Investing into Africa – Efficient Route to Market Using a Guernsey/South African Structure
The African Continent offers vast opportunities for inward investment and is of great interest to international investors searching for growth, particularly in relation to venture capital, private equity and infrastructure strategies.
Guernsey has an extensive track record in providing a stable, globally recognised and flexible regime for these strategies and Dixcart has seen a steady stream of enquiries for structuring investments into the African Continent for Family Offices, Private Equity Houses, South African Fund Managers and groups of mutual interest investors.
Structures are bespoke and often include an ESG (environment, social and governance) investment strategy. Both corporate and fund vehicles are typically used, with Private Investment Funds (PIFs) the favoured fund structure.
This note looks at a Guernsey Fund structure with the consideration of a South African Headquartering company (SA HQ Co) subsidiary. The principal is the same for a Guernsey holding company for international investors where a regulated Fund is not required.
Inward Investment: The Private Investment Fund (PIF)
For Fund Managers, there are compelling reasons to use a Guernsey fund structure due to the speed they can be launched, the competitive cost to establish and maintain, and the practicality of closely aligned time zones.
Guernsey is home to more than 850 investment funds with AUM of £310bn for Promoters, ranging from well-established global investment managers to boutique managers.
The newly revised Guernsey Private Investment Fund (PIF) structure provides incredible flexibility for:
- the speed it can be brought to market
- the streamlining of regulation with reliance being placed on the Designated Administrator, and
- there being three routes to market, tailored to suit different investor types
A PIF is limited to a maximum of 50 investors which is rarely an issue for these funds as they typically accommodate a limited number of investors. For further information on the three PIF types please click here, for the Qualifying Investor PIF please click here, and for the Family Relationship PIF please click here.
The Qualifying Investor PIF is a quick and efficient way for Fund Managers to access international institutional investors and raise capital for their African strategies.
Whilst Mauritius has often been considered a natural fit for access to the African market due to its treaty networks, the combination of a PIF with a SA HQ Co Structure beneath, offers an attractive alternative for tax efficient investing across much of Africa and is discussed further below.
The South Africa Headquartering Regime (SA HQ Regime)
(For investing outside of South Africa)
The SA HQ Regime was established in 2012 as a “Gateway into Africa” by amending the laws and exchange controls to provide significant incentives for private equity investments. The SA HQ Co would be a company incorporated in Guernsey but would have effective management and control in South Africa as a 100% subsidiary of the Guernsey PIF and be exclusively “resident” for South African tax purposes so can be registered as a HQ Co and have full access to tax treaty relief.
There should ideally be a single 100% foreign shareholder (i.e., the Guernsey PIF), with no requirement for this shareholder to be from a country with an existing South African Double Tax Agreement. However multiple shareholders, both foreign and local, are permissible.
This must be an active investment company, so the structure needs to affect the foreign investment as soon as possible. The predominant value of the company’s assets must represent interests in non-South African investments, with the income apportionment dependant on the SA HQ Co’s anticipated annual turnover.
The ideal income mix would be a combination of interest, dividends, and service fees. Whilst other classes of income are allowed under the SA HQ Co, these would be dealt with on a case-by-case basis working alongside an independent and recognised tax advisor in South Africa.
Highlights
- Full access to South Africa’s DTA network (23 DTA’s with African countries, 102 worldwide)
- Mitigation of SA transfer pricing provisions to related party transactions, including:
- Intra-group financial assistance
- Licensing of IP, involving the SA Investment Company
- SA’s Controlling Foreign Company (CFC) provisions are navigated to result in a nil net income imputation for the SA HQ Co
- The SA HQ Co can elect a functional currency other than the Rand
- The SA HQ Co may not be subject to further scrutiny on an exchange control front
Benefit Synopsis
The exact benefits will depend on the nature and location of each investment, but may be summarised as follows:
- Interest, dividends, and service fees can be received by the SA HQ Co from the foreign investment with a reduced or zero withholding tax, considering South Africa Double Tax Treaty provisions
- Dividends either paid out or received by the SA HQ Co, may be subject to relief, to the extent of either minimization, or a neutral tax effect. This relief can make up for the lack of a treaty between South Africa and Guernsey
- Disposals of participating holdings by the SA HQ Co are not subject to Capital Gains Tax
- There is no South African tax on an optimally designed structure
Conclusion
The PIF with an SA HQ Co subsidiary provides a robust, flexible and efficient structure for PE Houses and Fund Managers for structuring through, to enable their networks of professional and institutional investors to implement their African strategies.
For single investors and Family Offices where a regulated structure is not required, a Guernsey company above the SA HQ Co provides the same solution.
Additional Information
For more information on Guernsey, and the investment structures for Africa (or indeed anywhere else in the World) and how Dixcart can help, please contact Steven de Jersey at the Dixcart Guernsey office at: advice.guernsey@dixcart.com and visit our website www.dixcart.com
Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.
Dixcart Fund Administrators (Guernsey) Limited, Guernsey: Full Protector of Investor Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 68952.
