Shortly after the headquarter company legislation was introduced in an effort to establish South Africa as an attractive “Gateway into Africa”, we prepared a note in which we compared the South African headquarter company regime with the Mauritius GBC 1 regime. As a result of ongoing interest from investors, and because both regimes underwent some changes since our previous note, we decided to update the note.
In this publication, the South African headquarter company (“HQ Co”) is compared to the other popular and competing investment holding regime offered by Mauritius, namely the Global Business Company 1 (“GBC 1″).
This article is general in nature and is premised on a simple investment structure, in terms of which a HQ Co and/or GBC 1 is purely and from inception used as an investment holding company, from which dividend, interest and royalty income, as well as gains from the disposal of shares, could be generated.
How easy is it to qualify for the tax benefits offered by the respective regimes?
The table below briefly summarises and compares the latest requirements to qualify for the regimes.
|SOUTH AFRICAN HQ CO REGIME||MAURITIUS GBC 1 REGIME|
|The HQ Co must be tax resident in South Africa, which generally would require it to be effectively managed in South Africa, or to be incorporated in South Africa and not be effectively managed in another treaty country.(Note that it is not required that the HQ Co be incorporated in South Africa).
Prescribed minimum percentages:
An annual election to be treated as a HQ Company is required.
|In terms of the existing requirements, the GBC 1:
In addition to the existing requirements, the GBC 1 must also meet any one of the following additional requirements before 1 January 2015 for it to be deemed to be managed and controlled in Mauritius. The GBC 1:
The GBC 1 must annually submit an application for a tax residence certificate in relation to a specific treaty.
It therefore appears that, before recent amendments, Mauritius weighed heavier on the administrative burden side, and with the additional requirements introduced with effect
from 1 January 2015, that burden is increasing. South Africa’s substantive requirements to qualify for the regime were, and still are, more stringent.
How easy is it to qualify for the Excon benefits offered?
Mauritius does not have exchange control rules.
In order for the HQ Co to be exempt from the South African exchange control rules, certain requirements (similar, but not exactly the same, as those relevant for the tax benefits) must be met. The option to incorporate the HQ Co outside the Common Monetary Area, yet establishing its place of effective management in South Africa, remains. That way, the HQ Co will not be subject to the South African exchange controls, but may still qualify for the South African tax relief.
Comparison of tax benefits offered by the respective regimes
Below is a short comparison of the tax benefits offered by the two regimes.
|SOURCES OF INCOME/TRANSACTIONS||SOUTH AFRICAN HQ CO REGIME||MAURITIUS GBC 1 REGIME|
|Profits and gains generated in the underlying structure||The HQ Co is exempt from the Controlled Foreign Company (CFC) rules, and as such the profits and gains in the underlying structure will not be attributable to, or taxable in, the company.(The CFC rules could, however, be applicable to shareholders of the HQ Co if they are residents in South Africa and none of the CFC exemptions apply.)||There are no CFC rules in Mauritius, so that the profits and gains in the underlying structure will not be taxed in the GBC 1.|
|Interest received||The South African transfer pricing rules do not apply to loans to subsidiaries, so that it is possible to avoid interest receipts in the HQ Co by making interest-free loans to the 10% foreign companies.Other interest receipts are subject to the normal tax rules and can, in principle, attract tax at 28%.
Dividends earned by the HQ Co from a wholly-owned subsidiary of the HQ Co, even if earned out of interest earned by that subsidiary, would however qualify for tax-free receipt in the HQ Co.
|Transfer pricing rules exist in Mauritius.Interest received is taxable at a maximum rate of 3% (but the amount is eligible for reduction by foreign withholding taxes).|
|Dividends received||The dividends received by the HQ Co from the 10% foreign companies will be exempt from South African tax in terms of the participation exemption.||Dividends received from the underlying investments are taxable at a maximum rate of 3%, but reduced by foreign withholding taxes, which often means that the effective tax rate on dividends received would be nil.|
|Royalties received||The South African transfer pricing rules do not apply to the granting of the use, or right of use, of any intellectual property to the 10% foreign companies.Royalty receipts are subject to the normal tax rules and will attract tax at 28%.||Royalties received from the underlying investments are taxable at a maximum rate of 3% but could be reduced by foreign taxes.|
|Capital gains on the disposal of shares in 10% foreign companies||The HQ Co will qualify for the capital gains tax (CGT) participation exemption, as the HQ Co will hold 10% of the equity shares and voting rights in the 10% foreign companies.Consequently, it is unlikely that CGT would arise on a disposal of shares in underlying investments.||Mauritius does not levy CGT on foreign capital gains.|
|Dividends declared to shareholders||South Africa does not levy dividends tax on dividends declared by companies with HQ status.||Mauritius does not have a dividend withholding tax.|
|Interest paid on borrowings||South Africa will not levy an interest withholding tax (to come into effect on 1 January 2015) in respect of the granting of financial assistance by HQ Cos.Interest paid on money borrowed to on-lend to a 10% foreign company is tax deductible against, and limited to, interest received from any 10% foreign company. Net losses are ring-fenced, to be carried forward to the next tax year.
