Headquarter companies – an attractive option?

2011-04-07 00:00

THE tax legislation relating to headquarter companies (HQC) came into effect from January 1, 2011, and provides beneficial tax treatment to HQC’s in order to promote South Africa as a location from which businesses can expand into Africa.

The concept of an HQC is, however, not a new one; the HQC was first brought into the Income Tax Act in 2001 when the South African tax system changed from a source-based system to a residence-based system. The legislation was, however, removed in 2004 because the South African Reserve Bank’s (SARB) rules for exchange control purposes were too restrictive and were not in line with the tax legislation.

The main tax benefits of an HQC include the non-application of controlled foreign company rules, dividends declared by the HQC don’t attract secondary tax on companies and thin capitalisation and transfer pricing rules are relaxed.

HQC’s don’t only benefit from preferential tax treatment but are also afforded relaxed foreign exchange control regulations. For foreign exchange purposes, a qualifying HQC will be treated as a non-resident and no SARB approval will be required for borrowing from abroad as well as for the deployment of such funds locally and offshore.

What is considered to be an HQC from a tax perspective is, however, different from what qualifies as an HQC from a SARB perspective. The main difference being that in order to qualify as an HQC for foreign exchange purposes, the HQC may not be listed on the JSE nor may any shareholder of the HQC be listed on the JSE. Furthermore, no SA shareholder may hold more that 20% of the shares in the HQC. Thus although a company may be an HQC for tax purposes, it would not necessarily be an HQC for foreign exchange purposes.

When one looks at the foreign exchange requirements, it appears that the purpose of HQC’s is to attract foreign multinationals to use South Africa as a country through which to channel investments into Africa. For a South African company, however, the HQC may not be the most beneficial channel to use to invest out of South Africa.

Often, in practice, the exchange control rules are more onerous to comply with than tax rules. It perhaps would have made better sense if the tax rules and SARB requirements were aligned with each other, so investors don’t have to grapple with two separate sets of standards to qualify for the benefits of an HQC.

For more information call KPMG at 033 347 7600.

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