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| Tax incentives for Regional Holding Companies in SA in the pipeline? | 15 July 2010 | |
| Anton Lockem, Shepstone & Wylie - Lesley van Duffen | ||
| A regional holding company (RHC) may be established for a number of reasons, most notably for economic participation and expansion within a region. A RHC serves as a gateway into other countries within a region. The decision of where to register a RHC is to a large extent dependent on factors such as its political stability, investment protection and tax regime, the treaty network the country has with other countries in the region and exchange control. Notwithstanding South Africas economic footprint in Africa, it has not always been the preferred choice in which to register a RHC for access into the rest of Africa. In recent times certain Southern African Development Community countries have attracted foreign investment through the establishment of regional holding companies and many South African entities regard these countries as real investment alternatives, mainly due to the flexible exchange control environment and the provision of tax incentives. Possibly to counter this challenge, Treasury by way of the Taxation Laws Amendment Bill 2010 (the Bill) has introduced proposals to make South Africa a more attractive destination of choice for RHCs. From a tax perspective Treasury has identified three tax disincentives which need to be addressed in order to make South Africa an attractive RHC destination. In brief these tax disincentives are: • Where South African residents or a South African resident company hold more than 50% of the shares in a foreign company, the controlled foreign company rules, contained in section 9D of the Income Tax Act apply. This means, as a general rule, that the income of the controlled foreign company is attributed to the South African shareholders according to their proportional interest in it. Where for example the shareholder is the South African holding company (SA Holdco) then all the income of the controlled foreign company could potentially be attributed to and taxed in the hands of the SA Holdco; • Secondary Tax on Companies (STC) at rate of 10% adds to the cost of business when profits are repatriated from the SA Holdco to its foreign shareholder(s); • If a foreign investor finances a South African company by way of a loan and the South African company on lends the money to its foreign subsidiary in Africa, the thin capitalization rules could leave the South African company with non-deductable interest expenditure. To address these restrictions the Bill, among other things, proposes that: • In order to determine if a foreign company is a controlled foreign company in relation to the SA Holdco, the residence of the holding companys shareholders will be considered rather than the residency of the holding company. To illustrate: The shareholders of a SA Holdco are a South African resident as to 20% and two UK residents each holding 40% of the shares. SA Holdco owns all the shares in a Botswana subsidiary (Bot Subco). Bot Subco would be a controlled foreign company in relation to the SA Holdco under the normal rules. Under the proposed rules one would take the residency of the Holdco shareholders into account and as only 20% of the shares in SA Holdco are held by SA residents, the controlled foreign company rules would not apply; • The SA Holdco will be treated as a non-resident when passing on dividends and therefore no STC (or dividends tax when introduced) will be payable; • The thin capitalization rules will not take foreign loans to SA Holdco into account where such loans are on-lent to the foreign subsidiary and the equity shares in that foreign company are at least 20% held by the SA Holdco. These proposals are welcomed and Treasury should be commended for this initiative. However, tax concessions are only one factor investors would consider when deciding where to locate a regional holding company and the commercial rationale should always be the primary motive behind business and investment decisions. Perhaps the time has now also come to provide more exchange control flexibility, particularly as far intellectual property transfers and the no-exception application of the looping prohibition are concerned. | ||
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