decisions about where to
invest; and deciding the amounts and when to distribute profits to investors. On
the other hand, investment management is more one dimensional and ‘the actual
discretionary decisions of investment managers play a relatively minor role in the
overall picture of fund management’. The tax court relied on CGFM’s Transfer
Pricing Report, which states that CGFM is responsible for the overall
management of the Irish Funds, including but not limited to the investment
management function.

[23] The tax court found that the reason for creating CGFM was to generate
opportunities for its investors which it could not provide in South Africa. The tax
court was satisfied that CGFM has ‘economic substance and does not merely exist
on paper’, on the basis that its conduct did not amount to housing its activities in
a foreign company to avoid tax in the home country on the income it produced.

[24] While accepting that the assets under management consist of money which
investors invest in collective investment schemes, the tax court had the following
to say:
‘[T]he fee income of [CGFM] is based on the quantum of assets under management. Fees are
raised on the amounts invested by individuals and apportioned to various role players and a

portion is retained by [CGFM] and the balance paid to [CIMSA]. The relevant basis of
calculating the fees is on the globular amount under management. [CIMSA] submits, and I
agree, that the evidence is that the fee is based on the capital contributed by the investors which
occurs before any investment management takes place. Even therefore if raising fees were the
primary conduct of the company this would still not be as a result of investment management.
Fees are received as a result of the creation and managing of a fund. Investors’ money
comprises the assets under management. The fees are not based on the profitability of the
investments carried out by each individual person playing a role in the process of investment
managing. It is correct, as contended by [SARS] that investment performance does have some
impact on the quantum of the fee. But I agree with the submission of [CIMSA] that while
investment performance is an important part of the overall fund management business, its
relative contribution to the fund management fee is limited. As submitted by [CIMSA] it is the
confidence that investors place in the fund manager per se in placing its assets with the fund
manager that gives rise to the fee, rather than the investment management activity.’

[25] The tax court held that without the execution of the management function
by CGFM, none of the other functions could lawfully take place. The tax court
reasoned that without the existence of a licence to conduct the business of making
investments into the CIS, CGFM would not be able to conduct business and there
would be no other functions of investment management, administration, custody
or distribution:
‘[CGFM] is not an investment management company it is a Fund Management company – it
is a licensed fund management company. The licence states that it [is] licensed to conduct
collective portfolio management. One of the functions that are carried out by a fund
management company is investment management. In this instance that function is outsourced
on contract to others.’

[26] On this basis, the tax court was satisfied that the management function
performed by CGFM was the primary operation of the business of CGFM. It set
aside the additional assessment raised by SARS against CIMSA and directed

SARS to issue a reduced assessment for its 2012 year of assessment, in which no
amount was included in CIMSA’s income pertaining to the income of CGFM.

CBI Licence
[27] What is the precise nature of the business that CGFM’s license approves?
The licence, which is headed ‘Authorisation of a UCITS Management Company’,
provides for authorisation by the Irish Financial Services Regulatory Authority
of CGFM ‘as a management company in accordance with the provisions of the
European Communities (Undertakings for Collective Investment in Transferable
Securities) Regulations, 2003 as amended’. The accompanying letter sets out the
procedures with regard to anti-money laundering and terrorist financing.

[28] Schedule 1 of the licence reads:
‘Coronation Fund Managers (Ireland) Limited may not engage in activities other than the
management of UCITS authorised according to the Regulations and other collective investment
undertakings which are not covered by the Regulations and for which Coronation Fund
Managers (Ireland) Limited is subject to prudential supervision but which cannot be marketed
in another Member State under the Directive.
This authorisation does not include the provision of individual portfolio management services
or other non-core services as set down in Regulation 16(3)(b). Coronation Fund Managers
(Ireland) Limited must revert to the Financial Regulator seeking appropriate approval in the
event that it proposes to engage in these activities.’

[29] What is immediately apparent is that CGFM’s licence is limited to
collective investment management. It does not have the authority to engage in
individual portfolio management. However, the fact that it is licenced to perform
collective investment management is inconsistent with CIMSA’s assertion that it
is not licenced to perform any investment management. Instead, it appears that
investment management is integral to its licence as an authorised management
company.

