Expanding your enterprise to a new country is an exciting undertaking, but often comes with its own set of challenges, particularly related to domestic and international tax aspects.
Foreign enterprises considering expanding into South Africa should have a clear grasp of the South African tax regime. The tax position differs depending on the business vehicle chosen by the foreign enterprise when expanding their undertaking to South Africa.
For income tax proposes, South Africa follows a residency-based tax system which tax residents (including companies) on their worldwide income while non-residents are taxed on South African sourced income.
Here is a brief outline of some of the important tax considerations for foreign companies expanding to South Africa.
Corporate Income Tax
South African resident companies are subject to 27% corporate income tax on all its income. Non-resident companies carrying on a business in South Africa are taxed on their South African sourced or deemed sourced income.
Capital Gains Tax
Capital gains tax ("CGT") arises on the disposal of certain capital assets and is included in a company's taxable income. The CGT rate for companies is calculated on 80% of the gains realised, resulting in a 21.6% effective tax rate.
Value-Added Tax (VAT)
South Africa levies Value-Added Tax (VAT) on taxable supplies at a standard rate of 15% and 0% on qualifying goods and services. However, provision is made for certain exemptions, exceptions, deductions and adjustments, resulting in certain supplies being exempt from VAT s.
Companies supplying goods or services in South Africa need to register for VAT if their annual taxable supplies exceed ZAR 1 million in any consecutive 12-month period. When a company registers for VAT, it must issue a tax invoice for all its taxable supplies and proceed declare to SARS the VAT charged (and collected). The failure to issue tax invoices and reporting requirements is a contravention of the VAT Act and an offence in terms of the Tax Administration Act, No 28 of 2011 and may result in harsh penalties.
Customs and Excise Duty
Imported and exported goods are subject to customs duty and VAT (with certain rebates and refunds where applicable). A company importing to and/or exporting goods out of South Africa is required to register with the South African Revenue Service and obtain a customs code.
For other types of hoods that are controlled and restricted, importers may need additional permits as issued by other government agencies such as:
- International Trade Administration Commission of South Africa (ITAC)
- National Regulator for Compulsory Specifications (NRCS)
- South African Council for the Non-Proliferation of Weapons of Mass Destruction (the Council)
- Department of Agriculture, Forestry and Fisheries (DAFF)
Withholding Taxes
Certain payments to non-resident companies are subject to withholding taxes in South Africa. These include:
Dividends: Dividends paid to foreign shareholders are subject to a withholding tax of 20%, unless reduced by an applicable double tax agreement (DTA).
Interest: Interest payments to non-residents are subject to a 15% withholding tax, which may also be reduced by a DTA.
Royalties: Royalties paid to non-residents are subject to a 15% withholding tax, again subject to potential reduction under a DTA.
Immovable property: A disposal of immovable property by a non-resident company are subject to a 10% withholding tax if the disposal exceeds R2million.
Transfer Pricing
South Africa has transfer pricing regulations to ensure that transactions between related parties are conducted at arm's length. Foreign entities must be diligent in documenting and justifying their pricing strategies to avoid disputes and penalties. It is advisable to conduct regular transfer pricing reviews and prepare comprehensive transfer pricing documentation to substantiate compliance with these regulations.
Double Tax Agreements (DTAs)
South Africa has over 73 DTAs in place with numerous countries. DTA's are concluded with the aim of preventing double taxation by governing the taxing rights between the contracting states and encourage cross-border trade and investment. Foreign companies should thoroughly review the relevant DTA provisions to determine their tax liability, and to ensure compliance. Applicable DTAs can significantly reduce the tax burden on foreign entities doing business in South Africa.
Tax Incentives
South Africa offers various tax incentives to attract foreign investment and stimulate economic growth. These include:
- Research and Development (R&D) Tax Incentives: Companies investing in R&D activities may qualify for a tax deduction of up to 150% of their R&D expenditure.
- Special Economic Zones (SEZs): Businesses operating within designated SEZs can benefit from reduced corporate tax rates, accelerated depreciation allowances and other incentives.
- Headquarter Company Regime: Foreign companies establishing their regional headquarters in South Africa can benefit from certain tax exemptions and incentives, making it an attractive option for managing African operations.
South Africa also has incentives related of energy efficiency savings, international shipping incentives and training contracts.
Our tax team specialises in corporate, commercial and tax law, providing tailored solutions to help foreign entities seamlessly integrate into the South African market.
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.