How to establish a business enterprise in South Africa: Ten things to know

A business presence can be established in South Africa, one can either incorporate a South African entity or incorporate a foreign offshore entity, as a so called ‘branch’ or ‘external company’.

02 I Applicable legislation

Both forms of business enterprise are regulated by the Companies Act 2008. However, in the case of a branch, the ongoing compliance obligations are less onerous. The Act recognizes that an entity of that nature is governed primarily by the law of its original place of incorporation.

03 I Establishing a South African branch

The branch route entails the filing of the foreign entity’s founding documents at the South African Companies and Intellectual Property Commission (CIPC), together with a number of supporting documents. The powers of that entity are governed by its original incorporation documents, and its board of directors is the offshore board of directors. No ‘new’ entity would be created in South Africa and the foreign entity would be exposed to any debts or liabilities that are incurred in South Africa. It is for this reason that many foreign entities prefer to set up a separate South African entity as instead of a South African branch (but see 05 Tax below).

04 I Incorporating a separate South African entity

A separate South African company can be established by incorporating a new private company, or purchasing an existing shelf company that has already been incorporated. From a timing perspective, it is generally quicker to incorporate a new private company, which is tailored to your needs.

05 I Tax

Both a South African subsidiary and a branch are currently taxed at 28% on taxable income. Dividend tax at the rate of 20% would be payable on any dividends declared and paid by a South African subsidiary to a foreign shareholder, subject to a reduced rate in terms of any application of a double tax agreement; which usually reduces the rate to 5%. There is no branch remittance tax. The dividend tax benefit would need to be weighed up against the disadvantage that the foreign entity would be exposed to any debts or liabilities that are incurred in South Africa. The capital gains tax rate applicable to a South African subsidiary and a branch is 22.4%. Goods and services supplied in South Africa may be subject to VAT at a rate of 15%.

South Africa’s exchange control regulations limit the free-flow of capital (including intellectual property) in and out of the country. For instance, non-residents who wish to invest in South Africa by means of loan funding need to obtain a prior approval from the Financial Surveillance Department of the Reserve Bank, particularly with reference to intended repayment dates and interest rates. South Africa is in the process of implementing a new capital flow management framework to allow all cross-border transactions, except for those that are subject to the listed capital flow management measures or those that pose a high risk in respect of illegitimate cross border financial flows.

07 I Securities exchange

The South African Securities Exchange is known as the JSE Limited, and is situated in Sandton, Johannesburg. All public companies listed on the main board of the exchange are subject to the JSE Listings Requirements. A small to medium public company in its growth phase which does not meet the listings criteria for the main board of the JSE Limited, may apply to list on the alternative exchange, provided that it meets the Alt-X listings criteria.

08 I Licence requirements

Where a foreign investor is seeking to conduct business within South Africa, a licence or other form of authorisation may be required. For example, activities impacting the environment, construction, electronic communications, energy, financial services, mining, real estate and trade and commerce may require licensing.

09 I Black economic empowerment

Given the history of South Africa, legislation has been put in place to promote the achievement of the constitutional right to equality and to increase broad-based and effective participation by black people in the South African economy. A number of transformation charters have been published regulating broad based black economic empowerment in specific sectors such as the financial, mining, construction, property, agricultural, media, advertising and communication sectors.

10 I Labour

South African labour legislation regulates relationships between employers, employees and trade unions. The primary objectives of the various pieces of legislation is to realise the constitutional right to fair labour practices, promote collective bargaining and labour peace, encourage democratisation of the workplace and advance economic development.