[30] The UCITS Regulations, 20117 as amended (the regulations) define
collective portfolio management as ‘the management of UCITS and other
collective investment undertakings, and includes the functions specified in
Schedule 1’. The definition of a management company is one whose ‘regular
business . . . is the management of UCITS in the form of unit trusts, common
contractual funds or investment companies (or any combination thereof), and
includes the functions specified in Schedule 1’.

[31] Schedule 1 of the regulations deals with the functions. It reads as follows:
‘Functions included in Activity of Collective Portfolio Management
1.
Investment Management.
2.
Administration:
(a)
legal and fund management accounting services;
(b)
. . .
3.
Marketing.’

[32] The regulations specifically make provision for outsourcing or delegation.
Clause 23 of the regulations provides:
‘(1)
A management company may delegate activities to third parties for the purpose of the
more efficient conduct of the company’s business provided that –
(a)
the management company has informed the Bank in an appropriate manner (whereupon
the Bank shall, without delay, transmit the information to the competent authority of the home
Member State of a UCITS managed by that management company),
(b)
the delegation mandate does not prevent the effectiveness of supervision over the
management company, and in particular it shall not prevent the management company from
acting, or the UCITS from being managed, in the best interests of its investors,
(c)
when the delegation concerns investment management, the mandate is only given to
undertakings which are authorised or registered for the purpose of asset management and
subject to prudential supervision; the delegation shall be in accordance with investment-
allocation criteria periodically laid down by a management company,

7 European Communities (Undertakings for Collective Investment and Transferable Securities) Regulations, 2011.

(d)
where the mandate concerns investment management and is given to a third country
undertaking, cooperation between the Bank and the supervisory authorities of the third country
concerned is ensured,
(e)
a mandate with regard to the core function of investment management is not given to
the trustee or to any other undertaking whose interests may conflict with those of the
management company or the unit-holders,
(f)
measures are put in place which enable the persons who conduct the business of the
management company to monitor effectively at any time the activity of the undertaking to
which the mandate is given,
(g)
the mandate does not prevent the persons who conduct the business of the management
company either from giving at any time further instructions to the undertaking to which
functions are delegated or from withdrawing the mandate or both with immediate effect when
this is in the interest of investors,
(h)
having regard to the nature of the functions to be delegated, the undertaking to which
functions will be delegated is qualified and capable of undertaking the functions in question,
and
(i)
the prospectuses issued by a UCITS list the functions which a management company
has been permitted to delegate in accordance with this Regulation.
(2)
Neither the management company’s nor the trustee’s liability shall be affected by the
fact that the management company delegated any functions to third parties, nor shall the
management company delegate its functions to the extent that it becomes a letterbox entity.’
(My emphasis.)

[33] From the above, two points are apparent. First, collective portfolio
management, which CGFM has been authorised to conduct, includes investment
management, administration and marketing. That fund management included
investment management, administration and marketing was confirmed by
Tara Doyle (Ms Doyle), the Irish solicitor with expertise in the legal and
regulatory aspects of investment services in Ireland. This was also the evidence
of Alan West King (Mr King), the managing director of CGFM since 2008.
John Ashley Snalam (Mr Snalam), one of the founders of the Coronation Group,
now retired, testified that the licence permitted investment management of

collective investment schemes and this was one of the ‘core functions’ which the
company ‘elected to outsource as it did with administration and distribution and
trusteeship by custody’.

[34] Second, the regulations indicate that the purpose of delegation is to
enhance the efficiency of the company’s business. It does not detract from the
business of the company, nor is it possible for delegation to alter that business. It
merely entails supervision of the core business which, in terms of regulation
23(1)(e), is recognised as investment management. In terms of regulation
23(1)(b) the management company acts in the best interest of the investors. The
liability of the management company is also not affected by the fact that it has
delegated its core function. All CIMSA’s witnesses were unequivocal that the
delegation of trading activities did not relieve CGFM of its responsibilities to the
CBI.

