A regional holding company regime (or headquarter company regime) is being introduced with a view to encourage foreign investment into South Africa as a gateway for investment into the rest of Africa. The concept was proposed in the February budget speech, and the applicable legislation was set out in the draft 2010 Taxation Laws Amendment Bill (TLAB). This particular regime seeks to rival that which Mauritius can offer, as Mauritius currently appears to be the investment destination for investors wishing to invest into Africa.
Comments were submitted to National Treasury on the legislation proposed in the TLAB. The majority of the comments related to the requirements for the establishment of a regional holding company. These were dealt with in the draft TLAB as follows:
- Each shareholder of the holding company must have at least a 20% shareholding in the holding company throughout the year of assessment.
- 80% of the base cost (or tax value) of the holding company must constitute investments in foreign subsidiaries (either in the form of debt or equity) in which the holding company holds at least 20% of the equity shares, as determined on an annual basis (known as the asset test).
- 80% of the receipts and accruals of the holding company, as determined at the end of the year of assessment, must come from those foreign subsidiaries in which the holding company holds the 20% or greater interest. These receipts and accruals would include the following items of income, namely, management fees, interest, royalties, dividends, and sale proceeds derived from the foreign subsidiaries.
- The holding company would have to comply with all of the above requirements for each year of its existence (known as the uninterrupted compliance test). In the event that one of the requirements is not met in a particular year, the holding company would permanently lose its headquarter status.
National Treasury's draft responses to the comments submitted are as follows:
- The 20% minimum shareholding requirement remains, as it is intended that it be on par with the 20% minimum requirement of the current foreign participation tax exemption.
- Intellectual property licensed by the headquarter company to the 20% foreign subsidiary will now be treated favourably in that it will be included in the investment made in the foreign subsidiary by the holding company. This is in keeping with the aim of allowing the free flow of capital to the foreign subsidiary in whatever form.
- The 80% asset test will now be determined on a year-by-year basis with the 20% shareholding requirement also being considered on a year-by-year basis with no reference being made to previous years. The aim here is to ensure that lower shareholding in prior years will not count against the taxpayer.
- The 80% qualifying income test will treat all foreign income derived from the 20% foreign subsidiary as qualifying income, and not just the income specified as above.
- The 80% qualifying income test will not be subject to the uninterrupted compliance test. This is as the level of income earned by the holding company could vary on account of factors outside of the holding company's control. This test will now be determined on a yearly basis. The 80% asset test and the 20% holding company shareholding will remain subject to the uninterrupted compliance test.
- The controlled foreign company attribution will be changed so that any attribution required under section 9D of the Income Tax Act, 1962 will fall on the South African resident shareholder and not the holding company itself.
- Headquarter company dividends will continue to be treated as foreign dividends.
- The thin capitalization relief will only cover back-to-back loans and the losses resulting from the arrangement will continue to be ring-fenced. The purpose of the thin capitalization relief measures is to allow the free flow of debt capital to the foreign subsidiary from the holding company and the subsequent flow of interest from the foreign subsidiary to the holding company. The relief is not meant to allow taxpayers to use excessive interest to erode South African income which would otherwise have been taxable in South Africa.
The regime is expected to come into effect on 1 January 2011. It is yet to be seen whether these measures will be enough to attract foreign investors wishing to invest in Africa away from the established investment regime which Mauritius has to offer.
Afton Appollis, Associate, Tax