Setting your business up for expansion

When businesses expand, they often look beyond national borders. With such an expansion, there are several added advantages for establishing a holding company, which then owns the various group operating companies in different jurisdictions. Various aspects contribute to considering an ideal holding company location, and a brief discussion is outlined below.

Political stability
Political instability and constant political upheavals cause uncertainty within the jurisdiction and foreign countries that do business with that jurisdiction.

Ease of doing business
This does not specifically refer to actual business done by the company but relates to the associated (support) industries that one may encounter within the jurisdiction. Reputable banking institutions are required for transferring funds and investing capital; and competent service providers who know the industries, laws and practices.

Robust legislative framework
Laws and legal frameworks that allow the broader business plan and its associated structures to function are non-negotiables and the protection of property rights is essential. Beyond this, it is commonplace for many countries to implement (especially tax) laws to the detriment of citizens and resident retroactively. These jurisdictions could be harmful to an estate planning structure.

Ease of doing business with other jurisdictions
Considerations relating to tax- and trade treaty networks, business councils/chambers and foreign-owned company presence is important to ensure that a jurisdiction does not become isolated, and ceases to serve its intended purpose.

Structures and mechanisms to remove risk from the client
Some jurisdictions cater for structures such as trusts or foundations that may remove the inheritance- or capital gains tax burden or forced heirship rules from the business owner’s estate. This minimises tax liability on death, allows for the smooth succession of high-value assets, and ensures that management and control of assets remain central with professionals. Essential estate planning goes hand-in-hand with global expansion.

Substance requirements (laws)
As a requirement of meeting the “compliant” status that is issued by the OECD, jurisdictions have been required to reform and implement “substance laws”. To lay these out shortly, they are essentially a set of laws that ensure that no fraudulent money laundering activities take place through fictitious entities with fictitious members. In terms hereof, any structures that are established are required to meet the substance requirements as follows:

Carry out core income-generating activities in the jurisdiction (depending on which jurisdiction is chosen);
Ensuring that a ‘warm body’ is available to manage structures and that the “post box” effect is eliminated; and
At least a level of expenditure that is proportionate with the investing and management activities of the entity.

Advantageous tax and exchange control laws
A consideration in global expansion is choosing a tax-efficient jurisdiction that has easy-to-comply-with or no exchange control restrictions. These allow for ease in capital deployment, and benefits the owners when profits are derived. Taking advantage of tax-friendly countries to serve global expansion should, however, not be the only consideration.

The above provides only some of the primary considerations for a choice of headquarter location when expanding. It may also be that as part of an expansion, one jurisdiction is more suitable from an estate planning perspective, and another for business purposes, which tends to complicate matters. What is important, though, is a robust framework for the choice of jurisdiction, to ensure that ease of business and expansion efficiency may be possible.

SARS helping businesses lessen the tax load

The last few months have been extremely tough for small business owners as a result of the global COVID-19 pandemic, and various lockdown measures that have created a challenging trading environment. The South African Revenue Service (“SARS”) has identified this hardship, and as a result, the National Treasury recently tabled the Disaster Management Tax Relief Administration Bill, which would assist micro, small and medium businesses should they seek to utilise this relief.

Although many of these measures have applied in practise, they have not officially been included in a tax bill and will soon have the necessary legislative effect (once promulgated).

To be a candidate to claim relief, a small business must:

  • Have a tax compliant status;
  • Conduct a trade during the year of assessment ending after 1 April 2020 to 31 March 2021, and earn gross income of R100 million or less; and
  • Not more than 20% in aggregate of the gross income can come from interest, dividends, royalties, rental payments, annuities, or remuneration received from an employer (generally aimed at passive income).

The relief offered by the Bill covers the following:

Pay-As-You-Earn (“PAYE”) deferral

Employers can claim a four-month deferral relief from 1 April 2020. To claim, two options are available;

  • Employers are still required to submit full PAYE returns (EMP201). SARS will issue a statement of account reflecting the relief; or
  • Calculate the total payable at 65% of the total.

After 7 August 2020, SARS will determine an amount payable in six equal payments to cover the outstanding (deferred) liability.

Employment Tax Incentive (“ETI”)

This programme runs from April 2020 to July 2020 and is claimed in the monthly EMP201. To claim, an employer is required to calculate the total ETI and 65% of the PAYE. The employer then utilises the lessor of the total ETI, or 65% of the PAYE liability to claim relief.

Provisional tax deferral

The period runs from 1 April 2020 to 30 September 2020 for the first payment period, and from 1 April 2020 to 31 March 2021 for the second provisional payment period. The gist of this assistance is that companies are required to pay only 15% of the first provisional payments and 65% (after deducting the first 15%) of the second payment. The remaining 35% will be payable on the third provisional payment date to avoid interest charges on late payment.

Accelerated value-added tax (“VAT”) refunds

From 1 May 2020, VAT vendors can file monthly VAT claims as opposed to every 2 months. Category A vendors can claim this relief from April 2020 to July 2020, and vendors registered under category B from May 2020 to August 2020.

