| South
African International Holding Companies |
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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