Investing into the African Continent – Benefits of a Guernsey and South African Headquartering Company Regime
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 Private Equity Houses, South African Fund Managers, Family Offices, and groups of mutual interest investors.
This note looks at a Guernsey Investment structure investing into the African Continent using a South African Headquartering structure as an attractive and underutilised alternative to structuring through Mauritius. It is assumed such an investment structure would generate interest and dividend income, as well as gains from the disposal of shares of underlying subsidiaries.
In 2012, South Africa established itself as an attractive “Gateway into Africa”, by amending its tax laws and exchange controls to provide significant incentives for private equity investments, not only into Africa, but also into the rest of the world, using South Africa as a holding jurisdiction.
This became known as the South African Headquarter Company Regime (the SA HQ Regime), which gives effect to these incentives.
In the below diagram, a Guernsey Investment vehicle (either regulated or unregulated) (Guernsey Investment Co.) sits at the top for international investors to invest into, with a 100% Guernsey subsidiary below that is registered with the South African Revenue Services (SARS) as an SA HQ Company, with underlying wholly owned subsidiaries in the African country where the investment is ultimately being made.
How easy is it to qualify for the tax benefits offered by the SA HQ Regime?
Below is a brief summary of the requirements to qualify for the SA HQ Regime.
- The SA HQ Company must be tax resident in South Africa, which would require it to be effectively managed and controlled in South Africa.*
- Prescribed minimum percentages:
- At least 10% shareholding in the SA HQ Company by each shareholder80% or more of the cost of the total assets must be attributable to the underlying investment
- At least 50% of the gross income must comprise of passive income earned from the underlying investment
- An annual election to be treated as a SA HQ Company is required
- Annual reporting (non-onerous) is required.
*Note it is advisable to incorporate the SA HQ Co as a Guernsey company so not to be tied to South Africa should SARS change the Regime.
Tax benefits offered by the SA HQ regime**
- Profits and gains generated in the underlying structure are effectively exempt from SA tax
- Interest received – can be structured to minimise or zeroise tax
- Dividends received – exempt from SA tax
- Royalties received – outside the scope of SA tax
- Capital gains on the disposal of shares in the African Subsidiaries – exempt from SA tax
- Dividends declared to shareholders – outside the scope of SA tax
- Interest paid on borrowings – minimal or no SA tax
- Royalties paid – no SA tax
- Disposal of shares by non-resident shareholders – likely to be outside the scope of SA tax
**Subject to each structure’s circumstances. Independent tax advice from a recognised South African tax adviser will be required. Dixcart can make introductions to appropriate South African tax advisers, if required.
South African Tax Treaty Network
South Africa has more than twice as many Double Tax Treaties as Mauritius, with 102 treaties currently in force (23 of which are from the 54 African countries), compared to Mauritius’ 45 treaties.
Also, as an update, South Africa’s extensive treaty network continues to allow for treaty relief in almost every continent of the world, including Australia, North and South America, Africa and Europe. The Mauritius treaty network is, on the other hand, more focused on specific jurisdictions such as India and China and notably does not have treaties with Australia, Brazil, Canada, Ireland, Japan, Netherlands, New Zealand, Russia, Switzerland and the United States.
What are the Consequences of Disinvestment?
The shares held in the SA HQ Company Regime by the Investment Company would not be deemed as holding assets in South Africa as the SA HQ Company investments must be from outside of South Africa. This means that the disposal of the SA HQ Company’s shares by Investment Company as a non-resident shareholder would not give rise to any South African Capital Gains Tax (CGT) implications for it. However, the shareholders of the Investment Company, when they realise their holding, may be subject to tax in their jurisdiction of residence.
The Guernsey Investment structure for investing into the African Continent via a SA HQ Company is a very attractive and underutilised alternative to the traditional structuring through Mauritius, opening up additional Double Taxation Treaties as well as other operational advantages depending on the circumstances of investors and Investment Managers.
For more information on Guernsey and the SA HQ Company Investment structure for investing into Africa (or indeed anywhere else in the world) and how Dixcart can help, please contact Steven de Jersey at the Dixcart Guernsey office at: email@example.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.