2010 Budget Attracts South African Based Headquarter Companies – PwC

It is clear after the Budget Speech presented for the first time by Finance Minister, Pravin Gordhan on 17 February 2010 that the South African National Treasury understands the importance of drawing the attention of international investors.

National Treasury has revisited the idea of attracting international companies to set up their headquarters in South Africa. According to David Lermer, Director in Tax, PricewaterhouseCoopers (PwC), an international headquarter company (IHC) is a resident company that is used as the managing entity for investing in a particular region through other subsidiary companies.

Lermer says, “The reason we need IHCs in South Africa is because the host country benefits financially through the functions undertaken in managing the investments in the region. Even though South Africa has a superior infrastructure and financial system, Mauritius has been the preferred choice for locating headquarter companies for investments into Africa due to the high tax costs and strict exchange controls that exist in South Africa.”

In 2000 South Africa witnessed a transition from source, to residence based taxation. IHC companies were by definition included in the Income Tax Act and excluded from the newly introduced resident definition. The requirements called for all the shares to be held by non residents and that a minimum of 90% of the assets had to be held in non-resident subsidiary companies.

Elandre Brandt, Associate Director in Tax, PricewaterhouseCoopers continues, “In 2004, SARS believed that this definition provided preferential treatment to these companies and viewed the practice as a potentially harmful tax practice in terms of its international obligations. In addition, those IHC’s were excluded from the benefits of South Africa’s Double Taxation Agreements, resulting in them not being able to take advantage of South Africa’s extensive African treaty network.” Furthermore, it was conceded that South Africa’s strict exchange control regulations effectively made it impossible to operate such a company in South Africa.

The following are considered to be the key requirements for creating an environment conducive to IHC’s in South Africa:

Exchange Control
  • Freedom to pass funds through to other African countries without Exchange Control approval
Tax Issues
  • Controlled foreign company rules not to apply to these companies
  • No STC (or new Dividends Tax) for the IHC
  • Thin Capitalisation rules to be excluded where debt is passed on to foreign investor
    In conclusion Brandt says, “It would seem that these issues are no longer perceived as insurmountable obstacles from a policy perspective and the introduction of such a regime would be widely welcomed.”