Tax treaty with South Africa provides new alternatives for structuring investment into DRC
A tax treaty entered into between the Democratic Republic of Congo (DRC) and South Africa is likely to promote South Africa as a hub for inward investment into the DRC, says professional services firm PwC. “The tax treaty will provide multinational companies with alternative investment opportunities in the DRC,” says Elandre Brandt, an International Tax Director at PwC and Head of PwC’s Africa Tax Desk based in Johannesburg.
Until recently, the DRC had entered into only one Double Taxation Agreement (DTA) tax treaty (with Belgium). On 18 July 2012, the DRC doubled this number when its DTA with South Africa came into effect. “When a foreign company holds its DRC investment through South Africa, the treaty and South Africa’s attractive holding company regime may reduce the tax cost of doing business in the DRC,” explains Brandt.
The South African Government regards the DRC as a strategic partner in the African continent. According to recent statistics issued by the Department of Trade and Industry, two-way trade between South Africa and the DRC stood at R7.8 billion in 2011 compared to R6.2 billion in 2010 and R4.8 billion in 2009.
The DRC’s domestic laws provide that dividends paid by resident companies to non-resident companies are subject to a 20% withholding tax (10% for mining companies). However, the treaty with South Africa will reduce the rate to 5% if the South African resident company holds at least 25% of the DRC company. In all other cases, the rate is reduced to 15%.
Dividends include income from shares, mining shares, founders’ shares or other rights, as well as income from other corporate rights which is subject to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.
Interest arising in the DRC is subject to a 20% withholding tax rate (0% in the mining industry under certain conditions). If the beneficial owner of the interest is a South African resident, the treaty reduces this rate to 10%. Interest includes income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits.
Royalties arising in the DRC are subject to a withholding tax at an effective rate of 14%. However, if the beneficial owner of the royalties is a South African resident, the treaty reduces this rate to 10%. Royalties include payments received for the use of any copyright of literacy, artistic or scientific work including films, tapes or discs used for radio or television broadcasting, any patent, trademark, design or model, plan, or for the use of industrial, commercial, or scientific equipment.
The DRC/South Africa Double Tax Treaty provides that income derived by an individual who is a resident of South Africa shall be taxable only in South Africa unless he has a fixed base regularly available to him in the DRC for the purpose of carrying out his employment. An individual who is a resident of South Africa will be deemed to have a fixed base in the DRC if he stays in the country for an aggregate of 183 days in any 12-month period commencing or ending in the year of assessment concerned.
Directors’ fees derived by a South African resident are an exception to this provision as the tax treaty grants taxing rights for income earned in one’s capacity as a member of the board of directors of a company resident in DRC. Similarly, income derived by a resident of South Africa as an entertainer, or a musician, or a sportsperson, are also an exception.
On 24 September 2012, the DRC amended its tax legislation. The corporate income tax rate applied to a DRC company, subsidiary or branch or a foreign company has been reduced to 35%. This is applicable to the 2013 fiscal year in the DRC. Furthermore, a new withholding tax has been introduced on service fees. Brandt points out that the DTA is based on the Organisation for Economic Co-operation and Development (OECD) Model Convention. Therefore South African residents should be free of fee income from the 14% withholding tax.
Because taxpayers could qualify for reduced withholding tax rates without being subject to an additional layer of tax in South Africa (if the South African holding company qualifies as a ‘headquarter company’, there should be no additional layer of tax on dividends, interest and in future royalties), multinational companies with existing and planned investments in the DRC may wish to consider the potential benefits of holding their investments through South Africa, he says.
The treaty applies to amounts paid on or after 1 January 2013 and with respect to tax years beginning on or after 1 January 2013.