This content is from: South Africa

South Africa: Exchange control and tax dispensation for domestic treasury management companies

Peter Dachs
The Taxation Laws Amendment Act 2013 contains new currency rules for domestic treasury management companies.

Each entity listed on the Johannesburg Stock Exchange will be entitled to establish one subsidiary to fund African and other offshore operations and which will not be subject to the exchange control restrictions generally applicable to South African companies. These domestic treasury management companies will have to be registered with the Financial Surveillance Department of the South African Reserve Bank.

From an exchange control perspective, benefits to be enjoyed by a domestic treasury management company include:

  • Transfers of up to ZAR750 million ($68 million) per annum from the parent company to the domestic treasury management company will be allowed without prior approval required. These amounts may be freely deployed to fund foreign group operations. Additional amounts will be subject to prior approval from the South African Reserve Bank;
  • Domestic treasury management companies will be allowed freely to raise and deploy capital offshore, provided these funds are without recourse to South Africa. Additional domestic capital (in excess of the ZAR750 million per annum referred to above) and guarantees will be allowed to fund foreign direct investments in accordance with the current foreign direct investment allowance;
  • Domestic treasury management companies will be allowed to operate as cash management centres for South African multinationals and cash pooling will be allowed without limitations;
  • Local income generated from cash management will be freely transferable; and
  • Domestic treasury management companies may operate foreign currency accounts as well as a rand-denominated account for operational expenses.

The rulings issued by the South African Reserve Bank in respect of domestic treasury management companies state that a domestic treasury management company should "hold African and offshore operations". However, it may not be necessary for a domestic treasury management company to hold shares in foreign subsidiaries.

From a tax perspective, the domestic treasury management company will not be taxed in respect of exchange gains or losses determined as between its functional currency and the currencies in which it operates. It should therefore be ensured that the company's treasury operations are primarily concluded in its functional currency to avoid taxable exchange gains or losses.

The proposed tax relief is therefore limited to exchange gains and losses and the domestic treasury management company would be taxable on, among other things, its interest income. However the company would be able to utilise South Africa's double tax agreements to reduce any foreign withholding taxes on such interest income.

The broad idea is therefore to allow South African listed groups to avoid having to set up an offshore treasury company and, instead, to allow such groups to utilise a South African entity to fund their offshore operations.

Peter Dachs (pdachs@ens.co.za)
ENSafrica – Taxand
Tel: +27 21 410 2500
Website: www.ens.co.za

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