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South African International Holding Companies 

NB The International Holding Company regime was suspended in 2004. It is not clear what rules will apply to companies which had established themselves under the pre-existing regime described below.

The South African International Holding Company (IHC) form was intended to encourage international companies to establish their headquarters in South Africa.

The 2001 budget, which replaced a territorial system of taxation with one based on world-wide income for resident companies, was careful to preserve the non-residential status of IHCs.

The criteria for qualification were quite stringent:

• All equity share capital must be held by non-residents;
  
• The indirect interest of South African residents and trusts must not
  exceed 5% in aggregate of the company's total equity share capital;
  
• 90% of the value of the company's assets must represent interests in
  non-South African resident subsidiaries in which the IHC holds beneficially
  at least 50%.

However, for qualifying international companies, the incentives were substantial:

• Income from foreign subsidiaries was not imputed to the IHC under the Controlled Foreign Entity provisions;
  
• Dividends received from foreign subsidiaries and any other foreign-sourced income was not liable for South African taxation; and
  
• Dividends declared were not subject to the secondary company tax.

However as an IHC, to all intents and purposes, falls outside the South African income tax net, it was not able to make use of the country's extensive network of double taxation treaties, which may prove a problem when withholding tax on profits is applied in the source country which might otherwise have been reduced by the relevant treaty.

For a country to be an attractive location in which to set up a holding company 4 criteria must be satisfied:

• Withholding Taxes on Incoming Dividends: Incoming dividends remitted by the subsidiary to the holding company must either be exempted from or subject to low withholding tax rates in the subsidiary jurisdiction. This is usually achieved by having in place a double taxation treaty to which the subsidiary and holding company jurisdictions are parties. Clearly this cannot be the case with IHCs, so that they will really only be satisfactory as holding companies when originating income is untaxed or lightly taxed.

• Corporate Income Tax on Dividend Income Received: Dividend income received by the holding company from the subsidiary must either be exempted from or subject to low corporate income tax rates in the holding company jurisdiction. The IHC passes this test.

• Capital Gains on the Sale of Shares: Profits realized by the holding company on the sale of shares in the subsidiary must either be exempt from or subject to a low rate of capital gains tax in the holding company jurisdiction. Capital Gains tax at 15% was introduced in South Africa in 2001, but non-resident companies are liable for it only on the fixed property and other local assets of their permanent establishment in South Africa.

• Withholding Taxes on Outgoing Dividends: Outgoing dividends paid by the holding company to the ultimate parent corporation must either be exempt from or subject to low withholding tax rates in the holding company jurisdiction. There is no withholding tax on dividends in South Africa - and IHCs are exempt from the Secondary Tax on Companies (STC), so this condition is fulfilled.

By these criteria South Africa is a relatively attractive jurisdiction in which to set up a holding company, just as long as the originating income it receives is not taxed too heavily - but normally this will only be the case for income arising in low-tax areas, so South Africa can't really compete in the holding company stakes with countries such as Denmark, which do allow their double tax treaties to apply to holding company income.

(NB the STC is being phased out under reforms first proposed in the 2007/8 budget and taken forward in the 2008/9 budget. Under the first phase of this process the STC was reduced from 12.5% to 10% in October 2007. Under the second phase the STC is due to be replaced by a dividend tax on shareholders some time in 2010, conditional on the renegotiation of certain tax treaties that limit withholding tax on dividends to 0%).

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