Tax characteristics of an ideal holding company location

Abstract

The South African government announced in 2008 that it intends to promote South Africa as a suitable company headquarter jurisdiction for investment in Africa in general and the sub-Saharan region in particular. In order to achieve this goal the regulatory, economic and legal frameworks need to be suitable for international investment. One of the items of the economic and legal framework under review is the tax regime. The tax regime may contain attributes that are adverse to international holding companies and those that are favourable to such companies. This article analyses the tax characteristics of an ideal holding company regime and further observes the specific aspects of South Africa's tax laws as they affect holding companies and that would ensure that South Africa becomes an ideal holding company location. These are mainly a favourable capital gains tax regime, low income taxes, no or low tax on dividends, unilateral avoidance of double taxation, a favourable tax treaty network, the absence of controlled foreign company legislation and a liberal thin capitalisation and transfer pricing regime. Certain tax characteristics such as a unilateral avoidance of double taxation in the form of the granting of a tax credit on foreign taxed paid, participation exemption and the abundance of double tax treaties effectively attract investment in the form of holding companies into a country with such attributes. On the other hand features such as controlled foreign company provisions and stringent transfer pricing and thin capitalisation provisions have an opposite effect. Even in cases where the provisions do not apply to holding companies, the mere presence of the provisions could still deter foreign investors.