During 2013, a treasury management company regime was introduced for exchange control purposes to encourage the establishment of group treasury management functions in South Africa and to further enhance South Africa’s position as a “gateway into Africa”.
For exchange control purposes, each entity listed on the JSE Limited (“JSE”) may establish one subsidiary to fund African and other offshore operations, which is not subject to the exchange control restrictions generally applicable to South African companies. In addition, the regime was recently expanded to unlisted companies.
These domestic treasury management companies must register with the Financial Surveillance Department of the South African Reserve Bank (“SARB”) and will be subject to the following conditions:
- The domestic treasury management company must be incorporated and effectively managed in South Africa, i.e. it must be a South African tax resident;
- Initially, only one domestic treasury management company per JSE listed entity or unlisted entity will be allowed, however, this limitation will be considered further by National Treasury going forward; and
- Appropriate governance arrangements will be required.
From an exchange control perspective, benefits to be enjoyed by a domestic treasury management company, include:
- In the case of a JSE listed entity, transfers of up to R 2 billion per annum (previously R750 million) from the parent company to the domestic treasury management company will be allowed without prior approval provided transactions are not undertaken to avoid tax. A JSE listed company will also be able to apply to the SARB to transfer up to 25 per cent of its market capitalisation, provided the anticipated benefit to South Africa can be demonstrated.
- In the case of an unlisted entity, transfers of up to R 1 billion per annum are permitted from the parent company to the domestic treasury management company. The unlisted entity can also apply to the SARB to transfer additional amounts. These amounts may be freely deployed to fund foreign group operations;
- Domestic treasury management companies will be allowed freely to raise and deploy capital offshore, provided such funds are without recourse to South Africa. Additional domestic capital and guarantees may be allowed on request to SARB;
- Such 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
- Foreign currency accounts as well as a rand-denominated account for operational expenses may be operated.
In the case of a JSE listed entity, listing of the domestic treasury management company will be considered on application.
Whilst the Rulings issued by the SARB state that a domestic treasury management company should “hold African and offshore operations” we understand that it is not a requirement that the company must hold shares in foreign subsidiaries. Further, although the Rulings are not explicit, it is understood that funds transferred to the domestic treasury management company can be used to fund bone fide expansion abroad (e.g. to acquire shares in a foreign entity) in line with the parameters set out in the foreign direct investment allowances for South African companies.
Income tax considerations
In line with the above, certain tax concessions were also introduced in 2013 to promote the use of the domestic treasury management company regime. Essentially, a domestic treasury management company is permitted to use its functional currency, as opposed to Rand, as a starting point for currency translations for tax purposes providing relief in respect of unrealised foreign currency gains or loses.
However, interest income derived by the domestic treasury management company will continue to be subject to South African income tax. The relief is therefore limited to exchange gains and losses. It should thus be ensured that the company’s treasury operations are primarily concluded in its functional currency.
The broad idea is therefore to allow South African 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.
In the case of an offshore treasury company it is noted that such a company would typically constitute a “controlled foreign company” (“CFC”) and an amount equal to its taxable income would be allocated to and taxed in the hands of its South African shareholders unless an exemption applies, such as the exemption applicable where interest is received by one CFC from another CFC where such CFCs form part of the same “group of companies”.
An analysis of both the foreign and South African tax consequences should be undertaken when deciding whether it is more tax efficient to set up a domestic treasury management company or an offshore treasury company.