Establishing a business in South Africa

Establishing a business in South Africa

A Lacoona Legal extensive overview: A must read for any business starting out

This write up gives an overview of the key issues in establishing a business in South Africa, including an introduction to the legal system; the available business vehicles and their applicable formalities; corporate governance structures and requirements; foreign investment incentives and restrictions; currency regulations; and tax and employment issues.

Establishing a business in South Africa

1. What is the legal system in your jurisdiction based on (for example, civil law, common law or a mixture of both)? Does your jurisdiction operate a federal or unitary system?

Basis of Legal System

South African law comprises:

  • Common law (mainly drawn from Roman-Dutch law, with some English law influence).
  • Legislation (statute).
  • Judicial precedent (developed with reference to common law, legislation and developments in other jurisdictions).
  • Customary indigenous law.

These sources of law are governed by and interpreted in accordance with the spirit, purpose and object of the Constitution of the Republic of South Africa 1996, which is the supreme law of the country.

 

Business Vehicles

2. What are the main forms of business vehicles used in your jurisdiction? What are the advantages and disadvantages of each vehicle?

A company incorporated under the Companies Act 2008 (Companies Act) is the main business vehicle used in South Africa. The Companies Act governs the two broad categories of company, namely:

  • Profit companies, including:
    • public companies;
    • private companies;
    • state-owned companies;
    • personal liability companies;
    • external companies.
  • Non-profit companies.

A private company is the most commonly-used business entity. It is a limited liability vehicle with one or more shareholders (owners) who contribute equity and one or more directors who manage the company and report to the shareholders. A private company is easy to establish and administer. A private company is distinguished from a public company in that:

  • Its constitutional documents must include a restriction on the transferability of its shares and/or other securities.
  • It cannot offer its securities to the public.

There is no requirement for local ownership or directorship in the Companies Act. However, a company must have a public officer responsible for dealings with the South African Revenue Services, who must be resident in South Africa.

Businesses providing certain professional services from incorporated vehicles, such as law firms, are required, by law, to be personal liability companies in which all shareholders must also be directors and are jointly and severally liable for the company’s obligations.

Other models used in South Africa to conduct business include:

  • Partnerships.
  • Trusts.
  • Sole proprietorships.
  • Close corporations.

 

Establishing a Presence from Abroad

3. What are the most common options for foreign companies establishing a business presence in your jurisdiction?

A foreign company looking to establish a business in South Africa generally incorporates a private company as it provides the benefits of limited liability, separate legal personality and perpetual existence despite changes in shareholding, with less stringent requirements than those required of a public company in relation to corporate governance and financial reporting.

A foreign company that does not wish to incorporate a separate legal entity can register as an external company or branch office in South Africa. An external company will be registered and allocated a registration number by the Companies and Intellectual Property Commission of South Africa (CIPC) but will be governed by the same founding documents by which its foreign head office is governed (see Question 4).

4. How can an overseas company trade directly in your jurisdiction?

 

External Company

Description. A foreign company must register itself as an external company within 20 business days after it has begun to conduct business (in the case of a profit company), or non-profit activities (in the case of a non-profit company) in South Africa.

A foreign company will be regarded as conducting business or non-profit activities in South Africa if it is:

  • A party to one or more employment contacts within South Africa.
  • Engaging in a course of conduct, or has engaged in a course or pattern of activities in South Africa over a period of at least six months, that would lead a person to reasonably conclude that the company intends to continually engage in business or non-profit activities in South Africa.

A foreign company will not be regarded as conducting business or non-profit activities solely by virtue of doing any one or more of the following:

  • Holding board or shareholders’ meetings in South Africa, or otherwise conducting any of the company’s internal affairs in South Africa.
  • Establishing or maintaining any bank or other financial accounts in South Africa.
  • Establishing or maintaining offices or agencies in South Africa for the transfer, exchange or registration of the foreign company’s own securities.
  • Creating or acquiring any debts in South Africa, or any mortgages or security interests in any property in South Africa.
  • Securing or collecting any debt or enforcing any mortgage or security interest in South Africa.
  • Acquiring any interest in any property in South Africa.