The above relief measures contained in the Disaster Management Tax Relief Administration Bill are bound to bring some welcome cash flow and liquidity relief to struggling SMMEs in South Africa.

For more information on these relief measures, visit www.sars.gov.za/media/pages/tax-relief-measures.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Clearing loan accounts through dividends

In terms of the Tax Administration Act, the South African Revenue Service (“SARS”) can issue, in response to an application, Binding Private Rulings (“BPR”) and clarifies how the Commissioner would interpret and apply the provisions of the tax laws relating to a specific proposed transaction.

BPR 346 determines the income tax and dividends tax consequences of the redemption of intra-group loans by way of set-off against dividends payable. The ruling was made in connection with the interpretation and application of section 19 and section 64F(1)(a) of the Income Tax Act, dealing with debt waivers and dividends tax.

The below-mentioned companies belong to the same “group of companies” and are the parties to the ruling:

  • The applicant: A private company and a tax resident in South Africa;
  • Co-applicant A: A private company and a tax resident in South Africa;
  • Co-applicant B: A private company and a tax resident in South Africa; and
  • Co-applicant C: A private company and a tax resident in South Africa.

Description of the proposed transaction 

The applicant is an investment holding company that owns all the equity shares in co-applicant A and co-applicant B. Co-applicant B holds 100% of the share capital of co-applicant C.  The following loan accounts exist between the applicants –

  • Loan 1 receivable by co-applicant A from the applicant;
  • Loan 2 receivable by co-applicant A from co-applicant B;
  • Loan 3 receivable by co-applicant C from the applicant;
  • Loan 4 receivable by co-applicant C from co-applicant A; and
  • Loan 5 receivable by co-applicant B from the applicant.

The loans had their origin in ongoing advances between the group companies to one another to fund day-to-day operations. None of the funds were used to fund the acquisition of assets. The group wishes to eliminate the intra-group loans as far as possible.

The steps to implement the proposed transactions are as follows:

Step 1

  • Co-applicant A will declare a dividend to the applicant equal to the balance of loan 1, which will be left outstanding on the loan account.
  • Co-applicant A and the applicant will agree to set off the dividend payable by co-applicant A against loan 1 payable by the applicant to co-applicant A, resulting in the full settlement of both loans.

Step 2

  • Co-applicant C will declare a dividend to co-applicant B equal to the balance owing in respect of loan 3, which will be left outstanding on the loan account. Co-applicant C will cede loan 3 to co-applicant B in settlement of the dividend.
  • Co-applicant B will cede loan 3 and loan 5 to co-applicant A in part payment of loan 2.

Step 3 

  • Co-applicant C will declare a dividend to co-applicant B for an amount equal to the balance in respect of loan 4, which will be left outstanding on loan account. Co-applicant C will cede loan 4 to co-applicant B in settlement of the dividend.
  • Loan 2 and loan 4 will be set-off against each other. The net balance will be an amount owed by co-applicant B to co-applicant A in respect of loan 2.

Step 4 

  • Co-applicant A will declare a dividend to the applicant for an amount equal to the sum of the balances of loan 2, 3 and 5, which will be left outstanding on loan account.
  • Loan 3 and loan 5 will be set off against the dividend.
  • Co-applicant A will cede loan 2 to the applicant in settlement of the dividend.

Ruling by SARS 

The ruling made by SARS is as follows:

  1. No dividends tax will apply to the declaration of dividends in the various steps.
  2. The redemptions of loans 1, 3 and 5 by way of the set-off arrangements in step 1 and step 4 will, in each instance, constitute a “concession or compromise”. However, the set-off arrangements will in none of those cases amount to a “debt benefit” – therefore, none of the “debt waiver” provisions applies.

SARS further held that the ruling did not cover any general or special anti-avoidance provisions in the Act, which has been a condition on which they have recently issued rulings.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The de-merging of companies amid unbundling

Introduction

In terms of the Tax Administration Act, the South African Revenue Service (“SARS”) can issue Binding Class Rulings (“BCR”) in response to an application by a class or group of persons and clarifies how the Commissioner would interpret and apply the provisions of the tax laws relating to a specific proposed transaction. BCR70 deals with the tax consequences of recipients of listed shares in a company after an unbundling of its shares from the holding company. Although the ruling only applies to members of a specific class, it is relevant to take note thereof, since it offers guidance on how SARS interprets relevant provisions of tax acts. The ruling refers to the interpretation and application of section 46 of the Income Tax Act (the ITA) and section 8(1)(a)(iv) of the Securities Transfer Tax Act (the STT Act).

Class

The class members to which this ruling applies are all resident and non-resident shareholders of listed shares in the applicant company and reflected as such on the applicant’s securities register on the last day to trade.

Parties to the proposed transaction

In the current instance, the applicant was a resident listed company and an entity referred to as “ListCo” was a resident company and a wholly-owned subsidiary of the applicant, which is to be listed in due course.