[35] This is entirely consistent with the fact that CGFM is authorised as a
UCITS management company pursuant to the Investment Intermediaries Act,
1995 in Ireland. This Act is aimed at ‘investment business firms’, and its purpose
is ‘to make provision in relation to investment business firms and investment
product intermediaries and for the authorisation and supervision of investment
business firms and investment product intermediaries by the Central Bank of
Ireland . . .’.8

[36] The evidence given by the witnesses for CIMSA was that the regulatory
functions were incidental. Mr King testified that the licence largely looked after
itself. Ms Doyle went so far as to state that it was unnecessary to have employees
in Ireland, as the board members could have carried out the function of fund

8 Investment Intermediaries Act 11 of 1995 (Republic of Ireland).

management at their quarterly meetings. That managerial functions are ancillary
to the investment function is also evidenced by the appendix to the application
for the authorisation, in which ‘managerial functions’ are listed. These are
decision-taking, monitoring compliance, risk management, monitoring of
investment performance, financial control, monitoring of capital, internal audit
and supervision of delegates.

[37] The ‘delegate oversight’ guidance of the CBI deals with ‘delegated’ and
‘retained tasks’ and provides that a fund management company may delegate ‘in
whole or in part certain specific tasks which form part of the fund management
company’s management functions’.9 It goes on to state that delegation is
permitted but responsibility is retained and that the company should ‘take all
major strategic and operational decisions affecting the fund management
company and any investment funds it manages’.10 The reference to the investment
funds it manages in the CBI guidance is yet another indication that the
authorisation by the CBI was for fund management, which comprises investment
management, administration and marketing.

[38] CIMSA has conflated the role of a management company with its
outsourcing or delegation of its investment and other functions. By so doing, it
has impermissibly elevated the management role. The licence granted to CGFM
was for fund management, which includes investment management,
administration and marketing. That it elected to outsource these functions and
merely manage these functions, does not change the nature of the licence or
elevate the managerial role into any other than an ancillary one.

9 Section 14, Part 1 ‘Delegate Oversight’ of web-based guidance issued by the Central Bank of Ireland in
November 2015 titled ‘Fund Management Companies – Guidance’ and in relation to which UCITS management
companies are expected to comply.
10 Ibid, s 15.

[39] Therefore, CIMSA’s pleaded case that CGFM ‘has not been approved by
the CBI to perform investment functions’ is incorrect, nor is it borne out by its
own witnesses. The fact that CGFM did not obtain approval for individual
portfolio management, or other core services, does not mean that the licence
‘expressly excluded investment management from its ambit’. Indeed, the contrary
is true, as the CBI licence authorised ‘collective investment management’ and if
it were to engage in individual portfolio management, then it was required to
apply for ‘appropriate approval’.

The Primary Operations of CGFM
[40] Having established that the CGFM’s licence entails investment
management, it must be determined whether the nature of CGFM’s business in
Ireland is that of an investment company or a management company with ‘the
managed outsourcing of the investment management functions in accordance
with the terms of the licence’. It is common cause that the investment function is
not located in Ireland. Therefore, if its primary business is that of investment,
then its net income as a controlled foreign company will be imputable to CIMSA.

[41] Outsourcing is a commercial reality, particularly in Ireland where,
according to Ms Doyle, 70-80% of the businesses operate on an outsourcing
basis. CGFM’s rationale for setting itself up as a fund manager in Ireland, was to
exercise its right to grow internationally and appoint the ‘best in the class’
investment managers, thereby advancing the best interests of its investors.11
[42] De Koker and Williams12 had the following to say on outsourcing:

11 On 5 October 2015, the OECD released its final report on the strengthening of CFC rules and stated that ‘[a]
substance analysis looks at whether the CFC engaged in substantial activities in determining what is CFC income’.
It pointed out that many member states of the EU combine a categorical approach with some carve-out for genuine
economic activities. Substance analyses use a variety of proxies to determine whether the CFC’s income was
separated from the underlying substance, including people, premises, assets and risks. ‘Regardless of which
proxies they consider, the substance analyses are generally asking the same fundamental question, which is
whether the CFC had the ability to earn the income itself’.
12 A de Koker and R Williams Silke on South African Income Tax at 5.44, 5-63.

