Domestic treasury management companies
Domestic treasury management companies
In 2013, the South African government introduced the domestic treasury management company (DTMC) regime to enable South African companies, which are registered with the Financial Surveillance Department (FSD) of the South African Reserve Bank (SARB), to expand into the rest of Africa and abroad. The DTMC regime allows South African companies to establish one subsidiary as a holding company to hold African and offshore operations, without being subject to exchange control restrictions.
In order to give effect to the DTMC regime, the following provisions were introduced into the Income Tax Act, No 58 of 1962 (Act):
1. A definition for “domestic treasury management company” was inserted in s1 which came into operation on
27 February 2013 and became applicable in respect of years of assessment commencing on or after that date. This definition provided that a DTMC refers to a company:
- incorporated or deemed to be incorporated in South Africa;
- that has its place of effective management in South Africa; and
- that is not subject to exchange control restrictions by virtue of being registered with the FSD of
2. The definition of “local currency” in s24I was broadened to provide that the local currency of any DTMC in respect of an exchange item, not attributable to a permanent establishment outside South Africa, will be the functional currency of that DTMC;
3. The definition of “local currency” in paragraph 43 of the Eighth Schedule to the Act was also broadened to provide that the local currency of any DTMC in respect of amounts which are not attributable to a permanent establishment outside South Africa, will be the functional currency of that DTMC; and
4. Section 25D was amended to provide that where any amount received by, or any amount of expenditure incurred by a DTMC, in any currency other than the functional currency of the DTMC (which is not rand) must be determined in the functional currency of the DTMC and translated to rand using the average exchange rate for that year of assessment.
Tax implications of qualifying as a DTMC
As a result of the abovementioned additions to the Act, DTMCs enjoy the following tax benefits:
- DTMCs may use their functional currency as a starting point for currency translations for tax purposes, as opposed to rands, providing relief in respect of unrealised foreign currency gains or losses. This dispensation applies to taxable income, monetary items and capital gains items;
- the local currency of any DTMC in respect of an exchange item, not attributable to a permanent establishment outside South Africa, will be the functional currency of that DTMC in terms of s24I. Accordingly, no gains or losses should arise in respect of, inter alia, any unit of currency, any amount owing by or to that company in respect of a debt or owing by or to that company in respect of a forward exchange contract denominated in the functional currency of such company; and
- any amount received by or accrued to, or any amount of expenditure incurred by a DTMC in any currency other than the functional currency of that company which is not rand, must be determined in the functional currency of that company and must be translated to rand using the average exchange rate for the year of assessment.
- It should be noted that interest income derived by the DTMCs is subject to South African income tax. However, DTMCs would be able to rely on the provisions of double tax agreements to reduce any foreign withholding tax on such interest income.
Exchange control implications of qualifying as DTMC
DTMCs also enjoy the following exchange control benefits:
- Authorised Dealers (ie certain banks which have been appointed to assist the FSD in administering certain aspects relating to the exchange control policy) may authorise transfers from a listed company to the DTMC up to R3 billion per calendar year (as opposed to R2 billion for unlisted companies). Up to this amount, there will be no restriction on transfers in and out of the DTMC, provided that such transfers are not undertaken to avoid tax;
- the DTMC will be allowed to freely raise and deploy capital offshore, provided that these funds are without recourse to South Africa. Additional domestic capital and guarantees will be allowed to fund bona fide foreign direct investments in the same manner as the current foreign direct investment allowance;
- the DTMC will be allowed to operate as a cash management centre for South African entities. Cash pooling will be allowed without any restrictions and local income generated from cash management will be freely transferable; and
- the DTMC may choose its functional currency and operate a foreign currency account and a rand denominated account for operational expenses.
Furthermore, DTMCs are required to adhere to certain reporting requirements.
In order to make the DTMC regime more effective, the Taxation Laws Amendment Act, No 17 of 2017 removed the requirement that a DTMC must be incorporated or deemed to be incorporated in South Africa, with effect from 1 January 2018.
It is evident that companies will henceforth find it less cumbersome to manage their African and offshore operations from South Africa, which will support the growth of South Africa’s economy and promote integration across the continent and abroad.
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