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Proposed Amends To HQ Company Regime

South Africa

The South African HQ Company Regime is intended to provide tax rules which promote South Africa (SA) as the regional financial hub for Africa. Consequently, the purpose of HQ Company Regime is to ensure that the existing tax system does not hinder investment into Africa, using SA as a gateway. Taxand South Africa discusses the barrier to this goal caused by the "always qualification rule".

The "always qualification rule" creates practical difficulties in the case of certain start up operations. It is often not only practical, but also convenient to use shelf companies previously in existence to start up business in SA. The use of shelf companies creates an impediment to benefiting from the HQ Company Regime, as it does not meet the requirements of the "always qualification rule".

The proposed changes to the Draft Taxation Laws Amendement Bill (TLAB) aim to relax "the always qualification rule" to the extent that the company at issue is effectively dormant. The draft TLAB proposes that a company will qualify for the HQ Company benefits provided that:

  • The company was not engaged in trade during any year of assessment.
  • The company must not have held assets in excess of R50,000 during any year of assessment.

These provisions will effectively ensure that the dormancy period(s) of a company, i.e. the shelf company, does not prevent application of the HQ Company relief mechanism.

Discover more: Proposed amendments to the HQ Company Regime

Taxand's Take

This will certainly be welcomed by potential inbound investors wishing to establish a HQ Company in South Africa through the use of a shelf company. Previous to the draft TLAB, the requirements of the 10% shareholder test and the 80% asset test had to be satisfied for the relevant year of assessment, as well as all prior years of assessment in which that company existed. With this amendment, this rule will no longer apply.

Your Taxand contact for further queries is:
Bernard Du Plessis
T. +27 11 269 7891

Taxand's Take Author