Licensing and other legal/regulatory requirements. Although an external company continues to exist subject to the laws of its country of incorporation, it must appoint and register a South African resident as its public officer with the CIPC. This person is responsible for compliance in South Africa, which includes the filing of annual returns and director and officer details with the CIPC.

5. What are the formalities for setting up a partnership?

General Partnerships

A partnership can only be created by a contract between the parties intending to make and share profits. The contract or agreement can be oral, written or even tacit.

Applicable legislation/regulation. Partnership arrangements are governed by the common law.

The requirements for a partnership are that:

  • Each party to the contract must make a contribution to the partnership assets.
  • It must be formed to pursue business activities carried on together for the joint benefit of all the parties.
  • The object of the contract of partnership must be financial advantage, either in the form of commercial profit or otherwise (that is, the partners must share in the profits and losses of the partnership).
  • It must be formed for a lawful purpose.

Legal personality/Liability of partners. A partnership is not a legal entity or person separate from its members. This means that the rights of a partnership are vested in, and the liabilities are binding on, the individual partners. Partners can form an en commandite partnership, to be carried on by one or some of them. The other partner or partners contribute a fixed sum of money on condition that they receive a certain share of the profits, if there is any, but that in the event of loss they are liable to his or her co-partners to the extent of their agreed capital contribution only.

6. What are the formalities for setting up a joint venture?

Both unincorporated and incorporated joint ventures (JVs) are common in South Africa. Unincorporated JVs are established by contract and are regulated by contract law. They may or may not be partnerships.

Incorporated JVs are incorporated in the form of companies, in which the JV partners each hold shares. Like any company, a JV company is regulated by the Companies Act, but a shareholders’ agreement or JV agreement is generally concluded by the parties to record additional terms governing the relationship between them.

7. Are trusts (or a local equivalent) available in your jurisdiction?

Trusts are more commonly used for private estate planning and investment holding purposes than as trading entities. Trusts are legal institutions that allow property to be held and administered separately from the estate of the trustee(s). Trusts do not have separate legal personality. Trusts are governed by applicable common law principles, the Trust Property Control Act, 1988 and the trust deed establishing the trust.

The trust deed must be filed with the Master of the High Court of South Africa who issues letters of authority to enable trustees to act on behalf of (and to bind) the trust.

A trust is subject to tax to the extent that the trustees do not vest any capital or income in the beneficiaries during the particular tax year in which the trust earns the capital or income. Income is taxed at a rate of 45% and capital gains at an effective rate of 36% in the hands of the trust. If, however, capital or income is vested in the beneficiaries, the beneficiaries will be liable to tax at their personal income tax rates.

The answers to the following questions relate to private limited liability companies (or their equivalent).

Forming a Private Company

8. How is a private limited liability company or equivalent corporate business vehicle most commonly used by foreign companies to establish a business in your jurisdiction formed?

Regulatory Framework

The Companies Act is the central piece of legislation governing the formation, structure, governance and overall regulation of private limited liability companies in South Africa. However, it is not a complete codification of the legal principles applicable to companies. Various other pieces of legislation and common law principles are relevant to companies, including judicial precedent, regulations issued by government and the King Code of Governance.

The CIPC was established in terms of the Companies Act to regulate the registration and incorporation of companies.

Formation Process

To incorporate a company, the following documents must be submitted to the CIPC:

  • An application for a specific name (Form CoR 9.1).
  • A notice of incorporation (Form CoR 14.1).
  • A memorandum of incorporation (MOI), which is the constitution of the company.

The MOI can take the standard short form (Form CoR 15.1A) or standard long form (Form CoR 15.1B) included in the regulations published under the Companies Act. Alternatively, a unique MOI setting out the rights, duties and responsibilities of shareholders, directors and others or restrictions on the powers of the company can be adopted.

All documents and supporting documents (including certified true copies of the identity document/s or passport/s of the person/s applying for incorporation and the initial director/s of the company) are submitted to the CIPC electronically.

Where documents are lodged by a third party, such as a law firm, a power of attorney must also be submitted.