‘Few companies function completely independently, and businesses form partnerships with
suppliers as well as outside contractors. Working with outside contractors, or outsourcing,
enables companies to conduct their activities more effectively and more efficiently. Although
it would be contrary to the definition of a FBE for all the activities of a business establishment
to be out-sourced to third party suppliers, some outsourcing activity is possible. To the extent
that it is provided by a group company, this is expressly recognised subject to certain
conditions. But which functions may be outsourced to other parties must always depend on the
particular facts and, to some extent may vary according to the nature of the industry. Where
outsourcing does occur, a manager should possess experience, knowledge and skills in relation
to the primary business operations and must also have the authority to dismiss an
underperforming outsourced service provider. Clearly the personnel, equipment and facilities
for the critical “primary operations” of a business cannot be outsourced, but the secondary
operations are presumably determined in accordance with reference to turnover, profitability
or assets employed, need not necessarily require dedicated personnel, equipment and facilities.’

[43] CIMSA argues that the business13 of the foreign controlled company must
be determined first, since it must have ‘a fixed place of business . . . for the
carrying on of the business of the foreign controlled company for a period of not
less than one year’. This should be determined by what that entity actually does,
the normal commercial activity which it undertakes on a day-to-day basis. Here
the daily business is that of fund management, entailing the active management
of its service providers, plus regulatory compliance.

[44] According to CIMSA, the ‘primary operations’ referred to in s 9D(1)(a)
(ii)-(iv) are practical actions required to operate that particular business. On this
interpretation CGFM is suitably staffed, equipped and resourced to carry out its
primary operations which are conducted in Ireland. In short, CIMSA contends
that the functions which CGFM outsourced are not functions of the business that

13 The word ‘business’ is not defined in the Act, but the dictionary meaning of ‘business’ is ‘one’s regular
occupation, profession, trade, task or duty’.

it actually conducts in Ireland on a daily basis, but of the larger fund management
service provided to investors in conjunction with the investment manager.

[45] This argument cannot hold water. The meaning to be ascribed to ‘primary
operations’ and ‘business’ must be contextual, relative to the definition of a FBE,
where the words are found. The FBE definition refers to the ‘primary operations
of that business’, which is a direct reference to the business of the controlled
foreign company. The phrase ‘primary operations’ is not defined in either the Act
or the Tax Administration Act14 (TAA). The dictionary definition of the word
‘primary’ is, inter alia, ‘first in importance,  chief, leading, main . . .’.15
‘Operations’ means, inter alia, ‘working activity, the exertion of force or
influence, the way in which a thing works’.16

[46] In the Memorandum of Association the objects of CGFM are described as:
‘(a)
To carry on the business of establishing, either on the Company’s own behalf or on
behalf of other persons or bodies, specified collective investment undertakings, defined in
Section 18 of the Finance Act, 1989 (“Collective Investment Undertakings”) and to provide for
such undertakings investment management services including but not limited to financial
advisory services, administration services, marketing services, placement services, brokerage
services, agency services and all other services of a financial nature and generally to deal in
units of the undertakings managed by the Company.
(b)
. . .
(c)
To carry on the business of investment and financial management including venture
and development capital investment, corporate treasury management, fund management and
fund administration for individuals, investment schemes or undertakings other than Collective
Investment Undertakings international corporate bodies, governments or other authorities both
as principals and agents and to transact and do all matters and things incidental thereto which
may be usual in connection with the business of financing or dealing in monies. PROVIDED

14 Tax Administration Act 28 of 2011.
15 Collins English Dictionary https://www.collinsdictionary.com/dictionary/english/primary, accessed on
30 January 2023.
16 Oxford English Online Dictionary.

THAT the Company shall not act as or accept any appointment as a fund manager for any
investment scheme or undertaking other than a Collective Investment Undertaking without the
prior approval of the Irish regulatory authority but for the avoidance of doubt the Company
may provide fund administration, investment advisory or management services to any fund
manager appointed to an investment scheme or undertaking other than a Collective Investment
Undertaking.’

[47] The notion that investment management is not CGFM’s core business is at
odds with what is stated in its memorandum of association. The stated objects of
CGFM are to carry on the business of establishing specified collective investment
undertakings; to promote, establish, manage, regulate and carry on any
investment, unit or other trust or fund; and to carry on the business of investment
and financial management.

