INTERMEDIARY HOLDING COMPANIES DEFINED AND DISTINGUISHED FROM OTHER SIMILAR ENTITIES 

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BACKGROUND

The essential element of limitation of liability to the unpaid portion of the share capital, which is generally available for companies worldwide, is one of the main drivers for investors to opt for forming companies both for local and international business ventures. Attendant upon this method of entrepreneurship are also other commercial benefits some of which are attainable through structural modifications and proper planning, including tax planning.

PURPOSE

With the globalisation of the economy and the free movement of capital internationally, investors constantly seek ventures and business structures that would enable them to invest and conduct businesses utilising ultimate business vehicles tuned for their specific business needs. Depending on the objectives of large multinational structures, an increasing number of investors prefer to centralise the aggregate investments in one company formed specifically for the purpose of holding the wealth of the group.

Advantages to the South African Economy of hosting IHCs

According to Weigel et al“[i]ncreasingly, the ingredients of economic growth – created assets, technology, intellectual capital, learning experience, and organisational competence – are housed in company systems. To gain access to these ingredients developing countries need [IHCs] to participate in the domestic economy.” South Africa needs multitudes of companies to stimulate the economy and maintain a constant increased economic activity within its borders.

South African Government’s Objectives

During the course of 2004 the Director General of the National Treasury, Mr Lesetja Kganyago, announced the South African government’s Financial Centre for Africa strategy.8He stated that –
[r]ecognising the development challenges faced in Africa and the huge  contribution that South Africa’s financial markets could play in supporting this development, our government endorsed the development of a strategy to position South Africa as a Financial Centre for Africa.

