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 a 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.
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