[48] What then constitutes the core function of the business that CGFM operates
in Ireland? It obtained its licence in terms of the relevant legislation under the
Investment Intermediaries Act in Ireland. Investment management is a function
integral to the fund management licence. The UCITS regulations refer to
investment management as a core function of a management company.
Mr Snalam testified that investment management, administration and marketing
are ‘core functions’ for which CGFM is responsible. This sentiment was echoed
by Mr King.

[49] In addition, CGFM pays a fee to CAM and CIL out of the fees derived
from investment management in terms of the investment management agreements
it entered into between CAM and CIL, respectively. In terms of the agreements,
CAM and CIL receive a fee amounting to ‘50% of the net fund management fee
received by CGFM Ireland for the fund management services that it performs to

the Irish funds, plus any net performance fees, where applicable’.17
Notwithstanding the delegation of the investment management to CAM and CIL,
the fees in respect of investment was earned by CGFM. Mr King and Mr Snalam
testified that CGFM derives its fees from the assets under management, which
are essentially the monies of investors in the collective investment schemes. That
GCFM’s primary source of income is from investment is another indication that
CGFM’s core function is investment management. Having found that CGFM is
licensed as an investment management company, the business of the controlled
foreign company (in this instance, CGFM) is unquestionably that of investment,
as is also evidenced from the source documents.

[50] The fact that CGFM was permitted to outsource functions does not mean
that the scope of its business is confined to supervision of the functions which it
has outsourced, together with regulatory compliance. Its operations are
determined by those activities for which it sought, and was granted, a licence.
That it elected to outsource these functions, does not exclude these functions from
the scope of its business. On the contrary, these functions had to fall within the
ambit of its business in order to be outsourced. An agent cannot perform a
function which does not form part of the business of the principal. In other words,
CGFM could not outsource a function that it did not possess in the first place.

[51] The function of investment management is, per the licence, a component
of fund management, irrespective as to whether it is outsourced or not. The choice
of a particular business model cannot alter the primary operations of a company.
The nature of CGFM’s business was not transformed from an investment business
to a managerial one by outsourcing its investment functions. Put differently, the
true business of investment management cannot be transformed into ‘managed

17 Transfer Pricing Report.

outsourcing of investment management funds’, simply because it elected a
business model of outsourcing in which the function of investment management
is outsourced.

[52] If the key operations of the business have been outsourced (here,
investment management), then the fixed place of business in Ireland lacks the
staff and facilities to conduct those operations. If these operations are central to
the business of CGFM, because they go to the very nature of what this business
does, then CGFM does not conduct its primary operations in Ireland. Without the
investment management operations, can it be said to conduct its primary
operations in Ireland? The answer must be, ‘no’.

[53] The FBE definition is not aimed solely at advancing international
competitiveness for offshore businesses. Nor is the legislation concerned only to
prevent diversionary, passive or mobile income18 eroding the South African tax
base. It is also to limit a situation where an exemption is obtained over earnings
in a low tax jurisdiction when the primary operations for the business are not
conducted there.

[54] The essential operations of the business must be conducted within the
jurisdiction in respect of which exemption is sought. While there are undoubtedly
many functions which a company may choose to legitimately outsource, it cannot
outsource its primary business. To enjoy the same tax levels as its foreign rivals,
thereby making it internationally competitive, the primary operations of that
company must take place in the same foreign jurisdiction.

18 Diversionary income relates to tax schemes which artificially shift income off-shore; passive income includes
dividends, interest and royalties; and mobile income is that from a shell business which merely retains a post-box
address and has no non-tax reason for its existence.

[55] On these particular facts, I conclude that the primary operations of
CGFM’s business (and, therefore, the business of the controlled foreign company
as defined) is that of fund management which includes investment management.
These are not conducted in Ireland. Therefore, CGFM does not meet the
requirements for an FBE exemption in terms of s 9D(1). As a result, the net
income of CGFM is imputable to CIMSA for the 2012 tax year in terms of
s 9D(2).