ABSTRACT
CHAPTER 1 INTRODUCTION
1.1 BACKGROUND
1.2 PURPOSE
1.2.1 Advantages to the South African Economy of Hosting IHCs
1.2.2 South African Government’s Objectives
1.2.3 Katz Commission Recommendations
1.3 METHODOLOGY
1.4 A COMPARATIVE STUDY OF HOLDING COMPANY REGIMES
1.4.1 The Netherlands
1.4.2 Mauritius
1.4.3 Other Jurisdictions
1.5 THE RELEVANCE OF EXCHANGE CONTROL
1.6 SCOPE OF THE STUDY
1.7 REFERENCE TO THE TAX ACT
CHAPTER 2 INTERMEDIARY HOLDING COMPANIES DEFINED AND DISTINGUISHED FROM OTHER SIMILAR ENTITIES 
2.1 INTRODUCTION
2.2 AN IHC AS A COMPANY
2.3 TAX RESIDENCE OF AN IHC
2.4 AN IHC AS A HOLDING COMPANY AND A SUBSIDIARY
2.4.1 Company groups
2.5 THE INTERMEDIARY NATURE OF AN IHC
2.6 FUNCTIONS OF AN IHC
2.6.1 Acquisitions
2.6.2 Management
2.6.3 Reorganisations
2.6.4 Disposals
2.7 DISTINCTION BETWEEN AN IHC AND OTHER SIMILAR ENTITIES
2.7.1 International Holding Company
2.7.2 Offshore Holding Company
2.7.3 Foreign Financial Instrument Holding Company
2.7.4 International Headquarter Company
2.7.5 Foreign Base Holding Company
2.7.6 Foreign Group Finance Company
2.7.7 Foreign Financial Services Center Companies
2.7.8 Intellectual Property Holding Company
2.7.9 Personal Holding Company
2.8 CONCLUSION
CHAPTER 3 NON-TAX REASONS FOR FORMING AN IHC 
3.1 INTRODUCTION
3.2 RAISING EXTERNAL FINANCE
3.2.1 Country Risk
3.2.2 Currency Risk
3.2.3 Usage of Group Assets
3.3 EXCHANGE CONTROLS
3.4 ASSET PROTECTION
3.4.1 What is an “Asset”?
3.4.2 What are the Dangers?
3.5 GROUP REORGANISATION AND STRUCTURAL CONSOLIDATION
3.6 HOLDING, WITH A COMBINATION OF NON-HOLDING REASONS
3.7 CONCLUSION
CHAPTER 4 TAX REASONS FOR FORMING AN IHC 
4.1 INTRODUCTION
4.2 DEFERRING TAX ON OPERATING INCOME
4.3 DEFERRING TAX ON CAPITAL GAINS
4.4 MAXIMISING CREDIT FOR FOREIGN TAXES
4.4.1 No Tax on Foreign Income
4.4.2 Foreign Tax as an Allowable Deduction in Determining Taxable Income
4.4.3 Tax Exemption
4.4.4 Tax Credits
4.5 REDUCING WITHHOLDING TAXES
4.6 GROUP TAXATION
4.6.1 Introduction
4.6.2 Fiscal Unity System
4.6.3 Group Contribution System
4.6.4 Group Relief System
4.7 FOREIGN EXCHANGE GAINS AND LOSSES
4.7.1 Introduction
4.7.2 Tax treatment of Foreign Exchange Gains and Losses
4.8 RE-CHARACTERISATION OF INCOME
4.8.1 Income Paid and Received in the Same Jurisdiction
4.8.2 Income Received from a Different Jurisdiction
4.9 UTILISATION OF A LIQUIDATION LOSS
4.9 CONCLUSION
CHAPTER 5 8 CHARACTERISTICS OF AN IDEAL LOCATION TO ESTABLISH AN IHC
5.1 INTRODUCTION
5.2 NON-TAX CHARACTERISTICS OF AN IHC JURISDICTION
5.3 TAX CHARACTERISTICS OF AN IHC JURISDICTION
5.3.1 A Favourable Capital Gains Tax Regime
5.3.1.1 Determining the Acquisition Price
5.3.1.2 Timing and Event for Realisation of Gain or Loss
5.3.1.3 Amount Included in the Calculation of Taxable Capital Gains
5.3.1.4 Disposals between Related Persons
5.3.1.5 Roll-Over Provisions
5.3.1.6 Capital Gains Tax Rate
5.3.2 Low Income Taxes
5.3.3 No or Low Tax on Dividends
5.3.3.1 Numerically Low Amount of Tax on Dividends
5.3.3.2 Thin Dividend Tax Base
5.3.4 No or Low Withholding Tax on Dividends
5.3.5 A Favourable Treaty Network
5.3.6 Unilateral Avoidance of Double Taxation
5.3.7 The Absence of Controlled Foreign Company (“CFC”) Legislation
5.3.7.1 Definition of Controlled Foreign Company
5.3.7.2 Computation of Attributable Income
a. The entity approach
b. The transactional approach
5.3.7.3 Attributable Amount