Description of the proposed transaction

The applicant company comprises of three main business units. The purpose of the proposed transaction is to demerge one of these business units and separately list the unit on a recognised stock exchange. ListCo will have a primary listing on the JSE, whilst the listing of the applicant will be retained (i.e. the applicant will not de-list). To implement the transaction, the applicant will take several transaction steps, being the following:

  • The applicant establishes ListCo;
  • The applicant will distribute all its shares in ListCo to its shareholders (class members) as a distribution in specie as contemplated in section 46 of the ITA. This will happen after market closure on the last day to trade;
  • ListCo will be admitted to trade on the JSE and will make an initial public offering of shares on the listing date; and
  • The applicant will distribute its shares in ListCo to the class members who will be recorded and finalised on the record date.

Ruling

Although not a comprehensive list, the following are some of the more pertinent rulings that SARS made, which will bind the class members:

  • The distribution of the ListCo shares to the class members will constitute an “unbundling transaction”, as defined in the ITA.
  • Each class member must reduce the expenditure and market value attributable to its applicant shares by the amount so allocated to the ListCo shares. In other words, a proportionate allocation of costs needs to be made from the base cost of the Class’s share previously held.
  • No dividends tax will apply to the transaction.
  • The transfer of the ListCo shares to the class members or realisation agent will be exempt from STT under section 8(1)(a)(iv) of the STT Act.

Although taxpayers might not be members of the relevant class, it is always insightful to consider SARS’s interpretation of tax acts, as it could similarly apply in their circumstances.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Working from home can work for you

As the old adage goes, change is as good as a holiday. But the way that the novel coronavirus has shaken up the world we live in, has, to the contrary, been extremely disruptive and stress-inducing. For many people, the disruption has come in the form of shifting from the traditional office space to working from home.

People who had been working flexi-hours or may have been self-employed and working from a home office might be very familiar with claiming business-related expenses from their personal income tax as a tax-deductible expense. For the everyday worker, though, the shift to working from home may incur costs that would not have been necessary had they been able to safely work from their traditional office. If the COVID-19 pandemic has meant that you need to work from home, you may be able to claim some of your business expenses back when submitting your next tax return.

What then are the prerequisites for filing a tax return that includes your home office expenses as a tax-deductible expense?

  • You need to have an agreement with your employer that allows you to work from home. Especially since working from home has been necessitated during the pandemic, some of these agreements may have been assumed without due communication. To cover your bases, have the agreement made in writing.
  • You need to spend at least 50% of your working hours working from your home office. Since the tax year runs from the start of March through to the end of February the following year, it means that 50% of your time spent working in the tax year must be from your home office. Generally speaking, the necessitated use of the home for work purposes during the COVID-19 pandemic makes this somewhat tricky because it would require you to work 6 months of the tax year in the home office if you were to make a full return to your business office’s premises later (based on maintaining the same hours). For instance, working 3 months from home and 9 from the office will disqualify you from claiming your home-office as a tax-deductible expense, as you would only have spent about 25% of your working hours from your home office.
  • Home office expenses are only tax-deductible if you have an area set aside exclusively for work purposes. Hammering away at your keyboard from your living room sofa, unfortunately, does not qualify you for a home office tax deduction. Makeshift offices or rooms that have a purpose apart from dedicated work do not qualify.
  • Additionally, your home office specifically has to be fitted out for the purpose of your work. If there are specific tools or equipment that your work requires, your home office has to be set up with these readily available.

What can you deduct as a business expense?

For anyone who earns more than 50% of their income from a traditional salary, pro-rated tax deductions can be made as it relates to interest on your home loan or rent, as well as the repair and maintenance of your home. That is to say that the tax-deduction is directly related to the portion of your property that is dedicated as a home office and is calculated as a percentage of the whole.

For anyone who earns more than 50% of their income from commission (or income other than that which is earned from a salary) can claim for the same expenses as mentioned above, but can also claim business-related expenses from commission-based activity.

What if you don’t qualify for a tax return on business expenses?

For those who do not qualify for a tax deduction on their home office space, it shouldn’t necessarily mean that you need to take on all of the burdens of your business-related expenses yourself. Where previously you could rely on company internet, for instance, now you would need to use more data per month and incur an additional cost.

The best solution in this regard would be to see if an agreement can be made with your employer to carry some of the costs by reimbursing you for the personal loss suffered. If done amicably, it could only serve to strengthen the relationship with your employer.
While the change brought about from the COVID-19 virus may not be as good as a holiday, it may well be able to pay for one once you are recompensed for your tax-deductible expenses.

Reference list

  • https://www.thesait.org.za/news/460951/Deducting-your-home-office-expenditure.htm
  • https://www.businessinsider.co.za/how-to-claim-the-cost-of-setting-up-a-home-office-against-tax-in-south-africa-2020-5
  • https://www.news24.com/fin24/money/tax/lesser-known-tax-incentives-20180524

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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