South Africa has a world class investment management industry. In order to enhance the utilisation of the industry by foreign investors, giving rise to increased inflows of foreign funds to be invested in South Africa and the growth of the investment management industry, there has been a focus by National Treasury on amending the tax legislation in order to allow non-residents to utilise the services of a South African investment manager, without the foreign investment funds being pulled into the South African tax net. These amendments were mostly made to the income tax legislation. However, an important consideration which is often overlooked is the value-added tax (“VAT”) implications in relation to the services rendered by the investment managers to non-resident investors.
The Value-Added Tax Act No. 89 of 1991 (“the VAT Act”) provides that the supply of certain services to non-residents are subject to VAT at the zero rate. However, this provision is limited to, amongst others, supplies of services which are not in connection with movable property, excluding debt securities, equity securities or participatory securities, situated in South Africa at the time the services are rendered.
In order for the above zero-rating provision to find application, the following important considerations should be borne in mind:
- The services must be supplied to a person which is not a resident for VAT purposes. The definition of “resident” in the VAT Act includes a person which carries on an enterprise or other activity in South Africa and has a fixed or permanent place in South Africa relating to such enterprise or activity. In this regard, the activities which are performed by the South African investment manager should be carefully considered in order to determine whether such may give rise to the non-resident investor becoming a resident for VAT purposes;
- Where the assets which are managed by the investment manager are South African assets (for example shares in South African companies, bonds issued by south African companies, etc), the zero-rating provision will only find application if such assets constitute “debt securities”, “equity securities” or “participatory securities”. These are defined concepts and, whilst fairly wide in application, may not encompass certain types of derivative instruments.
The applicability of the zero-rating provision in relation to the fee charged by a South African investment manager is a relevant consideration in determining whether a South African resident investment manager who is a VAT vendor will be appointed (as opposed to a foreign manager) as the VAT component of the investment management fee is often considered to be material, especially where performance fees are payable. Should a South African entity be utilised as a vehicle for a fund, whilst it may be possible to achieve South African tax neutrality from an income tax perspective for the ultimate investors, the zero-rating provision will not be available in respect of the services rendered to such a fund. As such, foreign investors may be well advised to consider the appointment of a South African investment manager in relation to South African portfolio assets on a segregated basis as opposed to investing into a South African registered fund such as a collective investment scheme.