5.3.7.4 Exemptions
a. De minimis exemption
b. Genuine business activities exemption
c. Distribution exemption
5.3.8 Thin Capitalisation and Transfer Pricing Rules
5.3.8.1 Transfer Pricing
a. Cross-border transactions
b. Connected persons
c. Arm’s length
5.3.8.2 Thin Capitalisation
5.4 METHODS OF SETTING UP AN IHC
5.4.1 Incorporating a New Legal Entity
5.4.2 Changing the Shareholding of an Existing Entity in the Host Country
5.4.3 Converting the Functions of an Existing Company in the Host Country
5.4.4 Relocating the Tax Residence of a Company
5.4.5 Migration
5.4.6 Other Variations
5.5 CONCLUSIONS
CHAPTER 6 INTERNATIONAL ATTITUDE TOWARDS SYSTEMS SUITABLE FOR IHCs
6.1 INTRODUCTION
6.2 HARMFUL TAX COMPETITION
6.2.1 Tax Havens
6.2.1.1 No or Nominal Taxes on Income from Mobile Activities
a. What is mobile business activity?
b. The tax on mobile income
6.2.1.2 Availability to Non-Residents
6.2.1.3 Ability to Fund National Expenditure without Income Taxes
6.2.1.4 Characterisation of Tax Havens
a. Production Havens
b. Base Havens
c. Treaty Havens
d. Concession Havens
6.2.1.5 Taxation in Tax Havens
6.2.2 Harmful Preferential Tax Jurisdictions
6.2.2.1 Low or No Tax on Income
6.2.2.2 Ring-fencing of Foreign Income from the Domestic Economy
6.2.2.3 Lack of Transparency
6.2.2.4 No Exchange of Information
6.2.2.5 Other Features
6.2.2.6 Assessing the Economic Effects of a Preferential Regime in terms of
its Potential Harmfulness
6.2.3 A Summary of the Differences between Tax Havens and Harmful
Preferential Tax Regime Countries
6.2.4 Offshore Financial Centres
6.2.4.1 Introduction
6.2.4.2 Nature and Functions of Offshore Financial Centres
6.3 INITIATIVES AGAINST TAX HAVENS
6.3.1 Unilateral Initiatives
6.3.1.1 Controlled Foreign Companies Legislation
6.3.1.2 Transfer Pricing Rules
6.3.1.3 Restriction of the Exemption Method on Certain Income
6.3.1.4 Addition of Anti-Avoidance Measures
a. Focus on the countries from which the foreign income originates
b. The type of income
c. The effective rate of tax to which the income has been subjected
d. Foreign investment funds
e. Transparency of rulings
f. Foreign information reporting
g. Taxation of foreign dividends
h. Access to banking information
6.3.2 Treaty Measures
6.3.2.1 Greater and More Efficient Use of Exchanges of Information
6.3.2.2 Restriction on Entitlement to Treaty Benefits
6.3.2.3 Status of Domestic Anti-Avoidance Rules and Doctrines in Tax Treaties
6.3.2.4 Synchronising Exclusions from Treaty Benefits
6.3.2.5 Terminating Treaties with Tax Havens
6.3.2.6 Other Recommendations of the OECD Report
6.3.3 OECD Developments since the 1998 Report
6.3.3.1 Access to bank information
6.3.3.2 Effective Exchange of Information
6.3.3.3 Countering Harmful Tax Practices
6.4 CONCLUSION
CHAPTER 7 THE NETHERLANDS
7.1 INTRODUCTION
7.2 BACKGROUND
7.3 THE DUTCH CORPORATE TAX SYSTEM
7.3.1 General
7.3.2 Corporate Income Tax
7.3.3 Capital Gains Tax
7.3.4 Dividend Tax
7.3.5 Controlled Foreign Company Provisions
7.3.6 Transfer Pricing
7.3.7 Thin Capitalisation
7.3.8 Foreign Tax Credit
7.3.9 Exchange Control
7.4 THE DUTCH HOLDING COMPANY
7.4.1 Defining a Holding Company
7.4.2 Various Uses of the Dutch Holding Company
7.5 TAX ASPECTS THAT MAKE THE NETHERLANDS POPULAR
7.5.1 The Participation Exemption
7.5.1.1 The Nature of the Participation Exemption
7.5.1.2 Application of the Dutch Participation Exemption
a. Qualifying participations
