Tax treaty likely to ben­e­fit SA as in­vest­ment hub into DRC

Demo­cratic Repub­lic of Congo seek­ing to re­duce the cost of do­ing busi­ness

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - ELAN­DRE BRANDT

ATAX treaty en­tered into be­tween the Demo­cratic Repub­lic of Congo (DRC) and SA is likely to pro­mote SA as a hub for in­ward in­vest­ment into the DRC. The tax treaty will pro­vide multi­na­tional com­pa­nies with alternative in­vest­ment op­por­tu­ni­ties in the DRC.

Un­til re­cently, the DRC had en­tered into only one Dou­ble Tax­a­tion Agree­ment (DTA) tax treaty (with Bel­gium). On July 18 2012, the DRC dou­bled this num­ber when its DTA with SA came into ef­fect. When a for­eign com­pany holds its DRC in­vest­ment through SA, the treaty and SA’s at­trac­tive hold­ing com­pany regime may re­duce the tax cost of do­ing busi­ness in the DRC.

The South African government re­gards the DRC as a strate­gic part­ner on the African con­ti­nent. Ac­cord­ing to re­cent statis­tics is­sued by the De­part­ment of Trade and In­dus­try, two-way trade be­tween SA and the DRC stood at R7.8bn in 2011 com­pared to R6.2bn in 2010 and R4.8bn in 2009.

The DRC’s domestic laws pro­vide that div­i­dends paid by res­i­dent com­pa­nies to non-res­i­dent com­pa­nies are sub­ject to a 20% with­hold­ing tax (10% for min­ing com­pa­nies). How­ever, the treaty with SA will re­duce the rate to 5% if the South African res­i­dent com­pany holds at least 25% of the DRC com­pany. In all other cases, the rate is re­duced to 15%.

Div­i­dends in­clude in­come from shares, min­ing shares, founders’ shares or other rights, as well as in­come from other cor­po­rate rights which is sub­ject to the same tax­a­tion treat­ment as in­come from shares by the laws of the state of which the com­pany mak­ing the distri­bu­tion is a res­i­dent.

In­ter­est aris­ing in the DRC is sub­ject to a 20% with­hold­ing tax rate (0% in the min­ing in­dus­try un­der cer­tain con­di­tions). If the ben­e­fi­cial owner of the in­ter­est is a South African res­i­dent, the treaty re­duces this rate to 10%. In­ter­est in­cludes in­come from debt­claims of ev­ery kind, whether or not se­cured by mort­gage and whether or not car­ry­ing a right to par­tic­i­pate in the debtor’s prof­its.

Roy­al­ties aris­ing in the DRC are sub­ject to a with­hold­ing tax at an ef­fec­tive rate of 14%. How­ever, if the ben­e­fi­cial owner of the roy­al­ties is a South African res­i­dent, the treaty re­duces this rate to 10%. Roy­al­ties in­clude pay­ments re­ceived for the use of any copy­right of lit­er­acy, artis­tic or sci­en­tific work in­clud­ing films, tapes or discs used for ra­dio or tele­vi­sion broad­cast­ing, any patent, trade­mark, de­sign or model, plan, or for the use of in­dus­trial, com­mer­cial, or sci­en­tific equip­ment.

The DRC-SA Dou­ble Tax Treaty pro­vides that in­come de­rived by an in­di­vid­ual who is a res­i­dent of South Africa shall be tax­able only in South Africa un­less he has a fixed base reg­u­larly avail­able to him in the DRC for

Roy­al­ties aris­ing in the DRC are sub­ject to a with­hold­ing tax at an ef­fec­tive rate of 14%. How­ever, if the ben­e­fi­cial owner of the roy­al­ties is a South African res­i­dent, the treaty re­duces this rate to 10%

re­duced with­hold­ing tax rates with­out be­ing sub­ject to an ad­di­tional layer of tax in SA (if the South African hold­ing com­pany qual­i­fies as a “head­quar­ter com­pany”, there should be no ad­di­tional layer of tax on div­i­dends, in­ter­est and in fu­ture roy­al­ties), multi­na­tional com­pa­nies with ex­ist­ing and planned in­vest­ments in the DRC may wish to con­sider the po­ten­tial ben­e­fits of hold­ing their in­vest­ments through SA.

The treaty ap­plies to amounts paid on or af­ter Jan­uary 1 2013 and with re­spect to tax years be­gin­ning on or af­ter Jan­uary 1 2013.

Pic­tures: THINKSTOCK

A STRATE­GIC PART­NER

Un­til re­cently, the Demo­cratic Repub­lic of Congo had en­tered into only one Dou­ble Tax­a­tion Agree­ment tax treaty (with Bel­gium)

The South African government re­gards the DRC as a strate­gic part­ner on the African con­ti­nent. Two-way trade be­tween South Africa and the DRC stood at R7.8bn in 2011

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