Understatement Penalty and Under-Estimation of Provisional Tax
[56] SARS imposed an understatement penalty in respect of the imputed net
income of CIMSA’s 2012 tax year of assessment, in terms of s 222(1) read with
s 223 of the TAA, on the basis that there had been a ‘substantial understatement
resulting in a penalty of 10% of the tax that would otherwise have been paid’.19

[57] In the event of an understatement, the taxpayer must, in addition to the
proper tax that should have been paid, pay an understatement penalty, unless it is
the consequence of a ‘bona fide inadvertent error’.20 SARS bears the onus of
proving the facts upon which the penalty was imposed.21 A substantial
understatement as defined is where the prejudice exceeds 5% of the proper
amount that should have been paid, alternatively, exceeds R1 million. Clearly,
the threshold has been met in the present case – none of the net income of CGFM
was taxed in the hands of CIMSA. This exceeds 5% of the tax otherwise payable.

19 Section 221 of the TAA defines ‘understatement’ as ‘any prejudice to SARS or the fiscus as a result of – (a)
failure to submit a return required under a tax Act or by the Commissioner; (b) an omission from a return; (c) an
incorrect statement in a return; (d) if no return is required, the failure to pay the correct amount of “tax”; or (e) an
“impermissible avoidance arrangement”’.
20 Section 222 of the TAA.
21 Sections 102(2) and 129(3) of the TAA.

[58] CIMSA stated that it relied on a tax opinion procured from a leading tax
expert in the country.22 However, it did not disclose the contents thereof, or make
the opinion available to SARS. SARS relies on this non-disclosure to draw a
negative inference that the tax opinion did not support CIMSA’s claim for an FBE
exemption and that a deliberate and conscious decision was taken to exclude the
net income of CGFM. It is contended that this was not an inadvertent error.

[59] Similar reasoning is applied to the underestimation of provisional tax for
the 2012 year of assessment. In the case of an underestimation of provisional tax,
SARS has a discretion to impose additional tax of up to 20% where CIMSA’s
income is more than R1million and the provisional tax was estimated at less than
80% of the actual amount taxable.23 In such an instance, SARS must have due
regard to the factors bearing thereon. Once again, SARS calls upon this Court to
draw an inference from the non-disclosure of the tax opinion that it did not
support CIMSA’s position on the FBE exemption.

[60] There is nothing to gainsay CIMSA’s evidence that it prepared and
submitted all its tax returns under the guidance of PricewaterhouseCoopers, and
that Ernst & Young were the external auditors of CGFM. Nor is there anything
to suggest that CIMSA’s tax returns were not submitted in the bona fide belief
that CGFM may be eligible for a s 9D exemption. The fact that this Court has
now found that this course is not open to it, does not in any manner reflect on the
bona fides of CIMSA, any more than it reflects on the bona fides of any losing
party in litigation. Insofar as the tax opinion is concerned, it was not incumbent
on CIMSA to disclose a tax opinion that it had obtained, any more than it would
be on any other party which litigates on the basis of a procured legal opinion.

22 The tax opinion was referred to in Mr Snalam’s evidence.
23 Paragraph 20(1)(a) of the Fourth Schedule to the Income Tax Act.

[61] In Commissioner for the South African Revenue Service v The Thistle
Trust,24 an argument was presented on behalf of SARS that the taxpayer in that
matter had consciously and deliberately adopted a certain position when it elected
to distribute the capital gains. This Court held that it was correctly conceded that
the understatement was a bona fide error and that SARS was not entitled to
impose the understatement levy.

[62] Although dealing with the raising of an additional assessment, in
Commissioner, SARS v Pretoria East Motors (Pty) Ltd,25 this Court said that there
must be proper grounds for believing that there is undeclared income or that a
claim for a deduction or allowance is unjustified. It is only in this manner that
SARS can engage the taxpayer in an administratively fair manner, as it is obliged
to do.

[63] To speculate that a tax opinion must have gone against CIMSA merely
because it was not produced to SARS, is simply speculative. It is not sufficient to
attribute male fides on the part of CIMSA.

[64] For these reasons, the claim for understatement penalties and
underestimation penalties must fail.