Nominal fees are payable to the CIPC for the filing of the CoR forms required to incorporate the company as well as for CoR forms filed from time to time. On the date that CIPC issues a certificate of incorporation, the company will formally come into existence.

It is possible for companies to enter into contracts before their formal incorporation through the persons incorporating them. Under section 21 of the Companies Act, the company is bound by the terms of such contracts from the date of incorporation.

A company can amend its MOI or replace the MOI in its entirety at any time subject to the shareholders of the company approving the amendment/replacement by special resolution (75% majority or any higher majority provided in the existing MOI) The amendment/replacement must then be lodged with the CIPC. Amendments and/or replacements of the MOI take effect on receipt of confirmation from the CIPC that the amendment/replacement (as the case may be) has been accepted and placed on file at the CIPC.

Company Constitution

A company’s MOI is its constitution and applies to it in addition to the Companies Act and relevant principles of common law. MOIs filed with the CIPC are public documents. A company’s MOI:

  • Can only alter, negate, limit or qualify ” alterable provisions” of the Companies Act.
  • Cannot conflict with or vary any “unalterable provisions” of the Companies Act.

It is also possible for shareholders to enter into shareholders’ agreements, the content of which will not be made public. However, such agreements must not conflict with the MOI or the Companies Act. If they do, the provisions of the MOI will take precedence.

Financial Reporting

9. What financial or tax reports must the company submit each year?

Branches of Overseas Companies

All companies must file an annual return with the CIPC. Companies that must have their financial statements audited must also file their audited financial statement.

A private company is not required to have its financial statements audited unless its public interest score exceeds the threshold stipulated in the Companies Act, but it can elect to do so. The public interest score is based on the:

  • Number of employees.
  • Turnover.
  • Third-party liabilities.
  • Number of people who have interests in its capital.

All public companies must have their annual financial statements audited.

An external company must also submit an annual return to the CIPC but is only required to file its audited annual financial statements if its public interest score exceeds the threshold stipulated in the Companies Act.

Trading Disclosure

10. What are the statutory trading disclosure and publication requirements for private companies?

The name of a company must end with the appropriate suffix (for private companies, “Proprietary Limited” or its abbreviation “(Pty) Ltd”. If the MOI of a private company contains provisions that prohibit or restrict amendments, the letters “RF” must follow the name of the company.

Limited liability companies must list their directors on the company’s official letterheads.

11. How do companies execute contracts or deeds?

Generally, there are no prescribed formalities for the execution of contracts and the majority of contracts need not be concluded in writing. A person representing a company in concluding a contract (whether oral or in writing) must be authorised to bind the company (whether in terms of the company’s MOI or a specific board resolution, or in certain instances, a shareholders’ resolution). A company can authorise any one or more of its directors to contract on its behalf but can also delegate such powers to a person with no relation to the company, such as the company’s attorney.

Certain contracts, including contracts for the sale of land and consumer credit agreements, must be registered and executed in the manner prescribed by applicable legislation.

Membership/Shareholders

12. Are there any restrictions on the minimum and maximum number of members?

A private company must have at least one shareholder, but there is no requirement that shares must be issued by the company on incorporation. The shareholders can also be directors, provided they are natural persons. There is no prescribed maximum number of shareholders.

Minimum Capital Requirements

13. Is there a minimum investment amount or minimum share capital requirement for company formation?

No minimum investment or share capital requirements are prescribed for the formation of a company. However, if transfer pricing issues become relevant, a company must consider, among other things, its debt-to-equity ratios which must aligned with the arm’s length principle that is applied in the context of thin capitalisation/transfer pricing provisions contained in the Income Tax Act 1962.

14. Are there restrictions on the transfer of shares in private companies?

For a company to be considered a private company under South African law, the company’s MOI must restrict the right/ability to transfer shares in that company and prohibit any offer to the public for the subscription of any shares of the company.

These restrictions on transfer often take the form of pre-emptive rights.

Shareholders and Voting Rights

15. What protections are there for minority shareholders under local law? Can additional protections be given? Is liability limited to the value of shareholders’ shares?

Certain different protections are provided to minority shareholders in terms of the Companies Act, and additional protections can be given to minorities by the company’s MOI.

