Domestic treasury management companies – alignment of tax and excon provisions

When the DTMC regime came into effect on 27 February 2013, a DTMC was defined in s1 of the IT Act as a company that:

• is incorporated or deemed to be incorporated in South Africa;
• has its place of effective management in South Africa; and
• is not subject to exchange control restrictions by virtue of being registered with the FSD of the SARB.

A number of tax benefits apply to a DTMC, including the following:

• DTMCs may use their functional currency as a starting point for currency translations for tax purposes, as opposed to rands, providing relief in respect of unrealised foreign currency gains or losses. This dispensation applies to taxable income, monetary items and capital gains items; and
• the local currency of any DTMC in respect of an exchange item, not attributable to a permanent establishment outside South Africa, will be the functional currency of that DTMC in terms of s24I. Accordingly, no gains or losses should arise in respect of, inter alia, any unit of currency, any amount owing by or to that company in respect of a debt or owing by or to that company in respect of a forward exchange contract denominated in the functional currency of such company

The Budget explains that in 2017, the IT Act was amended to remove the requirement that the company be incorporated in South Africa. However, the SARB’s definition in Circular 5/2013 (also dealt with in Circular 7/2013) still includes the requirement that the company must be incorporated in South Africa. As a result, the 2017 changes are not aligned with the SARB’s requirements. It is proposed that the definition of “domestic treasury management company” is changed in s1 of the IT Act to reintroduce the incorporation requirement.

As a result of the above and pursuant to the proposed amendment, in order for a company to qualify as a DTMC, it will once again have to be incorporated in South Africa and be effectively managed from South Africa.