SA gains ground on Mauritius

"Government is eager to make South Africa a conduit for private equity investments, not only into Africa but also in the rest of the world, and provides significant incentives for this purpose," Lessing says.

Mauritius, with its absence of exchange controls and favourable tax regime for Global Business Companies (GBC1), has long had an edge over South Africa. However, the latter's "sincere effort" to create a more conducive environment through its headquarter company (HQ) regime appears to be producing results.

"There are even areas where South Africa is slightly more attractive as a holding jurisdiction for private equity," Lessing says. "South Africa has almost twice as many double tax treaties as Mauritius, with 70 treaties currently in force, compared to Mauritius's 36."

Tax treaty networks

She says South Africa's treaty network allows for treaty relief in almost every continent of the world, including Australia, North and South America, Africa and Europe.

"The Mauritius treaty network, on the other hand, is more focused on specific jurisdictions such as India and China, and notably does not have treaties with Australia, Brazil, Canada, Ireland, Japan, Malta, the Netherlands, New Zealand, Russia, Switzerland and the United States," Lessing says.

"That said, some of Mauritius's treaties with African countries are more favourable than South Africa's." This could be an area for South Africa to target for improvement, especially considering the massive interest worldwide in African investment.

Although important, tax treaties are only one of several aspects that private equity investors would take into account when choosing a gateway into Africa, others being exchange controls and local tax benefits, as well as how easy it is to apply for incentives.

Qualifying criteria

When it comes to qualifying for the tax benefits offered by both regimes, Mauritius and South Africa are not far apart. "It appears that Mauritius weighs heavier on the administrative burden side, while South Africa's substantive requirements to qualify for the HQ regime are more stringent," says Lessing.

For example, South Africa prescribes minimum equity interests and voting rights for shareholders in the HQ company, as well as for assets attributable to foreign (non-South African) investment. On the other hand, the country does not insist that the company should have local directors, a local bank account and locally kept accounting records, but it is required that the company's effective management be located in South Africa.

The position in Mauritius is different. Its entry criteria are low, but there is a stronger emphasis on a Mauritian presence through central management and control in Mauritius, along with requirements for local directors, local bank accounts and local accounting records. When it comes to exchange controls, Mauritius is still ahead of South Africa, for the simple reason that it has no exchange-control rules.

On the other hand, it is generally not difficult to qualify for exemption from the South African exchange rules. Should this prove problematic, it can be overcome, Lessing says.

"An option would be to incorporate the holding company outside South Africa, yet establishing its place of effective management in South Africa. That way, the company will not be subject to the South African exchange controls, but may still qualify for the South African tax relief."

Tax relief

South Africa's HQ company tax regime is more complex than the GBC1 of Mauritius, yet the end result is essentially the same - both countries' regimes offer significant tax incentives to private equity investors.

In both countries, there is no tax on dividends declared by the holding company.

In South Africa, dividends received by the HQ company from its foreign subsidiaries are not taxed. In Mauritius, these dividends are taxable at a maximum rate of 3%, but reduced by foreign withholding taxes, which often means that the effective tax rate would be nil.

Profits and gains generated in the underlying structure are not taxed in Mauritius. In South Africa, HQ companies will not pay tax on these either, as they are exempt from the Controlled Foreign Company rules. South African shareholders of HQ companies, however, are not exempt from these rules, says Lessing.

Mauritius does not levy an interest withholding tax, and although the situation is slightly more complex in South Africa, interest payments by HQ companies would often also avoid the soonto-be introduced interest withholding tax.

In the case of interest received, this is taxable at a maximum of 3% in Mauritius, but may be eligible for reduction by foreign withholding taxes. In South Africa, it is possible to avoid interest receipts in the HQ company by making interest-free loans to subsidiaries. Further, interest paid on money borrowed to on-lend to foreign subsidiaries is taxdeductible against interest received from these subsidiaries.

While other interest receipts are subject to the normal tax rules and can, in principle, attract tax at 28%, Lessing says this can be avoided by interposing a wholly owned subsidiary of the HQ company in a tax-free jurisdiction.

No capital gains tax is payable in Mauritius on the disposal of shares in foreign subsidiaries. In South Africa, it is unlikely that CGT would arise on a disposal of shares in underlying investments, according to Lessing. That is so because the HQ company would likely qualify for exemption if it held the shares for 18 months or longer and the foreign subsidiaries are not foreign financial instrument holding companies (FFIHCs). "What is more, the 18 months and FFIHC requirements are to be removed in terms of draft legislation," Lessing says.

Next leg of the race

South Africa seeks to further improve its African gateway status, and is considering introducing an investment manager exemption to prevent foreign funds from being taxresident in South Africa by virtue of their fund management activities.

"Specific provisions have yet to be finalised," Lessing says. "On the face of it, however, it appears that the investment manager exemption, coupled with the HQ company regime, could very well score South Africa another point against Mauritius in the race for an appropriate holding company jurisdiction."

Government is eager to make South Africa a conduit for private equity investments, not only into Africa but also in the rest of the world

Source: The Times via I-Net Bridge