A shareholder or a director of a company can approach a South African court to obtain relief from oppressive or prejudicial conduct by the company or a “related person” of the company (section 163, Companies Act).

Dissenting minority shareholders have appraisal rights that allow them to:

  • Exit the company and receive fair value for their shares where the majority of the shareholders take a decision that materially affects their rights or interests.
  • Approach a court for relief if they feel that they are being unduly oppressed by the majority.

(section 164, Companies Act.)

Under the Companies Act, certain corporate actions must be approved by a special rather than an ordinary resolution of the shareholders of the company. These include the:

  • Granting of financial assistance.
  • Disposal of all, or the greater part, of the assets or undertaking of a company.
  • Amalgamations.
  • Mergers.
  • Schemes of arrangement.

However, the majority required to pass a special resolution can be reduced or increased (see Question 17). The MOI of a company may also require that certain actions of the company or transactions entered into by the company be approved by unanimous consent of the shareholders.

The liability of every shareholder is limited to the amount it contributed to the capital of the company.

16. Are there any statutory restrictions on quorum or voting requirements at shareholder meetings? Must quorum or voting rights be proportionate to shareholdings?

To commence a shareholders meeting, there must be a sufficient number of shareholders present to exercise at least 25% of the voting rights entitled to be exercised in respect of at least one matter to be decided at the meeting.

A company’s MOI can set a higher or lower quorum requirement. Subject to a different threshold having been set in the company’s MOI, a meeting of shareholders of a company with more than two shareholders cannot commence until at least three shareholders are present.

A company can issue shares in different classes with different voting rights, but the voting and other rights of all holders of shares of a specific class must be identical and their voting rights must be proportionate to their shareholdings.

17. Are specific voting majorities required by law for any corporate actions (for example, increasing share capital, changing the company’s constitution, appointing and removing directors, and so on)?

Depending on the type of corporate action, shareholder authorisation can be given by an ordinary resolution or a special resolution.

An ordinary resolution must be supported by over 50% of the shareholder votes and a special resolution ordinarily requires at least 75% of the shareholder votes.

These percentages can be varied by the MOI, provided that the threshold to pass a special resolution exceeds the threshold to pass an ordinary resolution by at least 10%.

If the company has only one shareholder, that shareholder may exercise all the voting rights at any time without notice or compliance with any internal formalities, provided the MOI does not provide otherwise.

Directors of a company are elected (and can at any time be removed) by an ordinary resolution of the shareholders or appointed by the board of directors of the company. The MOI of a company can only be amended by a special resolution of the company.

The board of directors can resolve to issue shares in the company at any time if the shares have been authorised in the company’s MOI. If the shares have not been authorised in the company’s MOI, the MOI can be amended (see Question 8) to authorise further shares.

18. Can voting majorities required by law be disapplied to protect a minority shareholder (for example, through class rights, weighted voting or super-majority veto rights)?

The voting rights will depend on the rights attached to the class of shares and will be specified in the MOI of the company.

In addition, the company’s MOI can give minority shareholders certain protections by providing for an escalation of certain decisions that ordinarily only require board approval to a meeting of shareholders, therefore giving them greater protection. Such decisions can require an ordinary majority or super-majority of the votes cast by shareholders and are usually known as ”reserved matters” or “restricted matters”.

Reserved matters often include:

  • Voluntary liquidation or the commencement of business rescue proceedings.
  • Director remuneration.
  • Annual budget approval.
  • Removal/appointment of the chairman of the board.
  • Expenditure in excess of a stipulated amount.

For certain transactions which require the approval of shareholders, such as an amalgamation, merger or disposal of all or the greater part of the company’s assets, the voting rights of any shareholder who will be acquiring such assets and any shareholder related to, or acting in concert with, the person acquiring the assets, will be excluded from the vote.

Sectoral Restrictions

19. What are the conditions or restrictions on establishing a business in specific industry sectors? Are there industry sectors in which it is not permitted to establish a business?

To establish a business in a specific industry, the company must obtain the requisite licences, permits and compliance with the regulations in that industry.

Restrictions on a business depend on the industry sector and can include factors such as licensing requirements, permits, the zoning category of the land on which the business operates, health and safety, public interest and employment requirements.

