SciELO - Scientific Electronic Library Online

vol.45 issue1The application of section 85 of the National Credit Act in an application for summary judgmentThe institutionalisation of community service and community service learning at South African tertiary institutions: With specific reference to the role of university law clinics author indexsubject indexarticles search
Home Pagealphabetic serial listing  

Services on Demand



Related links

  • On index processCited by Google
  • On index processSimilars in Google


De Jure

On-line version ISSN 2225-7160
Print version ISSN 1466-3597

De Jure (Pretoria) vol.45 n.1 Pretoria  2012




Tax characteristics of an ideal holding company location


Belastingeienskappe van 'n ideale ligging vir 'n houermaatskappy



Thabo Legwaila

Bluris (Venda) LLB LLM (Wits) PGDip Tax Law LLM (UCT) LLD (Pret) Extraordinary Lecturer, University of Pretoria




Die Suid-Afrikaanse regering het in 2008 aangekondig dat hulle van voorneme is om Suid-Afrika te bevorder as 'n gepaste maatskappyjurisdiksie vir beleggings in Afrika in die algemeen en sub-Sahara Afrika in die besonder. Ten einde hierdie doel te bereik behoort die regulatoriese-, ekonomiese- en juridiese-raamwerke geskik te wees vir internasionale belegging. Een van die ekonomiese en juridiese aspekte wat tans hersien word, is die belasting-stelsel. Die belastingstelsel mag sommige eienskappe bevat wat nadelig is vir internasionale houermaatskappye en ander wat bevorderlik is vir sulke maatskappye. Hierdie artikel ontleed die belastingeienskappe van 'n ideale houermaatskappybedeling en beklemtoon die spesifieke elemente tot die mate wat dit houermaatskappye beïnvloed en wat sal verseker dat Suid Afrika 'n ideale ligging vir houermaatskappye word. Hierdie is hoofsaaklik 'n gunstige kapitaalwinsbelastingbedeling, lae inkomstebelasting, geen of lae belasting op dividende, eensydige vermyding van dubbelbelasting, 'n gunstige belastingverdrag netwerk, die afwesigheid van beheerde buitelandse maatskappy wetgewing en 'n liberale dun kapitalisasie- en oordragprys bedeling. Sekere belasting eienskappe soos 'n eensydige vermyding van dubbelbelasting in die vorm van 'n korting vir buitelandse belasting betaal, deelnemende vrystelling en 'n oorvloed van dubbelbelasting verdrae trek beleggings suksesvol aan in die vorm van houermaatskappye na 'n land met sulke eienskappe. In teenstelling hiermee het eienskappe soos buitelandse beheerde maatskappy wetgewing en streng oordragprys bepalings en streng dun kapitalisasie bepalings die teenoorgestelde uitwerking. Selfs in gevalle waar die bepalings nie op houermaatskappye van toepassing is nie mag die blote teenwoordigheid van bogenoemde bepalings steeds buitelandse beleggers afskrik.



“Full text available only in PDF format”


