Two simple options for foreign business entities to register a company and conduct business in South Africa

South Africa has long held an appeal for foreign investors. As an emerging market with established financial and infrastructure sectors, as well as being a key point of access to African economies, it provides countless business opportunities. The primary means of conducting business in South Africa is that of a company incorporated under the South African Companies Act of 2008. Registration of the overseas company with CIPC (South African Companies and Intellectual Property Commission) must occur within 20 days of starting up a business activity in South Africa (see Chapter 2, Section 23, SA Companies Act, 2008).

The following points guide regulators in deciding whether an entity has begun to conduct business in South Africa or not:

• the company has signed employment contracts
• the company is involved in activities that can reasonably be considered to indicate the intention of the entity to continue engaging in business in South Africa. Business activities as listed below will also be weighed up, but it must be noted that a conclusion cannot be drawn on the basis of one or more of these activities alone:
  • shareholder or board meeting(s) of the overseas company being held, or managing the internal matters of the business
  • creation/maintenance of bank or other financial accounts
  • creation/maintenance of offices in order to register, exchange or transfer the overseas business’ own securities
  • creation/acquisition of mortgages, debt or security interests in property
  • acquisition of an interest in any intellectual property

There are two main choices for foreign companies looking to conduct business in South Africa. These are:

• opening a South African subsidiary company
• or registering a South African branch of the foreign company

Although it is not a condition that a resident of South Africa is a director or shareholder of the company, the company’s compliance officer representative at CIPC and SARS (South African Revenue Services) must be a resident of South Africa. Furthermore, the entity must have a minimum of one office with a South African registered address.

Option 1: Subsidiary Company

A subsidiary is formed by registering a South African company where the shares are largely or completely owned by the foreign company. As an independent legal body, the subsidiary is able to enter into agreements in its own name without the support of the foreign holding company. A related scenario is where a foreign individual(s) forms a company in South Africa and is the shareholder(s). This company would adhere to equivalent regulations as in the case of a foreign subsidiary company.

Option 2: South African Branch of Foreign Company

A South African branch is formed by registering the foreign company as an external company in South Africa. In this case, it is essential to understand that the external company in South Africa is the same legal entity as the foreign company, i.e. the latter is now simply registered in two countries. This branch is able to execute commercial operations and enter into agreements but the branch’s debts and liabilities fall to the parent company.

The following table contrasts the two scenarios: The south African branch of an overseas company vs a subsidiary company.

Other compliance regulations and registrations

Further to your business registration, it may also be necessary to comply with the following (see description of the items in the paragraphs below):

• Income tax
• Registration for

• • VAT
  • PAYE
  • UIF
  • SDL

• Customs registrations
• E-filing setup

Income tax: SARS regulates South African income tax. As such, every business must be registered with SARS for income tax. This registration occurs automatically when a new business is started.

VAT (Value Added Tax): Where company turnover exceeds ZAR 1 million per annum, it must register for VAT on its products. Voluntary registration applies where the annual turnover is lower than ZAR 1 million. In order to register voluntarily, the business must demonstrate income earnings of no less than ZAR 50,000 across the preceding 12 months.

PAYE (Pay As You Earn): This is tax deducted from an employee’s earnings by the employer and paid to SARS. A business needs to register for PAYE within 21 working days after becoming an employer.

UIF (Unemployment Insurance Fund): The South African government requires businesses to register for UIF in cases where there is a minimum of one employee who works for the business for over 24 hours per month. Both the employer and employee contribute a monthly 1% of the employee’s gross salary. Therefore, the total monthly UIF contribution is 2% of the employee’s gross salary.

SDL (Skills Development Levy): Employers must register for SDL either where the wage bill is declared to be above R500 000 per year (i.e., about R41 000 per month), or where they have more than 50 employees. The SDL equals 1% of the employer’s payroll and is paid to the SDL fund monthly. This levy may not come off the employee’s wages.

South African Customs registration: This is necessary for any commercial importing and exporting.

E-filing: This is the SARS online portal. All bodies that have dealings with SARS should register on E-filing to submit tax returns and other regulatory requirements.