What is a connected person?

In the intricate world of taxation and business dealings, the term “connected person” holds significant weight. Across various tax systems globally, the connection between entities involved in transactions often dictates the application of anti-avoidance legislation. While some jurisdictions refer to them as “related parties,” in South Africa, they are known as “connected persons.” This classification denotes a non-arm’s-length commercial relationship between transacting entities and serves as the foundation upon which revenue authorities base the enforcement of anti-avoidance laws.

So, what exactly constitutes a connected person? Broadly defined, a connected person is any individual or entity that stands to benefit from the actions of another due to a familial relationship, trust beneficiary status, mutual partnership, or shareholding arrangement. Let’s delve deeper into the specifics:

1. Natural Persons: In the context of natural persons, a connected person includes relatives and trusts in which the individual or their relative is a beneficiary. Relatives are defined based on degrees of consanguinity, encompassing spouses, children (including adopted children), grandchildren, great-grandchildren, parents, grandparents, great-grandparents, siblings, nephews, and nieces. However, cousins, being related within the fourth degree of consanguinity, fall outside this definition.
2. Companies: For companies, a connected person comprises several categories:
   • Other companies within the same group, holding at least 50% of the equity shares and voting rights.
   • Individuals or entities holding, individually or jointly with connected persons, at least 20% of the equity shares or voting rights.
   • Companies where at least 20% of the equity shares or voting rights are held by another company, without any majority shareholder.
   • Companies managed or controlled by individuals connected to them.
   • In the case of closed corporations, members or their relatives, or trusts connected to members.

Determining whether companies are part of the same group involves assessing direct shareholdings and voting rights. For instance, if Company A owns 60% of Company B, and Company B owns 60% of Company C, all three companies are considered part of the same group, based on the cumulative shareholdings.

Understanding the concept of connected persons is crucial for tax compliance and business transactions. It helps authorities identify potential instances of tax avoidance or manipulation of commercial dealings. By scrutinizing relationships and transactions between connected parties, tax authorities aim to ensure fairness and transparency in the tax system.

Moreover, businesses need to be vigilant in assessing their connections to avoid unintended consequences or penalties arising from non-compliance with anti-avoidance regulations. Proper documentation and disclosure of relationships with connected persons are essential to mitigate risks and maintain regulatory compliance.

We understand that navigating the complexities of tax and business relationships can be challenging. If you require further insight or clarification on the concept of connected persons, we are happy to provide assistance. Feel free to reach out for guidance tailored to your specific circumstances.

In conclusion, the concept of connected persons plays a pivotal role in tax and business landscapes, shaping the application of anti-avoidance measures and influencing commercial transactions. Understanding who qualifies as a connected person and the implications of such relationships is essential for both taxpayers and regulatory authorities in fostering integrity and equity within the taxation framework.