* This article is an adapted version of part of the research done and submitted by the author in part fulfillment of the requirements for the degree LLD at the University of Pretoria.
1 National Treasury Budget Review (2010) 78-79.
2 National Treasury Budget Review 78-79.
3 See National Treasury Budget Review 78-79. See also Lermer "2010 Budget Attracts SA Based Headquarter Companies" Moneyweb available at (accessed 2010-04-01).
4 Legwaila "Intermediary Holding Companies and Group Taxation" 2010 De Jure 308 313-314.         [ Links ]
5 See Legwaila 2010 De Jure 308 313-315.
6 See Easson Tax Incentives for Foreign Direct Investment (2004) 17.
7 See Udal & Cinnamon "How to select a Jurisdiction for Your Holding Company" 2004 International Tax Review 18 available at http://proquest. = 789908371&Fmt = 3&clientId = 27625&RQT = 309 &VName=PQD (accessed 2010-05-19).
8 Olivier & Honiball International Tax - A South African Perspective (2008) 304.
9 See further on the factors that make a jurisdiction suitable for investment Cinnamon "Tasty Regimes Tempt Holding Companies" 1999 International Tax Review 9 9-11.
10 Olivier & Honiball 305. See also Rohatgi Basic International Taxation (2002) 239; Udal & Cinnamon 18.
11 Olivier & Honiball 305.
12 See Cussons & Bojkovic "Where do I hold my company?" 1998 Accountancy 123 124-125.
13 See further on a summary of the essential characteristics, Nethierlands: Dutch Holding Companies, on (accessed 2010-05-21).
14 See Burns and Krever "Taxation of Income from Business and Investment" in Tax Law Design and Drafting(ed Thuronyi) (1998) 646.
15 Ault & Arnold Comparative Income Taxation: A Structural Analysis(1997) 194.
16 Acquisition price is also referred to as "base cost", "basis", "cost price", "book value" or "cost base".
17 See par 20 Sch 8 Income Tax Act 58 of 1962. See also Burns & Krever Tax Law Design and Drafting 648.
18 Whiteman et alWhiteman on Capital Gains Tax(1980) 23.
19 Burns & Krever 647; see also Boidman & Ducharme Taxation in Canada, Implications for Foreign Investment (1985).
20 See Burns & Krever 647.
21 Burns & Krever 647.
22 Whiteman Whiteman on Capital Gains Tax (1988) 27.
23 Connected person is a defined term in the South African tax legislation (see the definition of "connected person" in s 1 Income Tax Act 58 of 1962). In other jurisdictions, reference is made to "related party" and "associated person". The definition differs from country to country and from situation to situation, mainly depending on the purpose of the definition and the context in which it is used. Generally, such definitions include blood relatives, lineal descendants and ancestors, members of the same partnership, and a company, its controlling shareholders and other companies in the same group of companies. See International Bureau of Fiscal Documentation (IbFd) International Tax Glossary (2005) definition of "connected person".
24 Burns & Krever 651.
25 Idem.
26 See IBFD International Tax Glossary definition of "roll-over relief". See also (accessed 2010-04-28).
27 Burns & Krever 652.
28 Idem.
29 Ibid 653-654.
30 Ibid 654.
31 See Whiteman 27.
32 In terms of par 10 Sch 8 Income Tax Act 58 of 1962.
33 Idem.
34 See s 26A read with par 3 Sch 8 Income Tax Act 58 of 1962.
35 See definition of "disposal" in par 1 Sch 8 read with par 11 Sch 8 Income Tax Act 58 of 1962.
36 See par 12 Sch 8 Income Tax Act 58 of 1962.
37 See par 10 Sch 8 Income Tax Act 58 of 1962.
38 Lambooij & Peelen "The Netherlands Holding Company - Past and Present" 2006 Bulletin for International Taxation 335 par 4.1;         [ Links ] Ernst & Young The 2011 Worldwide Corporate Tax Guide (2011) 769.
39 Ernst & Young 1178-1179.
40 Ernst & Young 1227.
41 Organisation for Economic Co-operation and Development Taxation and Electronic Commerce: Implementing the Ottawa Taxation Framework (2001) 144.
42 See the discussion in paragraph 4.5 below.
43 Incentives can also be special-purpose based such as those dedicated to famine relief, infrastructure development, employment creation, technology transfer and export promotion.
44 Ernst & Young 1225.
45 Ibid 50.
46 Ibid 1177.
47 Ibid 197.
48 Ibid 133.
