New benefits aim to woo company headquarters to South Africa

In January this year South Africa introduced a new international headquarter company (IHC) tax dispensation that it hopes will position it as an attractive international gateway for investment into the whole of Africa.

South Africa’s location, infrastructure, sizable economy, relative political stability and strength in financial services make it an ideal location for the establishment of regional holding companies for foreign multinationals. Furthermore, South Africa’s network of tax treaties and investment protection agreements provides ready access to other countries in the region.

The IHC regime

The IHC regime became effective on 1 January and offers foreign investors the following tax and exchange control benefits.

• Dividends received by an IHC are exempt from tax where the IHC holds more than 20% of the equity in the foreign company declaring the dividend.
• Similarly, any capital gain realized on disposal of shares in a foreign company is exempt from tax in the hands of an IHC, provided certain qualifying criteria apply. The most important of these are that the shares being disposed of were held for at least 18 months, that the IHC holds more than 20% of the equity shares in the foreign company at the time of the disposal, and that the shares are sold to a non-resident.
• Dividends distributed by an IHC to its shareholders are exempt from the normal secondary tax on companies of 10% (or dividend withholding tax once the dividends tax system comes into force on 1 April 2012). Foreign shareholders will therefore not be liable for any tax on dividends distributed by an IHC.
• There is currently no withholding tax on interest paid by an IHC, and the normal thin capitalization ratio of 3:1 applies to foreign shareholder funding. From 1 October, thin capitalization provisions will not apply to shareholder loans or funding, provided the foreign funding is used to extend debt funding to foreign companies in which the IHC holds at least 20% of the equity.
• There will also not be any withholding tax on interest in respect of shareholder loans, once the new interest withholding tax of 10% has been introduced in 2013.
• Royalties paid by an IHC are subject to 12% withholding tax, but this is reduced to zero under South Africa’s double tax treaties.
• South African controlled foreign company rules also do not apply provided that 50% or more of the shares in the IHC are held by non-residents.
• An IHC will be regarded as a non-resident for South African exchange control purposes and no exchange control restrictions will apply;