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Guidance for multinationals investing in prospecting or mining companies
It is common knowledge that investing in a South African prospecting or mining company is a long term, capital intensive and risky investment. Potential investors seek not only security over the assets but also an attractive return on investment. Taxand South Africa discusses the importance of understanding South African Double Tax Treaties (DTA) when thinking of such an investment.
One of the starting points when investing in a South African prospecting or mining company would be to set up an acquisition structure in a favourable jurisdiction. Commercially, the key considerations would include the stability of the country’s economic and political climate, whether such jurisdiction has a bi-lateral investment treaty (BIT) with South Africa, the in country laws and regulations as well as the tax advantages which that jurisdiction may offer, not only upon investing but also upon a future divestment of its interests.
From a security or protection viewpoint, a jurisdiction with a BIT is very important. From a return of investment perspective, proper tax planning is imperative and here a jurisdiction with a favourable DTA is preferred, providing for reduced rates of withholding tax on dividends, interest and royalty payments and also relief against the imposition of South African capital gains tax when the multinationals divest of their investments in the South African mining assets.
For these reasons, various multinationals with interests in South African mining assets have structured their share investments through countries that have a favourable DTA and BIT with South Africa. This would typically include Luxembourg, the Netherlands and until recently, Mauritius.
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Also published in Thomson Reuters' Taxnet Pro, 2 October 2013
Multinational companies who have invested in South African mining assets, especially those who have invested through Mauritius, should act proactively in understanding the tax status of their investment. This is relevant whether they intend selling, holding or expanding their interests in South Africa and also whether their investment should be restructured to manage their inevitable tax bill and the impact thereof on the return of their investment.