Interest received by non-South African lenders from a HQ Co will not be subject to South African normal tax, unless the lenders have a permanent establishment in South Africa.
|Mauritius does not levy an interest withholding tax.
Interest received by foreign shareholders from a GBC 1 is not subject to Mauritius tax, provided the shareholders do not carry on business in Mauritius.
|Royalties paid||South Africa does not levy a royalty withholding tax in respect of royalties paid by HQ Cos to 10% foreign companies, if the use of, or right to use, the IP in respect of which the royalties are charged is granted only to 10% foreign companies.Royalties paid to 10% foreign companies are tax deductible against, and limited to, royalties received by or accrued to the HQ Co from 10% foreign companies.
Net losses are not deductible and are ring-fenced to be carried forward to the next tax year.
|Mauritius does not levy withholding tax on royalties paid, provided that entity holds a GBC 1business licence.|
|Disposal of shares by non-resident shareholders||South Africa levies CGT on non-residents essentially only on gains attributable to fixed property or permanent establishments in South Africa. It is highly unlikely that the shares in the HQ Co would derive their value from either of these and therefore highly unlikely that gains on the disposal of shares in a HQ Co by non-resident shareholders would be subject to CGT.||Mauritius does not levy CGT.The disposal of shares in a GBC 1 will thus not give rise to CGT for the shareholders.|
Tax treaty networks
South Africa has more than twice as many double tax treaties as Mauritius, with 84 treaties currently in force, compared to Mauritius’ 37 treaties currently in force.
South Africa’s extensive treaty network allows for treaty relief in almost every continent of the world, including Australia, North and South America, Africa and Europe. The Mauritius treaty network is, on the other hand, more focused on specific jurisdictions such as India and China and notably does not have treaties with Australia, Brazil, Canada, Ireland, Japan, Malta, Netherlands, New Zealand, Russia, Switzerland and the United States. Some of its treaties, however, are more favourable than South Africa’s.
What are the consequences of disinvestment?
Non-residents are generally not subject to CGT in South Africa unless the asset disposed of is or relates to fixed property located in SA, or to a permanent establishment of the non-resident in South Africa.
As the shares in the HQ Co would most likely not fall into any of these categories (the whole point being that the bulk of the HQ Co’s investments must be outside of South Africa), the general principle would apply so that the disposal of the HQ Co’s shares by non-resident shareholders would not give rise to any South African CGT implications for them. They may, however, be subject to tax in their jurisdiction of residence.
Assuming the shares in the HQ Co are held on capital account (as it would generally be in a private equity scenario), South African resident shareholders who dispose of their shares in the HQ Co would generally be subject to CGT at the effective rate of 18.64% (for companies), 13.32% (for individuals) and 26.64% (for trusts). The participation exemption for the disposal of the HQ Co’s shares by South African resident shareholders to non-residents has been removed.
A disinvestment in the form of a share buy-back out of profits could, under the appropriate circumstances, be exempt from dividends tax in South Africa in terms of the participation exemption that applies to dividends paid or declared by a HQ Co.
As no CGT is levied in Mauritius, the disposal by Mauritian residents of shares in a GBC 1 would not give rise to any income tax implications in Mauritius. The disposal by non-residents in relation to Mauritius of shares in a GBC 1 may, however, be subject to tax in the country where the shareholder is a resident.
What are the consequences of cessation of HQ or GBC 1 status?
Cessation of HQ status has no tax consequences, save that the benefits described above going forward might be lost. If, having given up HQ status, the company elects back into that status, the election triggers a deemed disposal at market value of the company’s worldwide assets, thereby potentially triggering CGT.
The cessation of GBC 1 status would not give rise to tax implications in Mauritius.