The South African Domestic Treasury Management Company regime – hidden weapon or damp squib?

We all know about the South African (“SA”) Headquarter Company (HQC) regime (see “Is it time to revisit the South African Headquarter Company regime as a gateway to doing business in Africa?”) now it’s time to consider the SA Domestic Treasury Management Company (“DTMC”) and whether it is actually helpful for SA businesses wanting to operate and invest internationally.

What is a DTMC? 

The SA government first introduced the establishment of the DTMC regime in 2013 and inserted a definition in section 1 of the South African Income Tax Act. This sets out the requirements that need to be met to qualify as a ‘domestic treasury management company’. In simple terms a DTMC is:

• A company that is tax resident in SA; and
• is not subject to exchange control restrictions by virtue of being registered with the South African Reserve Bank (“SARB”).

Why? 

For tax purposes, domestic companies are generally required to use the Rand as a functional currency (i.e. the currency of the primary economic environment in which business operations are conducted) and which means that translations to measure foreign exchange gains and losses are calculated by reference to the Rand. Then came along the HQC regime which allowed the HQC to operate in a foreign currency as its functional currency and therefore any foreign exchange fluctuations pertaining to the Rand would not arise within the HQC.

However, with the HQC’s very specific requirements and qualifying criteria, an HQC is normally only suitable in very specific circumstances, in particular where the HQC is predominantly held by non-SA resident shareholders.

Therefore, like any other SA taxpayers, previously treasury holding management companies which did not meet the requirements of an HQC were required to operate on a Rand functional currency.

The introduction of the DTMC regime specifically allowed treasury management companies to choose their own functional currency and in essence allowed for SA companies to incorporate a holding company and hold their African and offshore operations without the SA holding company being subject to exchange control restrictions.

Is that the only benefit? 

In a nutshell, yes. The benefits of a DTMC are almost solely focused around a relaxation of the SA exchange control rules, particularly as they relate to a treasury or cash pooling function. There are no SA tax benefits to the DTMC regime, other than the fact that the functional currency can be chosen, rather than be the Rand (and therefore exchange gains and losses in relation to the Rand are not taken into account for SA tax purposes).

The main benefit of the DTMC regime from an exchange control perspective has been the ZAR3 billion (for listed companies, ZAR2 billion for unlisted companies) which the SARB allows to be transferred to a DTMC, and correspondingly for it to invest offshore annually. This limit has now been increased to ZAR 5bn for listed companies as announced in last week’s budget.

The SARB currently allows for bona fide offshore foreign direct investment up to ZAR1bn (with the relevant documentation) for all SARB corporate residents, and therefore, depending on the amounts of the proposed offshore investment, this is not a benefit exclusively for DTMC’s. In addition, like any offshore investment, application for and compliance with the DTMC annual requirements may be onerous.

How are DTMC’s taxed? 

As mentioned above, a DTMC would not have specific SA tax benefits. The following table summarises the taxation of DTMC’s:

So when would a DTMC be beneficial?

A DTMC may be worth considering where a group requires a centralised treasury operation but, where a foreign treasury company is used, the foreign treasury company would be caught by the SA-controlled foreign company (CFC) rules.

Currently, the SA CFC rules require the income earned from a CFC to be imputed to its immediate SA parent company where that CFC conducts treasury operations, regardless of whether the foreign business establishment exemption would have applied. Therefore, any treasury company operations which are conducted by a foreign subsidiary (which qualifies as a CFC) would be taxable in SA in any event.

In addition, in many cases for foreign treasury companies of SA headquartered groups, at the very least the initial funding for that treasury company would be required to be transferred from SA. This would then need SARB approval. Annual SARB approvals would be needed for any additional funding or transfers made to the foreign treasury company.

A DTMC would eliminate the additional compliance burden of complying with the CFC rules and regulations (as well as the local tax compliance regulations in the treasury company’s country of residence). A DTMC would also provide a blanket SARB approval for the first ZAR R5 billion for listed entities which would provide relief for the often onerous and time-consuming SARB approval process.

So the answer to our big question on whether the South African Domestic Treasury Management Company holds the key to the ‘Offshore and African Gateway’? Well, the answer to that depends entirely on the shape of the keyhole…If the Group’s main concern is foreign exchange fluctuations and/or onerous SARB administration then maybe. However, if not the DTMC may not be all that grand.

Contact us to discuss if this could be relevant for your business.