6 November 2011

New life for South Africa's headquarter company regime

With effect from 1 January 2011, a new tax regime, regarding headquarter companies was enacted in the Income Tax Act 58 of 1962 (the Act) to ensure that the tax system did not act as a barrier to the use of South Africa as regional headquarter company (HQC), especially for Sub-Saharan Africa.

Under the new HQC regime, dividends received are exempt from income tax and dividends declared are not subject to STC (or the dividend withholding tax), the controlled foreign company rules in section 9D of the Act are applicable in respect of foreign subsidiaries and certain transfer pricing and thin capitalisation rules are relaxed on financial assistance provided to and by the HQC.

However, in order to qualify as a HQC, a company has to satisfy certain minimum criteria prescribed in the "headquarter company" definition in section 1 of the Act, which in certain respects provided to be impractical. To rectify these practical concerns and issues raised by taxpayers, the Taxation Laws Amendment Bill, 2011 (TLAB) has proposed the following retrospective amendments to the Act (ie with effect from 1 January 2011), with the aim of relaxing the qualifying criteria in the following respects:

  • for the duration of the year of assessment and all previous years of assessment, each shareholder must hold at least 10% of the equity shares and voting rights in the HQC (previously the requirement was 20%);
  • at the end of the year of assessment and all previous years of assessment, 80% a or more of the cost of the total assets of the HQC should be attributable to:
    • an interest in equity shares;
    • an amount loaned or advanced to; or
    • intellectual property licensed by the HQC to;
    • any foreign company in which the HQC held at least 10% of the equity shares and voting rights (previously, the HQC was required to hold 20% in the foreign company);
  • in addition, in calculating the total assets of the HQC, one will no longer be required to take into account any amount in cash or bank deposit payable on demand;
  • if the gross income of the HQC exceeds R5million (previously there was no safe habour for small HQC's), 50% or more of the gross income must consist of amounts in the form of:
    • rentals, dividends, interest, royalty or service fees paid by the foreign company; and
    • proceeds from the disposal of any interest in equity shares in a foreign company or any intellectual property licensed by the HQC to the foreign company.

The notable relaxations to the above requirement are the incorporation of the new 10% participation provision; the HQC's "gross-income" and not receipts and accruals is now the benchmark and the previous 80% threshold is lowered to 50%.

Despite the proposed amendments in the TLAB, which will certainly be welcomed by foreign investors and persons interested in using the HQC regime, the Financial Surveillance Department is yet to amend/replace its Exchange Control Circular No 2/2011 (the Circular). The requirements prescribed in the Circular that will allow a HQC to invest offshore without restriction are not yet aligned with the TLAB. For instance, the Circular requires no shareholder to hold less than 20% of the shares in the HQC, no more than 20% of the shares in the HQC may be held by residents and a number of the "old" requirements remain. Hopefully the Circular will be aligned with the TLAB in due course.

Andrew Lewis and Danielle le Roux

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