(i) Ownership of at least 5%
(ii) Subsidiary’s capital divided into shares
(iii) Shares not held as trading stock
(iv) Additional requirements for foreign subsidiaries
7.5.2 Advance Tax Rulings
7.5.3 Treaty Network
7.5.4 Parent-Subsidiary Directive
7.5.5 Comparison between the Directive and the Participation Exemption
7.6 PROPOSALS FOR THE DUTCH CORPORATE TAX REFORM
7.6 CONCLUSION
CHAPTER 8 MAURITIUS
8.1 BACKGROUND
8.2 MAURITIAN CORPORATE INCOME TAX
8.2.1 Rates of Tax
8.2.2 Alternative Minimum Tax
8.2.3 Other Tax Instruments
8.3 TAX ASPECTS THAT MAKE MAURITIUS POPULAR
8.3.1 Companies Holding Global Business Licences
8.3.1.1 Taxation of GBL1 Companies
a. Tax residence of a GBL1 company
b. Tax treatment of a GBL1 company
(i) Underlying Tax Credit
(ii) Presumed Tax Credit
(iii) Tax Sparing Credit
(iv) Application of the Credits
(v) The Benefits of a GBL1 Licence for an IHC
8.3.1.2 GBL2 Companies
a. Taxation of GBL2 companies
8.3.2 Advance Tax Rulings
8.4 CONCLUSION
CHAPTER 9 SPECIAL FEATURES IN OTHER TAX REGIMES
9.1 INTRODUCTION AND BACKGROUND
9.2 BELGIUM
9.2.1 Introduction
9.2.2 Corporate Income Tax
9.2.2.1 CFC Legislation
9.2.2.2 Transfer Pricing
9.2.2.3 Notional Interest Deduction
9.2.2.4 Dividend Withholding Tax
9.2.3 Special Features in the Belgian Tax System
9.2.3.1 Dividends Received Deduction
9.2.3.2 Tax Exemption for Capital Gains Realised on Shares
9.2.3.3 Thin Capitalisation
9.2.4 Conclusion
9.3 IRELAND
9.3.1 Introduction
9.3.2 Corporate Income Tax
9.3.3 Special Features in the Irish Tax System
9.3.3.1 Low Corporate Tax Rate on Dividends
9.3.3.2 Exemption from CGT on Disposal of Qualifying Shareholdings
9.3.3.3 Tax Credit System
9.3.3.4 Pooling of Tax Credits
9.3.3.5 Group Taxation
9.3.4 Conclusion
9.4 UNITED KINGDOM
9.4.1 Introduction
9.4.2 Corporate Income Tax
9.4.2.1 Capital Gains Exemption
9.4.2.2 Tax Credits
9.4.2.3 Controlled Foreign Company Legislation
a. Application
b. Analysis
9.4.3 Special Features in the UK Tax System
9.4.3.1 No Withholding Tax on Dividends
9.4.3.2 No CGT on Sale of UK Subsidiary
9.4.3.3 Group taxation
9.4.4 Conclusion
9.5 CONCLUSION
CHAPTER 10 SOUTH AFRICAN TAX SYSTEM
10.1 INTRODUCTION
10.2 OUTLINE OF SOUTH AFRICAN CORPORATE INCOME
TAXATION
10.2.1 Corporate Income Tax Rate
10.3 CFC LEGISLATION
10.3.1 General
10.3.2 Content of South African CFC Regime
10.3.2.1 Participation Rights
10.3.2.2 Controlled Foreign Company
10.3.2.3 Attributable Amount
10.3.2.4 Net Income
10.3.2.5 Exclusions / exemptions
a. Income that has already been taxed
b. Dividend income from a related CFC
c. The foreign business establishment (“FBE”) exemption
(i) Definition of an FBE
(ii) Locational permanence
(iii) Economic substance
(iv) Business purpose
(v) Application of the FBE
(aa) Amounts arising from non-arm’s-length transactions with residents
(bb) Sale of goods by a CFC to a resident connected person
(cc) Sales to unconnected South African residents
(dd) Services performed for connected residents
(ee) Mobile passive income
d. CFC interest, rents and royalties
10.3.2.6 Special Rulings Provisions
10.4 TAXATION OF DIVIDENDS
10.4.1 General
10.4.2 Definition of Dividend under the STC Regime
10.4.2.1 Liquidation Dividends
10.4.2.2 Going-Concern Dividends
10.4.2.3 Partial Reduction or Redemption of Capital or Share Buy-Backs
10.4.2.4 Company Reconstructions
10.4.3 New Definition of Dividend
