South Africa’s tax treaty with the DRC provides a new avenue for international investment

The tax treaty entered into between the Democratic Republic of Congo (DRC) and South Africa provides opportunity to promote South Africa as a hub for inward investment into the DRC. The tax treaty provides multinational companies with alternative investment opportunities in the DRC.

Until recently, the DRC had entered into only one Double Taxation Agreement (DTA) tax treaty (with
Belgium). On 18 July 2012, the DRC doubled this number when its DTA with South Africa came into effect. When a foreign company holds its DRC investment through South Africa, the treaty and South Africa’s headquarter company regime may reduce the tax cost of doing business in the DRC.

The South African Government regards the DRC as a strategic partner in the African continent. According to recent statistics issued by the Department of Trade and Industry, two-way trade between South Africa and the DRC stood at R7.8 billion in 2011 compared to R6.2 billion in 2010 and R4.8 billion in 2009.

The treaty applies to amounts paid on or after 1 January 2013 and with respect to tax years beginning on or after 1 January 2013.

The DRC’s domestic laws provide that dividends paid by resident companies to non-resident companies are subject to a 20% withholding tax (10% for mining companies). However, the treaty with South Africa will reduce the rate to 5% if the South African resident company holds at least 25% of the DRC company. In all other cases, the rate is reduced to 15%.

Dividends include income from shares, mining shares, founders’ shares or other rights, as well as
income from other corporate rights which is subject to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a  resident.

Interest arising in the DRC is subject to a 20% withholding tax rate (0% in  the mining industry under certain conditions). If the beneficial owner of the interest is a South African resident, the treaty reduces this rate to 10%. Interest includes income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits.

Royalties arising in the DRC are subject to a withholding tax at an effective rate of 14%. However, if the
beneficial owner of the royalties is a South African resident, the treaty reduces this rate to 10%. Royalties include payments received for the use of any copyright of literary, artistic or scientific work including films, tapes or discs used for radio or television broadcasting, any patent, trademark, design or model, plan, or for the use of industrial, commercial, or scientific equipment.

As is common in most agreements of this nature, the DRC/South Africa Double Tax Treaty ensures that the business profits of a South African enterprise will be subject to tax in the DRC only if the South African enterprise carries on business in the DRG through a permanent establishment. In the case of professional services rendered by an individual, the individual will be deemed to have a permanent establishment in the DRC only if he is present in the DRC for a period or periods in aggregate of more than 183 days in any 12 month period commencing or ending in a year of assessment.

Directors’ fees derived by a South African resident are an exception to this provision as the tax treaty grants taxing rights to the DRC for income earned in one’s capacity as a member  of the board of directors of a company resident in DRC.

On 24 September 2012, the DRC amended its tax legislation. The corporate income tax rate applied to
a DRC company, subsidiary or branch or a foreign company has been reduced to 35%. This is applicable to the 2013 fiscal year in the DRC. Furthermore, a new withholding tax has been introduced on service fees. The DTA is based on the Organisation for Economic Co-operation and Development (OECD) Model Convention. On this basis one should consider that South African residents should be taxable on such fees only if they fall within the ambit of business profits and are attributable to a permanent establishment in the DRC. However the application of Article 20.3 of the DTA leaves room for doubt. If the service fees are treated by the DRC as income subject to Article 20, the service fees will be subject to the DRC withholding tax.

South African companies that qualify as a headquarter company enjoy treaty benefits, but the dividends,
interest and (in future) royalties paid by such a company will enjoy relief from the withholding regime that will be fully operational from 1 March 2014. For this reason, multinational companies with existing and planned investments in the DRC may wish to consider the potential benefits of holding their investments through South Africa.

Author: PwC (PwC, Synopsis, Tax Today, May 2013)