Most Read Contributor in South Africa, September 2016
A number of amendments are proposed in the Draft Taxation Laws
Amendment Bill, 2012 (the "Draft TLAB")
to section 9I of the Income Tax Act No. 58 of 1962
("the Act") that deal with international
headquarter companies ("the HQ
Company"). The HQ company regime is intended to
provide tax rules that promote South Africa
("SA") as the regional financial hub for
Africa. Consequently, the purpose of HQ Company tax regime is to
ensure that the existing tax system does not hinder the use of
South Africa by foreign multinationals as the regional economic hub
for investments into Africa.
The current tax benefits enjoyed by HQ Companies include
exemptions from dividends tax on outbound dividends; from income
tax on inbound dividends; and from attribution rules applying to
'controlled foreign companies' under the provisions of
section 9D. In addition, South Africa's transfer pricing and
thin capitalisation rules are generally waived on financial
assistance provided by and to the HQ Company.
In order to qualify as a HQ Company, a resident company must
meet certain criteria as set out in Section 9I of the Act. The
requirements for an HQ Company are mainly that:
each shareholder of the HQ company must hold at least 10% of
the HQ's equity shares;
the company's asset base must comprise at least 80%
participation interests in foreign subsidiaries (that is, equity,
loans and intellectual property); and
if the income of the HQ exceeds R5 million per annum, at least
50% of the HQ company's gross income must be derived from the
aforementioned asset base.
The 10% shareholder test and the 80% asset test must be
satisfied for the relevant year of assessment, as well as all prior
years of assessment in which that company existed, that is,
"the always qualification rule". In contrast, the 50%
gross income test needs to be satisfied only in respect of the
relevant year of assessment. In addition the HQ company must file
an annual election to become (and remain) a HQ company.
The proposed changes to the Draft TLAB aim to relax "the
always qualification rule" to the extent that the company at
issue is effectively dormant. As stated above, the 10%
shareholder test and the 80 asset test must be satisfied not only
for the relevant year of assessment but also for all prior years of
assessment in which that company exists. Thus "the
always qualification rule" creates practical difficulties in
the case of certain start up operations. It is often not only
practical, but also convenient to use "shelf-companies"
previously in existence to start up business in SA. The use of
shelf-companies therefore creates an impediment to benefiting from
the HQ Company regime.
It is proposed that a company will qualify for the HQ Company
benefits provided that:
the company was not engaged in trade during any year of
the company must not have held assets in excess of R50,000
during any year of assessment.
These provisions will effectively ensure that the dormancy
period(s) of a company does not prevent application of the HQ
Company relief mechanism. This will certainly be welcomed by
potential inbound investors wishing to establish a HQ Company in
South Africa through the use of a shelf company. This aspect was
emphasised at the recent National Treasury workshop (on the Draft
TLAB) where it was stated that "start up relief should apply
to new entities that do not trade for part of a year, as often a
shelf company is acquired mid-year".
Moreover, and in line with the intended policy premise of
the HQ Company regime, it is proposed that the current transfer
pricing rules be relaxed in respect of back to back licensing of
intellectual property through the use of a HQ Company. The proposed
rules in this regard will mimic the existing rules in respect of
back-to-back loan interest.
More specifically this will result in:
net losses created being ring-fenced; and
exemption of withholding tax in respect of back to back
royalties if the royalties are paid to a 10% or greater shareholder
(the current HQ Company regime allows for the tax free flow through
of dividends and interest, but not royalties).
Sections 20C (ring-fencing of interest and royalties incurred by
HQ Company) and 31 (Transfer pricing rules) of the Act have been
amended to coincide with the above amendments proposed to the HQ
These amendments which will assist in making South Africa more
competitive are to be welcomed.
This amendment will come into effect on 1 January 2013 and will
apply in respect of any year of assessment commencing on or after
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
In response to information provided by FIRS, NSE has sent letters to publicly listed companies, who were purportedly identified by FIRS as non-compliant.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).