Foreign Investment Restrictions

20. Are there any restrictions on foreign shareholders/company members?

There are no general restrictions on foreigners holding shares in companies in South Africa. However, there are restrictions on the percentage of shares in a company that can be owned by foreign nationals where the company requires certain licences and permits to operate its business in sectors that require a certain percentage of the shares to be held by South Africans and in certain instances, specifically black South Africans.

South African ownership is required in the following sectors:

  • Insurance.
  • Mining.
  • Banking.
  • Broadcasting.
  • Telecommunications.
  • Aviation.

If the company wishes to conduct business with the state or with state-owned companies in South Africa, it must comply with the Broad-Based Black Economic Empowerment Act of 2003. This legislation requires a certain proportion of the ownership, management, employees and suppliers of the company to be black South Africans for the company to qualify for state contracts.

21. Are there any exchange control or currency regulations? Are there any registration requirements under anti-money laundering laws?

Exchange Control or Currency Regulations

Exchange control is regulated by the:

  • Currency and Exchanges Act 9 of 1993 and the regulations published under this act.
  • Exchange Control Manual.

These acts require all funds introduced into South Africa to go through the foreign exchange desk of an authorised dealer and any exportation of funds to be authorised by the authorised dealer or the South African Reserve Bank (Financial Surveillance Department), depending on the type of exchange control approval required. Most registered commercial banks are authorised dealers.

22. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?

There is no restriction on foreign investors acquiring property in South Africa. However, a foreign investor cannot obtain a mortgage bond exceeding the amount of capital it has introduced from offshore.

To register mortgage or notarial bonds over South African property, the foreign company must either:

  • Be registered with the CIPC as an external company.
  • Provide documentary evidence to the Registrar of Deeds (in the form of an auditors’ certificate or an affidavit from a director of the foreign company) that the company does not need register as an external company under section 23(2) of the Companies Act.

Directors

23. Are there any general restrictions or requirements on the appointment of directors?

In general, directors are elected by the shareholders of the company. However, the MOI may allow for one or more persons to be appointed by the board or a specific shareholder.

Persons precluded from acting as directors include a:

  • Person declared by court to be unfit to be a director.
  • Court declared delinquent.
  • Rehabilitated insolvent.
  • Person who has been removed from an office of trust on grounds of misconduct involving dishonesty.
  • Person who has been convicted for crimes such as theft, fraud, forgery, perjury or any other offences listed in the Companies Act.
  • Person under the age of 18.
  • Mentally disabled person.
  • Person who is prohibited in terms of any public regulation to be a director.

A company can stipulate additional categories of persons who are precluded from becoming directors in its MOI. For example, the MOI for incorporated professional services companies can require that all directors be qualified and registered to practise that profession.

A company must notify the CIPC within ten business days after a director is appointed or ceases to be a director.

Board Composition

24. What are the legal requirements for the composition of a company’s board of directors?

Structure

The board can consist of both executive and non-executive directors.

Number of directors or members

A private company can have a single director, but there must be at least three directors on the board of a public company.

Any number of board committees (with delegated authority in respect of specified matters) can be created under the Companies Act.

Every public company and every private company with a public interest score above the threshold prescribed in the Companies Act must establish an audit committee comprising at least three non-executive directors. This means that there will be a minimum of three non-executive directors on the board of directors of such companies. The duties of the audit committee are stipulated in the Companies Act.

There is no requirement that the directors be resident in, or citizens of, South Africa.

Employees’ representation

The Companies Act does not require any employee to be represented on the board of a company but does afford employees special rights as “affected persons” if the company is placed under supervision for business rescue under Chapter 6 of the Companies Act.

Re-Registering as a Public Company

25. What are the requirements for a business to re-register as a public company or when does an entity become a reporting issuer?

Membership

A private company can convert to a public company by amending its MOI to comply with the requirements of a public company. This is done by filing a notice of amendment (attaching an amended MOI) together with the prescribed fee with the CIPC. The amendments to the MOI must be approved by a special resolution of the shareholders and at the least, require the removal of any restrictions on the transferability of shares and securities in that company from its MOI.