49 Baker Dividend and Dividend Policy (2009) 3 ;
50 Schreiber & Stroik All About Dividend Investing: The Easy Way To Get Started (2005) 5-12.
51 For example 2%.
52 For example 2 cents in each Rand.
53 Further on the need for impression of the country's ability to host holding companies see Legwaila "Taxation of Holding Companies in South Africa" 2011 SA Merc LJ 1.
54 See ss 64B-64R Income Tax Act 58 of 1962.
55 Canadian Master Tax Guide (2008) par 6030; Ernst & Young 169.
56 See IBFD International Tax Glossary definition of "withholding tax".
57 Idem.
58 See Olivier & Honiball 359-361.
59 Idem.
60 The tax is levied in terms of s 64B Income Tax Act 58 of 1962.
61 S 64B(2) Income Tax Act 58 of 1962.
62 The tax is levied in terms of s 64B-64R Income Tax Act 58 of 1962.
63 See Ernst & Young 1225.
64 Ibid 767.
65 See s 10(10(k)(ii) Income Tax Act 58 of 1962.
66 See Udal & Cinnamon 21.
67 Loncarevic Tax Treaty Policy and Development (2005) 19. See Vogel Klaus Vogel on Double Taxation Conventions (1997) 1130. See also Ault & Arnold 385-403.
68 Loncarevic 20.
69 Transfer pricing is an area of law and economics that is concerned with ensuring that prices charged between associated enterprises for the transfer of goods and services are not used to avoid tax by shifting profits to a low tax jurisdiction. See IBFD International Tax Glossary definition of "transfer pricing". See further on transfer pricing the discussion of transfer pricing in paragraph 4 8 1 below.
70 Treaty shopping refers to a situation where a person who is not entitled to the benefits of a tax treaty makes use of another person in order to indirectly obtain treaty benefits that are not available directly. See IBFD International Tax Glossary definition of "treaty shopping".
71 Vanhaute Belgium in International Tax Planning (2008) 157.
72 A "limitation of benefits clause" is a treaty provision that limits benefits to entities that have a certain minimum level of local ownership, deny benefits to entities which benefit from a privileged tax regime or which are not subject to tax in respect of the income in question, or which pay on more than a certain proportion of the income in tax deductible form (see IBFD International Tax Glossary definition of "Limitation on benefits provision")
73 Nelson "China: How to Prepare for Implementing Rules" 2007 International Tax Review 1 (accessed 2010-06-13)
74 Such prevention of tax avoidance and evasion is achieved by the exchange of information provisions in the Double Tax Agreements. See Van Weeghel The Improper Use of Tax Treaties (1998).
75 See (accessed 2011-10-17).
76 Vogel 1174.
77 See Udal & Cinnamon 18.
78 Loncarevic 19.
79 Loncarevic 22.
80 Testimony of Barbara Angus, US Department of Treasury before the Senate Committee on Foreign Relations on Pending Income Tax Agreements, 24 September 2004, (accessed 2011-10-25).
81 S 6quat Income Tax Act 58 of 1962.
82 S 6 quat (1C) Income Tax Act 58 of 1962
83 S 6quinIncome Tax Act 58 of 1962.
84 This could be varied by the provisions of a double taxation agreement. See Vogel "Worldwide vs Source Taxation of Income - A Review and Reevaluation of Arguments (Part I)" 1998 Intertax 219. See also Forst "The Continuing Vitality of Source-Based Taxation in the Electronic Age" 1997 Tax Notes International 1455; Udal & Cinnamon 20.
85 Rohatgi 305.
86 Rohatgi 305 states: "The CFC rules counter the deferral of taxation in such companies. Under its rules, the income earned by a CFC is attributed on a current basis to the shareholders on a pro rata basis even when not distributed to them."
87 See Legwaila "Tax Reasons for Establishing a Headquarter Company" 2011 Obiter 129.
88 See Arnold & McIntyre 90.
89 France, Portugal and Denmark are examples of this. See Arnold & McIntyre 90.
90 In New Zealand, market value circumstance is heavily relied on where the shareholder interests are to be determined. Market value circumstance exists where a person's voting interest does not accurately reflect the shareholder's economic interest and the shareholder's percentage ownership is determined by reference to both voting interests and the market value interests held in the company. It takes into account the existence of debentures, shares, options and other arrangements which may affect the balance of interests within the company to such an extent that a simple examination of voting power may be misleading. Lindsay New Zealand Master Tax Guide (2008) par 16:170.
