The Choice From a SA Company or Individual Perspective
Before addressing the topic of this article, it is appropriate to look at the proposed changes to the double tax agreement between Mauritius and SA announced in May 2014 and what the impact will be for investment by non-residents into SA and SA companies expanding offshore via Mauritius.
New DTA Provisions
Comments have been made that the change will significantly impact the use of Mauritius companies and /or that their use will be provocative to the SARS.
The first point to make is that the DTA only applies to those companies which are duel resident and in terms of the 1996 DTA where a company is tax resident in Mauritius and SA, then the place of effective management will determine where the company is resident.
The new DTA introduces a new form of tie breaker rather than following the more typical OECD model. In terms of the new DTA it is for the authorities in the two countries ‘by mutual agreement endeavour to settle the question’.
This creates a degree of uncertainty as the tax payer may be unsure of the outcome prior to making an investment. In a worse case if the authorities cannot reach agreement, the tax payer will not be able to rely on the DTA.
It must be stressed that the new DTA provisions are to deal with dual resident companies and that for a Mauritius incorporated company which is managed and controlled from Mauritius, the tie breaker provisions will not apply.
The new DTA has not therefore changed anything for most Mauritius companies, but care must be taken to demonstrate that they are properly managed in Mauritius.
The DTA makes a number of changes to withholding tax on loan interest, dividends and royalty payments from SA and CGT in respect of gains made by foreign companies on immovable property in SA.
This does mean the a Mauritius company may be less attractive where the company is making inward investments into SA but not for SA companies looking to use Mauritius as a gateway for foreign investments into Africa and beyond.
Mauritius Versus SA
It is clear from articles by many leading economists plus data from the IMF and other institutions that there is increasing interest in investing in Africa. This is also borne out by the number of potential clients requesting assistance in structuring their African investments. The concerns expressed by investors include regulatory constraints, political and currency risk, lack of infrastructure and banking concerns, as well as tax considerations.
Investors are therefore looking to establish their holding company in a stable jurisdiction where they have tax certainty and the benefits of a DTA network.
Choosing the jurisdiction is complex and important and will inevitably involve a number of jurisdictions and should always be done with the assistance of a specialist tax advisor.
The following are some of the key features that an investor is looking for:
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No or low tax on dividends to shareholders
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No capital gains tax on profits from the disposal of investments
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No tax on dividends received or paid
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No tax on other income received
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No tax on capital invested
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Extensive double tax agreements (DTA’s)
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No controlled foreign company rules
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No exchange control rules
There are clearly other factors to be taken into consideration when choosing the location and the tax tail cannot be allowed to wag the dog. These would include:
Mauritius has been seen as a jurisdiction that has met the above requirements for many years and has traditionally been the standard route through which investments have been made into Africa and India.
In 2010, SA introduced the Head Quarter Company (HQC) regime which challenged the use of Mauritius and provides investors with an alternative.
The table below sets out the main differences between the Mauritius GBL1 and South Africa’s HQC regimes.
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Mauritius GBL1
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SA HQC
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Effective corporate Income tax rate
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3%
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28%
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Dividends paid by company
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Max 3% reduced by credits for W/H tax or deemed credit 80%
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Nil on foreign divs provided 10% of equity and voting
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Dividends paid by company
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No W/H tax on divs paid
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Dividend payments
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Taxation of interest received
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Max 3% may be reduced by claiming foreign tax credit
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Interest received may be offset against interest paid in respect of funds borrowed and on lent to subsidiaries.
Interest received by non- resident share holder on a loan to an HQC will not be subject to tax provided the S/H does not have PE in SA
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Treatment of interest declared by company and received by S/H
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Interest exempt from W/H tax for non-resident if paid by GBL1 company
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SA – 15% W/H tax on interest from 1/1/2015 but HQC will not be subject to the tax if 10% participation
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Taxation of Royalties
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Max rate 3%
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28%
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W/H tax on royalties paid
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Exempt if 10% participation non residents if paid by GBL1
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Otherwise 15% from 1/1/2015 subject to treaty relief
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Capital Gains Tax
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No CGT
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Non-resident company only subject to CGT on sale of immovable property in SA or assets owned by a PE of non resident in SA. If shares in HQC sold by non-resident, no CGT subject to above.
Sale of share in foreign company by HQC exempt from CGT if participation exemption requirements are met.
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No transfer pricing rules
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Transfer pricing rules are generally applicable.
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CFC Rules
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Not applicable
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Not applicable to an HQC but CFC rules may apply to S/H of HQC if they are SA resident and no exemption applies.
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The above is an abridged summary of the differences and before proceeding with any structure, detailed professional tax and legal advice should be obtained.
Conclusion
From the comparison above it seems that the HQC regime appears to compete favourably with a Mauritius GBL1. However, overall it seems unlikely that the HQC will compete with the Mauritius GBL1 for the following reasons:
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HQC legislation is more complex
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Application process is more complicated
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Difference in applicable tax rates
I am not sure of other people’s experiences, but in the time since the HQC regime has been in place, I have not had a single enquiry regarding the use of an HQC whilst dealing with enquiries weekly for SA individual’s and company’s looking to set up structures offshore and looking at Mauritius GBL1’s as their preferred route.