This Note provides guidance and clarity on the interpretation and application of section 9I which deals with headquarter companies.
The Note also briefly discusses other provisions of the Act that provide special tax relief for headquarter companies, as well as the specific anti-avoidance rules that are designed to prevent misuse or abuse of those provisions.
The Note does not discuss all of the sections which are applicable to headquarter companies. For example, the Note does not discuss “gross income” as defined in section 1(1) or section 11(a) which, although these sections do not specifically refer to headquarter companies, are applicable to headquarter companies.
The information in this Note is based on the income tax and tax administration legislation (as amended) as at the time of publishing and includes the following:
The Taxation Laws Amendment Act 34 of 2019 which was promulgated on 15 January 2020 (as per Government Gazette 42951).
The Tax Administration Laws Amendment Act 33 of 2019 which was promulgated on 15 January 2020 (as per Government Gazette 42952).
The Rates and Monetary Amounts and Amendment of Revenue Laws Act 32 of 2019 which was promulgated on 15 January 2020 (as per Government Gazette 42950).
The South African government wished to promote South Africa as a gateway for investments into Africa. The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2010 stated the following:
“South Africa is the economic powerhouse of Africa. South Africa’s location, sizable economy, political stability and overall strength in financial services make South Africa an ideal location for the establishment of regional holding companies by foreign multinationals. Furthermore, South Africa’s network of tax treaties provides ready access to other countries in the region. South Africa is therefore a natural holding company gateway into the region.
However, in order to serve as an ideal holding company jurisdiction, three sets of South African tax rules were identified as significant barriers: (i) the CFC rules, (ii) the charge on outgoing dividends, and (iii) the thin capitalisation rules.”
- Definition of “headquarter company”
3.1 The law
The relevant sections are quoted in the Annexure.
3.2 Application of the law
In order to be a headquarter company for any year of assessment, a company must –
be a resident (see 3.2.2);
comply with the requirements of section 9I(2) (see 3.2.3); and
make an election (see 3.2.1) to be a headquarter company.
3.2.1 Annual election
The election to be a headquarter company must be in the form and manner determined by the Commissioner. The election must be made for a specific year of assessment and is valid for that year of assessment only. The election is currently recorded in the Income Tax Return for Companies (ITR14) which asks the question “Does the company elect to be a headquarter company in terms of s9I for this year of assessment?”.
The election to be a headquarter company for a specific year of assessment can be made only at or after the end of that year of assessment if the requirements of section 9I(2) have been met. If any of the requirements in section 9I(2) has not been met for a specific year of assessment, a company cannot elect to be a headquarter company for that year of assessment.
The election is effective from the commencement of the year of assessment for which it is made.
3.2.2 Resident companies
Only a resident company4 may elect to be a headquarter company. A company is a “resident” if it –
is incorporated, established or formed in South Africa; or
has its place of effective management5 in South Africa; and
a tax treaty does not deem that company to be exclusively a resident of another country for purposes of the application of any tax treaty.
3.2.3 Requirements of section 9I(2)
A resident company must meet three requirements in order to be eligible to elect to be a headquarter company for any year of assessment, namely, –
the “10% shareholding and voting rights” requirement [see 3.2.3(a)];
the “80% or more of the cost of total assets in, to or by a qualifying foreign company” requirement [see 3.2.3(b)]; and
the “50% or more of gross income” requirement [see 3.2.3(c)].
(a) The “10% shareholding and voting rights” requirement
Section 9I(2)(a) provides that each holder of shares in the company, whether alone or together with any other company forming part of the same group of companies as the holder, must hold 10% or more of the equity shares and voting rights in the potential headquarter company. The holder may be a resident or non-resident.
The term “group of companies” is defined in section 1(1) as follows:
“ ‘[G]roup of companies’ means two or more companies in which one company (hereinafter referred to as the ‘controlling group company’) directly or indirectly holds shares in at least one other company (hereinafter referred to as the ‘controlled group company’), to the extent that—
(a) at least 70 per cent of the equity shares of each controlled group company are directly held by the controlling group company, one or more other controlled group companies or any combination thereof; and
(b) the controlling group company directly holds at least 70 per cent of the equity shares in at least one controlled group company;”
A holder that is a company may hold 10% of the equity shares and voting rights on its own or together with another company that is part of the same group of companies. The equity shares and voting rights held by a connected person, that is not part of the same group of companies, are not relevant. Similarly, if the holder is a natural person or a trust, connected person holdings are not relevant and the natural person or trust must hold 10% or more of the equity shares and voting rights on its own.
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This article first appeared on sars.gov.za.
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