10.4.4 Tax Treatment of Foreign Dividends
10.4.4.1Exemptions
a. Dividends from taxable amounts
b. Amounts arising from resident company dividends
c. Dividends declared by listed companies
d. CFC dividends
e. Participation exemption
10.4.4.2 Deductibility of Expenditure Incurred in Producing Foreign Dividends
10.5 REBATE IN RESPECT OF FOREIGN TAXES ON INCOME
10.5.1 General
10.5.2 Foreign-Source Income
10.5.2.1. CFC Income Attributable to the Resident
10.5.2.2 Foreign Dividends
10.5.2.3 Capital Gains
10.6 EXCHANGE CONTROL
10.6.1 Introduction
10.6.2 Purpose of Exchange Control
10.6.3 Application of Exchange Controls in South Africa
10.6.4 Restriction on Export of Currency and Import of South African Rand
10.6.5 Rules Applicable to Subsidiaries of South African Companies
10.6.6 Local Borrowing Restrictions
10.6.7 Dividends
10.6.8 Interest on Foreign Loans
10.6.9 Management and Administrative Fees
10.6.10 2009 Developments
10.7 CAPITAL GAINS TAX IN SOUTH AFRICA
10.7.1 Introduction
10.7.2 Key Terms, Taxpayer and Exclusions
10.7.2.1 Capital Gain and Asset
10.7.2.2 Base Cost
10.7.2.3 Disposal
10.7.2.4 Persons Liable to Capital Gains Tax
10.7.2.5 Exclusions
a. Disposals by creditor of a debt owed by a connected person
b. Disposal of interest in equity share capital of a foreign company
10.7.2.6 Capital Distributions
10.8 TAX RULINGS
10.8.1 Binding General Rulings
10.8.2 Binding Private Rulings
10.8.3 Binding Class Rulings
10.8.4 Non-Binding Private Opinions
10.9 GROUP TAXATION IN SOUTH AFRICA
10.9.1 Margo Commission
10.9.2 The Katz Commission Recommendations
10.9.3 Current Law
10.9.3.1 Company Formations
10.9.3.2 Intra-Group Transactions
10.9.3.3 Liquidation, Winding-up and Deregistration
10.10 TRANSFER PRICING PROVISIONS
10.11 THIN CAPITALISATION PROVISIONS
10.12 INTERNATIONAL HEADQUARTER COMPANY REGIME
10.13 CONCLUSION
CHAPTER 11 CONCLUSIONS AND RECOMMENDATIONS
11.1 INTRODUCTION
11.2 BACKGROUND
11.3 ASSESSING THE SUITABILITY OF SOUTH AFRICA TO HOST IHCs
11.3.1 Corporate Tax Rate
11.3.2 Taxation of Dividends
11.3.3 The Participation Exemption
11.3.4 Controlled Foreign Company Legislation
11.3.5 Thin Capitalisation
11.3.6 Advance Tax Rulings
11.3.7 Exchange Control
11.4 RECOMMENDATIONS
11.4.1 Exchange Controls Recommendations
11.4.1.1Recommendation regarding the Residence of an IHC
11.4.1.2Recommendation regarding Loop Structures
11.4.2 Recommendation on the Special Income Tax Dispensation for IHCs
11.4.2.1Recommendation regarding the Participation Exemption
11.4.2.2Recommendation regarding CFC Ownership Rules
11.4.2.3Recommendation regarding Thin Capitalisation Rules
11.4.3 Recommendation on the Introduction of Group Taxation
11.5 ADDRESSING RECOMMENDATIONS OF THE KATZ COMMISSION
11.5.1 A Reasonable Double Tax Agreement Network 356
11.5.2 The Exemption of Offshore Corporate Dividend Income from Local Income Tax
11.5.3 The Exemption of Defined Offshore Corporate Income from Local Income Tax
11.5.4 The Absence of Local Corporate Capital Gains Tax 356
11.5.5 Low or No Local Withholding Tax on Dividends Paid to Shareholders
11.5.6 An Efficient Local Tax Rulings System 357
10.6 COMPLIANCE WITH THE NON-DISCRIMINATION CLAUSE
IN SOUTH AFRICAN TAX TREATIES
11.7 CONCLUSION
BIBLIOGRAPHY

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The Suitability of the South African Corporate Tax Regime for the Use of South African Resident Intermediary Holding Companies