With a world-class business infrastructure, a robust regulatory framework and double taxation agreements with many countries, South Africa has earned its reputation as the powerhouse of Africa.
South Africa has made steady progress in reducing complexity in the past years, dropping down the rankings from 23rd most complex globally in our 2018 Global Business Complexity Index (GBCI) to 47th in 2021.
While this progress is impressive, South Africa can still present a challenging economic environment, with several contributing factors that include government finances, policy issues, business conditions and the country's response to the pandemic.
Why invest and do business in South Africa?
As the economic hub of Africa, South Africa is home to some of the world's biggest corporations and boasts a diverse business landscape. A world-class business infrastructure supports a robust regulatory framework governing investment in all sectors of the economy.
Government policy has focused on promoting growth in four sectors:
- Infrastructure – unparalleled, an excellent springboard into Africa
- Tourism – hit hard by the pandemic
- Manufacturing – export driven
- Agriculture – high employment potential
South Africa boasts advanced financial centres and banking platforms, from a technological perspective. As a hub, Johannesburg is a natural choice for investors and companies looking to enter multiple countries in Africa.
Incorporating in South Africa – key considerations
During the pandemic, while many jurisdictions have become more complex for incorporating and conducting business affairs, South Africa's digitalisation efforts have simplified certain processes, resulting in significantly shorter times required for incorporation. Here we take a closer look at some of the most important things to bear in mind when setting up in South Africa.
1. Legal structures
The following legal structures are available in South Africa: private company, public company, personal liability company, partnership, external company (branch office) and non-profit.
While several structures are available, the most common question when incorporating in South Africa is: should a private company or a branch office be set up?
Private companies have additional requirements in South Africa, whereas a branch office may offer a more simplified way of doing business. However, the tax implications of a branch are more significant when compared to a private company.
There are a few key differences in the requirements for setting up a private company versus a branch company, some of which are highlighted below.
2. Memorandum of Incorporation (MOI)
The Memorandum of Incorporation, or MOI, sets out the guidelines of a business in compliance with the Companies Act of South Africa. According to the country's company registrar, the Companies and Intellectual Property Commission (CIPC), the MOI provides for default company rules and alterable provisions, which companies may accept or alter as they wish, as long as they remain in line with the Companies Act.
A standard MOI can be used, or a company's legal counsel can prepare a more customised version to meet its business needs. All companies require a local address for registration.
CIPC has made significant improvements to its systems, allowing for the incorporation of a private company typically within 21 days. Director updates and address changes can occur almost instantaneously. In addition, upon incorporation, registration for income tax happens immediately.
As for branch companies, the incorporation documentation/ constitution/memorandum and articles of association/memorandum of incorporation of the foreign parent company must be registered. If these are not available in English, sworn translated versions are required. The company is also obliged to appoint a local representative who is a South African resident. It is mandatory to register all active directors of the parent company as active directors of the branch company in South Africa.
3. Annual return
CIPC requires that all companies lodge their annual return within 30 business days from the anniversary of the incorporation date of the company. The submission of an annual financial statement (AFS) is no longer compulsory for all companies when lodging annual returns, except those that are subject to a mandatory audit. In this case, the company's latest approved AFS must be submitted to CIPC in iXBRL format.
4. iXBRL reporting
CIPC mandated iXBRL, a digital reporting system, for all qualifying entities in July 2018 to reduce the burden of multiple submissions to different regulators. iXBRL stands for Inline eXtensible Business Reporting Language; this format allows for electronic communication of business information to CIPC when submitting a company's annual return, and also provides faster processing in the preparation, analysis and communication of AFSs.
5. Directorship
A private company must have at least one director. For both private companies and branch offices, directors are not required to be residents of South Africa. They do however need to meet the qualification criteria, as required under the Companies Act. However, delays may occur when registering foreign directors, as original versions of certain documents, such as passports, must be apostilled, notarised or certified as a true copy of the original.
6. Public officer requirement
A public officer is your tax representative and must be resident in South Africa. The public officer will serve as the liaison between your business and the South African Revenue Service (SARS). Having a fiduciary role, a public officer must be registered with SARS and enroll for an eFiling account. The public officer is responsible for all the tax returns and filings that are required for the company.
7. Opening a bank account
A company's bank account must be opened with a South African bank in order to trade in the country. Previously, this requirement presented challenges and resulted in delays if a company's director was located overseas, as original versions of signed documents were required to open a business bank account. However, banks have begun allowing for electronically signed or scanned versions of original documents during the Covid pandemic. It is unclear if this will continue to be the case post-pandemic.
8. Non-resident endorsement
In the event that the shareholder of a South African company is a non-resident, the share certificate that will be issued to the foreign shareholder needs to be stamped by the company's bankers as "non-resident". This may also require approval by the South African Reserve Bank. This requirement is in the terms of the South African Exchange Control Regulations and plays a vital role when trying to extract funds or dividends from the South African entity to the offshore non-resident shareholder.
9. Industry body certifications
Similarly, it's important to seek legal guidance when evaluating industry body requirements, which depend on what areas the business entails. For example, a property company and a trading company will have a different set of rules that apply to each.
10. B-BBEE compliance
South Africa's Broad-Based Black Economic Empowerment, or B-BBEE, is a statutory requirement for both the public and private sectors. The policy is intended to redress the imbalances created by apartheid. The B-BBEE Act of 2002 was enacted by parliament to promote black economic empowerment through equity ownership, management control, employment, skills development, enterprise development and support, and preferential procurement.
The legislation has changed over the years, and foreign companies wishing to operate in South Africa must be aware of the latest developments in order to maintain compliance, as well as ensuring that any of their suppliers are also compliant.
TMF South Africa
Whether you want to set up in South Africa or to streamline your existing South African operations, talk to us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
