Re­mov­ing bar­ri­ers to en­try for com­pa­nies

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

SOUTH African taxres­i­dent com­pa­nies or those with places of ef­fec­tive man­age­ment in SA can qual­ify as head­quar­ter (HQ) com­pa­nies. A num­ber of rules must be met, but once th­ese hur­dles are ne­go­ti­ated, the sys­tem makes SA an at­trac­tive des­ti­na­tion for multi­na­tional com­pa­nies wish­ing to in­vest in Africa. Each share­holder must hold 10% or more of the shares and vot­ing rights in the com­pany and where trade com­mences dur­ing an as­sess­ment year, the pre-trade pe­riod is ig­nored. Busi­nesses can use dor­mant com­pa­nies to qual­ify for the 10%.

Where the com­pany’s gross in­come ex­ceeds R5m, 50% or more of its gross in­come, for that as­sess­ment year, must com­prise ei­ther: (i) rental, div­i­dend, in­ter­est, roy­alty or ser­vice fee paid or payable by a for­eign com­pany in which the com­pany holds 10%; or (ii) pro­ceeds from the dis­posal in eq­uity shares in a for­eign com­pany in which the com­pany holds 10%, or IP li­censed to a for­eign com­pany in which the HQ com­pany holds 10%. The com­pany’s gross in­come must take ex­change dif­fer­ences into ac­count. If the re­quire­ments are met, the HQ com­pany regime can be elected. An an­nual re­port must be sub­mit­ted to the min­is­ter.

For the end of an as­sess­ment year and pre­vi­ous as­sess­ment years, at least 80% of com­pany’s to­tal as­set cost must be at­trib­ut­able to ei­ther (i) an in­ter­est in eq­uity shares; or (ii) a debt owed to; or (iii) in­tel­lec­tual prop­erty (IP) li­censed to a for­eign com­pany where the HQ com­pany held 10%. To­tal as­sets in­clude cash or bank de­posits payable on de­mand. Where the as­set mar­ket value was be­low R50k that as­sess­ment year is disregarded when de­ter­min­ing the 80%.

An HQ com­pany is sub­ject to 28% in­come tax with cer­tain tax ex­emp­tions — the bal­ance is likely to qual­ify for for­eign tax cred­its. Div­i­dends de­clared are treated as for­eign div­i­dends for South African res­i­dents and non-res­i­dents and tax ex­empt. Div­i­dends de­clared to share­hold­ers are not sub­ject to div­i­dend with­hold­ing tax. For­eign div­i­dends re­ceived by the com­pany are tax ex­empt if it holds 10% in the for­eign sub­sidiary pay­ing the div­i­dend. HQ com­pa­nies are ex­empt from Con­trolled For­eign Com­pany (CFC) rules and gains in the un­der­ly­ing com­pa­nies are not at­trib­ut­able to them. For­eign in­vest­ments con­sti­tute CFCs in re­la­tion to South African share­hold­ers of the head­quar­ter com­pany, if South African share­hold­ers hold more than 50% in the in­vestees.

An HQ com­pany is gen­er­ally sub­ject to South African trans­fer pric­ing rules ex­cept where it re­ceives fi­nan­cial as­sis­tance from non-res­i­dent com­pa­nies which is on­lent to a for­eign com­pany and the head­quar­ter com­pany holds 10%. The trans­fer pric­ing rules do not ap­ply where (i) an HQ com­pany grants fi­nan­cial as­sis­tance to a for­eign com­pany in which it holds 10%; (ii) a for­eign com­pany grants the right of use of IP to the HQ com­pany and (a) the HQ com­pany grants it to a non-res­i­dent in which it holds 10%; and (b) the HQ com­pany does not use the IP li­cense, sub­ject to ex­cep­tions, where the head­quar­ter com­pany holds 10%. The trans­fer pric­ing rules do not ap­ply where an HQ com­pany holds 10% in a for­eign com­pany and the HQ com­pany grants an IP li­cense to it.