[65] All that remains is s 89quat(2) of the Act, which provides for interest to be
charged on the underpayment of provisional tax. Interest is payable in terms of
this section if the ‘normal tax’ payable by a tax payer in respect of its taxable
income exceeds the credit amount in relation to such year. Normal tax includes
any additional amounts payable in terms of s 76 of the Act and paras 20 and 20A

24 Commissioner for the South African Revenue Service v The Thistle Trust [2022] ZASCA 153 (SCA) para 29.
25 Commissioner, SARS v Pretoria East Motors (Pty) Ltd [2014] ZASCA 91; [2014] 3 All SA 266 (SCA); 2014
(5) SA 231 para 11.

of the Fourth Schedule thereto. Here, there has been an underpayment on the
normal tax and, accordingly, interest is payable in terms of s 89quat(2).

[66] In the result, the following order is made:
The appeal is upheld.
The order of the Tax Court is set aside and substituted with the following:
‘1
The appellant is directed to pay the additional tax imposed in respect
of the respondent’s additional assessment dated 23 March 2017, and the
interest imposed thereon in terms of section 89quat(2) of the Income Tax
Act 58 of 1962.
The appellant is to pay the respondent’s costs, including the costs of
two counsel.’
The respondent is to pay the appellant’s cost of appeal, including the costs
of two counsel.

____________________
C HEATON NICHOLLS
JUDGE OF APPEAL

Appearances

For appellant:
R T Williams SC (with her H Cassim)
Instructed by:
State Attorney, Cape Town

State Attorney, Bloemfontein

For respondent:
M W Janisch SC (with him C M Rogers and V M Jere)
Instructed by:
Bowmans, Cape Town

Matsepes Attorneys, Bloemfontein
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
MEDIA SUMMARY OF JUDGMENT DELIVERED IN THE SUPREME COURT OF
APPEAL
From: The Registrar, Supreme Court of Appeal
Date:
07 February 2023
Status: Immediate
The following summary is for the benefit of the media in the reporting of this case and does not form part of
the judgments of the Supreme Court of Appeal
Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd
(1269/2021) [2023] ZASCA 10 (07 February 2023)
Today, the Supreme Court of Appeal (SCA) delivered a judgment in which it upheld with costs an appeal by the
Commissioner for the South African Revenue Service (SARS) against the decision of Western Cape Division of
the High Court, Cape Town, sitting as a tax court (the tax court) which found in favour of Coronation Investment
Management SA (Pty) Ltd (CIMSA).

The respondent, CIMSA, is the holding company for the Coronation Group which is registered and tax resident
in South Africa. During 2012, CIMSA was a 90% subsidiary of Coronation Fund Managers Limited and the 100%
holding company of Coronation Management Company and Coronation Asset Management (Pty) Ltd (CAM),
both registered for tax in South Africa. CIMSA was also the 100% holding company of CFM (Isle of Man) Ltd,
tax resident in Isle of Man. CFM (Isle of Man) Ltd, in turn, was the 100% owner of Coronation Global Fund
Managers (Ireland) Limited (CGFM) and Coronation International Ltd (CIL), which were registered and tax
resident in Ireland and the United Kingdom respectively.

The central issue in the appeal was whether the net income of CGFM should have been included in the taxable
income of its South African holding company, CIMSA, or whether a tax exemption in terms of s 9D of the Income
Tax Act 58 of 1962 (the Act) was applicable to the income that had been earned by CGFM. The answer, said the
SCA, was dependent on what the primary functions of CGFM in Dublin, Ireland were. If it were found that the
primary operations were conducted in Ireland, then the s 9D exemption would apply. CGFM had adopted an
outsource business model where its investment management function was conducted by CAM in South Africa
and CIL in the United Kingdom.

SARS assessed the tax liability for the 2012 tax year to have included in its income an amount equal to the entire
‘net income’ of CGFM. The tax court upheld CIMSA’s objection and found that CGFM was a ‘foreign business
establishment’ (FBE) as defined in s 9D(1) of the Act and, accordingly, qualified for a tax exemption. The
exemption only applies to foreign entities that qualify as a ‘controlled foreign company’. It set aside SARS’s
additional assessment against CIMSA and ordered it to issue a reduced tax assessment, in which no amount was
included in CIMSA’s income under s 9D of the Act pertaining to CGFM’s income. Consequently, SARS was not
entitled to claim (a) understatement penalties in terms of s 222 of the Tax Administration Act 28 of 2011
(the TAA); (b) understatement penalties for provisional tax under paragraph 20 of the Fourth Schedule to the Act;
and (c) interest in terms of s 89(2) of the Act.

