In the 2013 Budget Speech, the Minister of Finance, Pravin Gordhan announced that over the past five years, the South African Reserve Bank approved approximately 1,000 investments into 36 African countries.
These investments have provided political and strategic benefits, as well as, economic stimulus in general for South Africa.
Investments in Africa and the rest of the world also provide a sustainable market and continuity of work for South African companies outside of South Africa and contribute to enhancing the international profile of South Africa. There are also benefits to social upliftment and skills transfer through additional employment and generally foreign currency earnings are remitted back to South Africa in the form of dividends. As these investments are fundamentally beneficial to South Africa, a number of measures are proposed to be put in place, to reduce the current exchange control regulations governing South African companies investing in African countries. It is anticipated that these measures will incentivise South African companies to manage their African operations from South Africa instead of from offshore, and in so doing maximise the benefits to the South African economy.
To this end, it was announced that every company listed on the JSE will be permitted to incorporate one wholly-owned subsidiary company to house all its African and offshore investments. This subsidiary company must be a South African tax resident, but it will not be subject to any exchange control regulations.
It is proposed that:
- R750 million per year may be transferred from the listed company to the subsidiary company;
- the subsidiary company will be allowed to freely raise and utilise capital offshore;
- additional capital and guarantees will be allowed to fund bona fide foreign direct investments by the subsidiary company;
- the subsidiary company will be allowed to operate as a cash management centre;
- cash pooling will be allowed without any restrictions;
- income generated by the subsidiary company from cash management will be freely transferrable;
- the subsidiary company may choose its functional currency and operate a foreign currency account whilst retaining a rand-denominated account for operational expenditure.
At present, only one wholly-owned subsidiary per JSE-listed company will be permitted. However, in future, jointly owned subsidiary companies, multiple subsidiary companies and subsidiaries of non-listed companies may also be considered.
A corresponding tax incentive is also being evaluated to allow the subsidiary company to use foreign functional currency for tax reporting purposes. This would ensure that the subsidiary company is not taxable on foreign currency gains and losses arising in the course of its treasury operations.
The recent announcements are a further attempt by National Treasury to position South Africa as a favourable jurisdiction in which to establish a holding company as a gateway for investments into Africa.