91 In France the percentage holding required is 50%.
92 The required percentage holding in Portugal is 21.5% and in Denmark is 25% (see Ernst & Young 276, 900).
93 Where the holding requirement refers to connected or related persons the required holding per person is generally low.
94 For example, Australia (s 340 Income Tax Assessment Act 1936), Canada (s 112 Income Tax Act) and New Zealand (s EX1(1) New Zealand Income Tax Act 2004) require that for a foreign corporation to be a controlled foreign corporation five or fewer residents should control such a corporation.
95 Arnold & McIntyre 96.
96 There are, however, exceptions to the general rule.
97 Arnold & McIntyre 94.
98 Idem.
99 Idem. See also IBFD International Tax Glossary definition of "base company".
100 Arnold & Mclntyre 94.
101 Idem.
102 For this provision in the South African system see proviso to s 9D(9)(b) Income Tax Act 58 of 1962.
103 Arnold & McIntyre 97.
104 See s 9D(9)(b)(iii) Income Tax Act 58 of 1962.
105 Arnold & McIntyre 96-97.
106 See Olivier & Honiball at 373-375. Also see Legwaila 'The Business Establishment Exemption' December 2004 De Rebus42 42-43.
107 Arnold & McIntyre 97.
108 See s 9D Income Tax Act 58 of 1962.
109 S 9D(2) Income Tax Act 58 of 1962.
110 See Legwaila 2010 De Jure308 314-315.
111 Legwaila 2010 De Jure308 313-315.
112 Vann "International Aspects of Income Tax" in Tax Law Design and Drafting (ed Thuronyi) (1998) 781.         [ Links ] In some countries, for example the United Kingdom, transfer pricing rules apply even to transactions entered into between related parties within the domestic sphere. This application is not adopted by many countries due to the fact that there would not be any depletion of the tax base, as the ultimate income would still be taxable in the particular country.
113 Vann 781.
114 See Olivier & Honiball 399.
115 Vann 781.
116 See OECD Model Tax Convention on Income and on Capital (2008) -Commentary on Art 9 Par 1.
117 Vann 781-784.
118 Vann 781.
119 The attribution applies both to enterprises and parts or divisions of those enterprises. See Hamaekers "Arm's Length - How Long?" in International and Comparative Taxation, Essays in Honour of Klaus Vogel, Series on lnternational Taxation (ed Raad) (2002) 29.
120 Rolfe International Transfer Pricing'(1998) 6-23; Arnold & Mclntyre 60.
121 Olivier & Honiball 405.
122 Hamaekers 38. Arnold and Mclntyre 61-65. The following methods are used to determine whether a price is at arm's length or not: (a) Comparable Uncontrolled Price ("CUP") Method; (b) the Resale Price Method; (c) the Cost Plus Method; (d) Profit-Split Method; and (e) Transactional Net Margin Method (TNMM).
123 See Sawyer "Advance Pricing Agreements: A Primer and Summary of Developments in Australia and New Zealand" (2004) Bulletin for lnternational Fiscal Documentation556 556-565.
124 Vann 785.
125 See Arnold & McIntyre 83.
126 Vann 785-786.
127 Arnold & McIntyre 85.
128 Among the countries using the debt-equity rules the ratios differ. The common range is between 1.5:1 and 3:1. The rules also provide for an application to the revenue authorities to allow a higher ratio. With the earnings-stripping rules, the rules are more permissive for financial institutions whose businesses consist in borrowing and lending and that typically operate at much higher debt levels than other businesses. Vann 785.
129 Arnold & McIntyre 86.
130 See Udal & Cinnamon 21.
131 See s 31 Income Tax Act 58 of 1962.
132 See s 31(4)(b) Income Tax Act 58 of 1962.
133 See s 31(4)(a) Income Tax Act 58 of 1962.
134 See (accessed 2011-11-03); Oguttu Curbing Offshore Tax Avoidance: The Case of South African Companies and Trusts(LLD dissertation 2007 UNISA) 271-273.

Creative Commons License All the contents of this journal, except where otherwise noted, is licensed under a Creative Commons Attribution License