The location of the ‘primary operations’, referred to in s 9D(1)(a)(ii)–(iv), was pivotal in determining whether
CGFM was an FBE as defined. Thus, it was imperative to determine whether the primary operations had been
outsourced, and if so, whether an exemption in terms of s 9D exemption was applicable. SARS submitted that the
FBE definition requires each of the requirements set out in s 9D(1)(a)(i) to (v) to be present in a fixed place of

business in order for a controlled foreign company to qualify as a FBE. If not, the business is not entitled to a tax
exemption under s 9D(1)(a). SARS submitted that while it is permissible for a controlled foreign company to
outsource locational permanence and economic substance, it must comply with the proviso set out in s 9D and
each of the discreet requirements in the subsections (aa), (bb) and (cc) of the proviso have to be met.

In October of 2007, CGFM applied to the Irish Financial Services Regulatory Authority for authorisation of an
Undertakings for Collective Investment and Transferable Securities a (UCITS) and received its licence from the
Central Bank of Ireland (CBI) as a ‘management company’ in accordance with the European Communities
Regulations under Investment Services Directive 93/22/EEC 2125. In its business plan, that was attached to its
licence application, CGFM presented an outsource business model where CGFM concentrates on being a ‘product
provider’. All non-core functions, such as investment, administration and custodial functions, are outsourced.
According to the business plan, because these functions are outsourced to independent third party service
providers, CGFM is not subject to South African Transfer Pricing rules. CIMSA denied that CGFM outsourced
functions of ‘its business’ as referred to in the FBE definition and contended that investment management services
were not a necessary part of a fund manager’s business.

The SCA held that CGFM’s licence entails investment management, and turned to determine whether the nature
of CGFM’s business in Ireland was that of an investment company or a management company with ‘the managed
outsourcing of the investment management functions in accordance with the terms of the licence’. The SCA held
that it was common cause that the investment function was not located in Ireland. Therefore, if its primary business
is that of investment, then its net income as a controlled foreign company should be imputable to CIMSA. CIMSA
argued that the ‘primary operations’ referred to in s 9D(1)(a) (ii)-(iv) are practical actions required to operate that
particular business. CIMSA further argued that the functions which CGFM outsourced were not functions of the
business that it actually conducts in Ireland on a daily basis. The SCA rejected this argument and held that the
meaning to be ascribed to ‘primary operations’ and ‘business’ must be contextual, which is relative to the
definition of a FBE, where the words are found. The FBE definition refers to the ‘primary operations of that
business’, which is a direct reference to the business of the controlled foreign company. The SCA examined
CGFM’s objects as recorded in its Memorandum of Association and held that the notion that investment
management is not CGFM’s core business was at odds with what is stated in its memorandum of association. The
stated objects of CGFM are, inter alia, to carry on the business of establishing specified collective investment
undertakings; to promote, establish, manage, regulate and carry on any investment, unit or other trust or fund; and
to carry on the business of investment and financial management. The SCA concluded that the primary operations
of CGFM’s business (and, therefore, the business of the controlled foreign company as defined) was that of fund
management which comprises of investment management. These are not conducted in Ireland, said the SCA.
Therefore, CGFM did not meet the requirements for an FBE exemption in terms of s 9D(1). As a result, the SCA
held that the net income of CGFM is imputable to CIMSA for the 2012 tax year in terms of s 9D(2).

SARS had imposed an understatement penalty in respect of the imputed net income of CIMSA’s 2012 tax year of
assessment, in terms of s 222(1) read with s 223 of the TAA, on the basis that there had been a ‘substantial
understatement resulting in a penalty of 10% of the tax that would otherwise have been paid’. In this regard,
CIMSA stated that it relied on a tax opinion procured from a leading tax expert. However, it did not disclose the
contents of the opinion, nor make the opinion available to SARS. SARS claim for understatement penalties failed
as the SCA held that CIMSA was not obligated to disclose the tax opinion to SARS and that not making the
opinion available to SARS was not sufficient to attribute male fides on the part of CIMSA.

~~~~ends~~~~