SA1 - Structuring Strategic Investment into Europe Through Malta and The UK

The European Union (EU) offers many opportunities for investment by South African companies.

Mauritius is often used as a route for companies investing into South African Development Community (SADC) countries. However a different approach is needed to find tax efficient solutions for investment into companies in EU countries.

The Choice of Jurisdiction

Investing through a Special Purpose Vehicle (SPV) should be considered when a major stake is to be taken in a European subsidiary. The location of the SPV within Europe is very important.

A European jurisdiction needs to be used that minimises or eliminates relevant withholding and corporate taxes, but at the same time has a respectable public image. Malta and the UK are jurisdictions worth consideration.

Taxes to be Considered

The following taxes need to be considered when a SPV is going to be used to hold the investment.

• Withholding taxes on both dividends received and paid
• Taxation of dividends within the SPV
• Tax on capital gains on the sale of shares in the target company
• Tax on capital gains on the disposal of shares in the SPV
• Capital duty on share capital

Withholding taxes and the EU Parent/Subsidiary Directive

Under the EU Parent/Subsidiary Directive, where a parent company is in one EU member state and holds at least 10% of the shares of a company in another EU member state, the dividends paid from the subsidiary to the parent are exempt from taxation.

Withholding taxes will vary significantly depending on the route that a South African company chooses to invest into a European company.

Where South Africa has a tax treaty with a specific country, withholding taxes on dividends may be reduced to 5% on holdings of at least 25% and reduced to 15% on holdings of more than 10%, but less than 25%. If there is no tax treaty, withholding taxes can be as high as 30%.

The withholding tax between the target company and the SPV can be reduced to zero by routing the investment through an SPV in Malta or the UK. There are no withholding taxes on dividends paid from the countries to South Africa, or indeed to any other country, even if that country is in a zero tax jurisdiction.

Taxation of Dividends within the SPV

Malta and the UK each have participation exemptions. This ensures that dividends are not taxed at the level of the SPV. Certain conditions must, however, be met, particularly in the UK. Information Notes on holding companies for each of these jurisdictions are available on request.

Taxation of Gains on the Sale of Shares in the Target Company

Malta has an exemption from tax on the disposal of qualifying holdings. The UK has a capital gains tax exemption on the disposal of “substantial interests” in a trading company.

Taxation of Gains on the Disposal of Shares in the SPV

Malta and the UK do not charge non residents capital gains tax on the sale of company shares in the respective jurisdiction.

Capital Duty

There is no capital duty payable on the transfer of shares in Malta. In the UK, stamp duty is payable at a rate of 0.5% on the arm’s length consideration.

South African Participation Exemption

The South African participation exemption rules provide that if a shareholder holds more than 20% of the equity share capital of a foreign company, the dividends receivable are exempt from tax. Provided that the shares are held for at least eighteen months and are sold to a non resident, the proceeds on disposal of the shares are exempt from capital gains tax.

Advice should be taken with regard to any anti avoidance legislation that may apply.

Summary

The jurisdictions of Malta and the UK offer a number of tax advantages for South African companies seeking to invest into the EU.

How Can Dixcart Help?

We can provide additional information on effective strategic investment into the EU. In addition, we can provide the following services in Malta and the UK:

• Company incorporation
• Provision of directors
• Registered office and secretarial services
• Provision of serviced offices
• Provision of virtual offices
• Statutory accounting services
• Acting as a tax agent

Additional Information

If you have any questions or require any additional information on the jurisdictions of Malta and the UK, please contact:

• Sean Dowden, regarding Malta – sean.dowden@dixcart.co.za
• Laurence Binge, regarding the UK – laurence.binge@dixcart.co.za