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International Headquarter Companies - An underutilised tax regime

15 April 2015   (0 Comments)
Posted by: Author: Mike Treuchert
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Author: Mike Treuchert (Mazars)

The Headquarter Company (HQCo): National Treasury’s response to the ever-increasing competition amongst countries on the continent to establish themselves as the ‘Gateway into Africa’.  Typically, international investors make use of an African investing holding company through which the Group would hold its share investments in subsidiaries operating in the various African states.

Aim of the HQCo: The HQCo regime is aimed at attracting holding companies; establishing South Africa as the ‘gateway’ through which investments are made into Africa.  Although primarily aimed at the African market, the regime has much wider application than just investments into Africa, and applies equally to investments through or from South Africa into any offshore market.

The regime was introduced into the Income Tax Act with effect from 1 January 2011, but has in practice been largely underutilised, primarily due to investors being largely unaware of the relief now provided for.

HQCo Benefits:  

  • dividends received by the HQCo from its investments in SA and abroad (in which it holds more than 10%) will be exempt from SA income tax;
  • dividends paid by a HQCo will not be subject to SA dividends withholding tax;
  • the interest withholding tax will not apply to interest paid by the HQCo to any of its shareholders;
  • similarly, the royalties withholding tax will not apply to royalties paid to any of the HQCo’s shareholders;
  • no capital gains tax is payable on the disposal of its offshore investments (provided that it holds more than 10% interest therein);
  • SA transfer pricing and thin capitalisation rules are considerably relaxed (and will in most instances not apply) to the HQCo, or its investments, enabling non-arm’s length financing of both the HQCo as well as its subsidiaries for SA tax purposes;
  • the HQCo will not be subject to the SA CFC rules; and
  • if less than 20% of the shares of the HQCo are held by SA residents, exchange control restrictions will not apply to the outbound investments made by the HQCo.

Non-tax benefits: Other than the exchange control relief mentioned above, that is provided for qualifying HQCo’s, the other non-tax benefits that companies have by choosing SA as holding company jurisdiction include South Africa providing arguably the best infrastructure available on the continent, making it much more competitive when compared to its other competitors which have very little to offer in reply in this respect. It also makes for an attractive destination if companies investing need to relocate management (and their families) to SA from their homes in, for example, Europe. From a management perspective, this also makes it easier to use SA as a holding company location; companies often struggle to add sufficient substance to companies set up in traditionally low-tax jurisdictions to justify that they are managed from there. 

HQCo Qualification Criteria:  

  • each shareholder must hold at least 10% (on its own or together with a connected person) of the shares in the company; 
  • the company must be tax resident in SA (which generally translates into it having its place of effective management in SA);
  • for all of the company’s tax years that the company has had a gross asset value in excess of R50 000, at least 80% of the cost price of all of its assets (excluding cash) must be attributable to shares in, or loans or IP licensed to a non-SA company in which the company has at least a 10% shareholding; and
  • (if the company’s turnover exceeds R5 million), the excess of that turnover must, broadly speaking, be attributable to income linked to the assets forming part of the 80% mentioned above (i.e. dividends, interest and/or royalties).

This article first appeared on the March/April 2015 edition on Tax Talk.


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