IN257 - Increasing Value of the South African International Headquarter Regime

South Africa has introduced legislation designed to make it the location of choice for investment, particularly into Africa.  This information note evaluates South Africa’s International Headquarter Regime. 

Features of an Ideal International Holding Company Location

The features of an "ideal" international holding company location include:

• A good double tax treaty network.
• A minimisation of withholding tax on dividends received.
• Exemption of dividend income from taxation.
• Does not charge capital gains tax on the disposal of subsidiaries.
• Has no controlled foreign company (CFC) rules or exchange control.
• Does not apply withholding tax on distributions from the holding company to its shareholders.
• The jurisdiction should be operationally efficient as well as being tax efficient.

South Africa’s Tax Treaty Network

South Africa has over 70 tax treaties, including 19 with African countries. An additional 8 treaties with other African nations are under negotiation.  South Africa offers a specific advantage over other jurisdictions with regard to its favourable treaties with African countries and it also has many other particularly interesting treaties.

Participation Exemption

South Africa’s normal rate of tax is 28% and it is charged on the company’s worldwide income. 

A South African Headquarter Company benefits from an exemption from tax on foreign dividends, provided that the International Headquarter Company holds at least 10% of the total equity shares and voting rights in the foreign company.

Participation Exemption – Capital Gains

There is no capital gains tax on the disposal of shareholdings by a Headquarter Company. This is provided that it holds at least 10% of the equity shares and voting rights of the foreign company, has held these for at least 18 months before the sale and that the foreign company’s assets do not predominantly comprise of financial instruments.

CFC Legislation

Provided that more than half of the share capital of the Headquarter Company is held by non-South African residents, South Africa’s CFC laws do not apply to the Headquarter Company. 

Exchange Controls

Headquarter Companies are free to raise and deploy capital offshore, without restriction, as long as the following conditions are met. They must be 80% foreign owned, must not be quoted on the Johannesburg Stock Exchange, no shareholder can hold less than 20% of the shares or voting rights of the Headquarter Company and, at the end of the year, at least 80% of the assets of the Headquarter Company must be foreign assets.  Headquarter Companies are, in effect, treated as non-resident companies, although they are required to meet full  reporting obligations.

It is anticipated that some of the exchange control requirements will be reduced in the future to bring them in line with the qualification requirements for South African Headquarter Companies, detailed below.

Qualification Requirements for a South African Headquarter Company

To qualify as a Headquarter Company, the following conditions must be met:

• For every year of assessment, each shareholder must hold 10% or more of the equity shares and voting rights in the Headquarter Company.
• At the end of the year of assessment, 80% or more of the value of the total assets of the Headquarter Company must be attributed to:
• An interest in equity shares in qualifying foreign companies.
• Loans to qualifying foreign companies.
• Certain intellectual property, licensed by the Headquarter Company to qualifying foreign companies.  

A qualifying foreign company is one in which the Headquarter Company holds at least 10% of the equity shares. 

In determining total assets, no cash or bank deposits payable on demand can be taken into account.

• If the Headquarter Company’s gross income for the year of assessment exceeds ZAR 5 million, 50% or more of the gross income must consist of:
• Rentals, dividends, interest, royalties or service fees paid or payable by foreign qualifying companies.
• Proceeds from the disposal of qualifying foreign shares or qualifying intellectual property.

In determining income, foreign exchange gains are excluded.

An election must be made each year to qualify as a Headquarter Company for tax purposes.  If the criteria are met, qualification is automatic.

Conclusion

South Africa offers a number of commercial advantages: location, sizeable economy, political stability, breadth of financial services and a wide network of tax and asset protection treaties. These factors, combined with the attractive South African Headquarter Company Regime, make this location a leading intermediate holding company jurisdiction in Africa.

Care must be taken to constantly ensure that the relevant criteria are achieved to meet both Headquarter status requirements and the easing of exchange control obligations.

Contact

If you would like further information on this subject, please contact Laurence Binge: laurence.binge@dixcart.com, or your usual Dixcart contact.

Summary of Treaties