In­ter­est de­duc­tions on for­eign loans and roy­alty pay­ments on IP li­censes are ring-fenced. In­ter­est on for­eign fi­nan­cial as­sis­tance is de­ductible against in­ter­est to the non-res­i­dent com­pany in which the com­pany holds 10%. Roy­al­ties paid are de­ductible against roy­al­ties earned from IP li­censes granted to non-res­i­dent com­pa­nies in which the com­pany holds 10%. Ex­cesses are car­ried for­ward and deemed to be in­curred in the next year.

In­ter­est re­ceived by non­res­i­dents from a South African source is not sub­ject to tax where the non-res­i­dent nei­ther has a per­ma­nent estab­lish­ment nor spend more than 183 days in-coun­try in the tax year. SA im­poses a 15% with­hold­ing tax on in­ter­est paid to non-res­i­dents. HQ com­pa­nies are ex­empt from in­ter­est with­hold­ing tax on in­ter­est on for­eign fi­nan­cial as­sis­tance granted to it by a non­res­i­dent com­pany which holds 10% in the HQ com­pany. Oth­er­wise, the com­pany is li­able to a 15% in­ter­est with­hold­ing tax. HQ com­pa­nies are ex­empt from roy­alty with­hold­ing tax on roy­al­ties in­curred in grant­ing of use, or right of use or per­mis­sion to use IP to HQ com­pa­nies by non­res­i­dent com­pa­nies which hold 10% in it. In other cases they are li­able to 15% roy­alty with­hold­ing tax.

HQ com­pa­nies must dis­re­gard cap­i­tal gains or losses trig­gered on the dis­posal of eq­uity shares in a for­eign com­pany if they held 10% in the for­eign com­pany im­me­di­ately be­fore dis­posal.

Where an HQ com­pany is cre­ated it is, sub­ject to ex­cep­tions, deemed to dis­pose its as­sets at mar­ket value prior to con­vert­ing and re-ac­quire the as­sets at mar­ket value on the day it be­came an HQ com­pany which trig­gers no­tional in­come and cap­i­tal gains tax. Where an HQ com­pany is es­tab­lished: (i) its as­sess­ment year ends the day be­fore it be­came one; (ii) the next as­sess­ment year starts when it be­comes an HQ com­pany; and (iii) it is, on the day be­fore it be­came such a com­pany deemed to de­clare and pay a div­i­dend of an as­set in specie. The as­set in specie is, sub­ject to ex­cep­tions, deemed to be the as­set mar­ket value on that date less con­trib­uted tax cap­i­tal of all classes of shares and is deemed to be paid to the per­son hold­ing the shares in ac­cor­dance with the ef­fec­tive in­ter­est of their shares. The deemed div­i­dend is sub­ject to a 15% div­i­dend with­hold­ing tax payable by the HQ com­pany.

Such a com­pany may with the ap­proval of the SA Re­serve Bank in­vest out­side SA with­out re­stric­tion, if: (i) its shares or debt are not JSE-listed, and its shares are not held by a share­holder with JSE shares or debt; (ii) each share­holder must hold 10%; (iii) South African res­i­dents’ eq­uity may not ex­ceed 20%; (iv) at the end of a fi­nan­cial year, 80% or more of the as­sets must be for­eign (not cash and short term debt); (v) reg­is­tra­tion with the Bank re­mains valid; (vi) it is treated as a non-res­i­dent com­pany for ex­change con­trol pur­poses. Trans­ac­tions by South African en­ti­ties with an HQ com­pany are viewed as be­ing with a non-res­i­dent.

SA is be­com­ing more at­trac­tive for re­gional hold­ing com­pa­nies now, though the rules are quite com­plex. Let’s hope more make use of the new sys­tem.

HQ com­pany regime can be elected if the re­quire­ments are met

Ferdie Sch­nei­der is head of tax at BDO South Africa.

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