On conversion, the suffix at the end of the company’s name will change to “Limited” (abbreviated “Ltd”) and the last digit of its registration number will change to 6.

Share Capital

A public company can be listed or unlisted. There are no minimum share capital requirements in relation to unlisted public companies, but where a company is listed on the JSE Securities Exchange (JSE) certain minimum criteria must be met at listing and maintained throughout the period the company remains listed.

The listing requirements of the Main Board of the JSE include the following:

  • A subscribed capital, including reserves but excluding minority interests and revaluations of assets and intangible assets that are not supported by a valuation by an independent professional expert acceptable to the JSE prepared within the last six months, of at least ZAR50 million.
  • At least 25 million equity shares in issue.
  • Either:
    • audited financial statements for the preceding three financial years, with the last one reporting an audited profit of at least ZAR15 million before taxation and after taking account of the headline earnings adjustment on a pre-tax basis; or
    • a subscribed capital of at least ZAR500 million (including reserves but excluding minority interests, revaluations of assets and intangible assets not supported by an independent valuation prepared within the last six months). The JSE can, in its absolute discretion, list a company (other than a mineral company) which is in its development stage and does not have the required profit history if it has a subscribed capital of at least ZAR500 million and has existed for at least 12 months.
  • 20% of each class of equity securities is held by the public to ensure reasonable liquidity.

Securities are not regarded as being held by the public if they are beneficially held, whether directly or indirectly, by:

  • The directors of the company or of any of its subsidiaries.
  • An associate of a director of the company or of any of its subsidiaries.
  • The trustees of any employees’ share scheme or pension fund established for the benefit of any directors or employees of the company or any of its subsidiaries.
  • Employees of the issuer, where restrictions on trading in the issuer’s listed securities, in any manner or form, are imposed by the issuer on such employees.
  • Any person that is interested in 10% or more of the securities of the relevant class, unless the JSE determines that, after taking account of relevant circumstances, such person can be included as a member of the public for the purposes of complying with the 20% publicly held requirement referred to above.

Tax

26. What main taxes are businesses subject to in your jurisdiction?

Income tax is levied under the Income Tax Act 1962 (Income Tax Act) and is calculated by applying pre-determined rates to the taxable income of a person. The current applicable rates for income tax are as follows:

  • Individuals are taxed on a sliding scale between 18% and 45%. Individuals under the age of 65 earning less than ZAR87,300 per annum are not obliged to pay income tax.
  • Domestic companies and branches are taxed at 28%.
  • Trusts are taxed at 45%.
  • The principal source of indirect taxation revenue in South Africa is Value Added Tax (VAT), which is levied at the rate of 15% subject to certain exemptions (mainly certain financial services, residential accommodation and public transport). Certain specified supplies may be zero-rated if the relevant requirements are met. If an entity (which includes a domestic company, subsidiary or branch of a foreign-owned company) sells goods or provides services that constitute taxable supplies of over ZAR1 million in any uninterrupted period of 12 months, it must register as a VAT vendor.
  • Securities Transfer Tax (STT) is levied at 0.25% on every transfer of beneficial ownership in a security (such as shares) of a South African company or close corporation, as well as securities of foreign companies listed on any South African stock exchange. For a private company, STT is calculated on the consideration payable or market value of the shares, whichever amount is higher. There is no STT on the issue of shares.
  • All employers with a South African payroll exceeding ZAR500,000 per annum must pay a monthly 1% of total remuneration as a skills development levy. Every employer which pays or is liable to pay remuneration to an employee must contribute a total contribution of 2% (1% by the employee and 1% by the company) on a monthly basis to the Unemployment Insurance Fund, subject to certain limits.
  • Certain payments to non-residents are subject to withholding taxes which can be reduced under an applicable double taxation agreement.
  • Dividends: 20%.
  • Interest: 15%.
  • Royalties: 15%.
  • Withholding tax is imposed on the disposal of immovable property by non-South African residents (unless the consideration payable for the acquisition of the property does not exceed ZAR2 million). The purchaser must withhold the following tax from any consideration paid to a non-resident seller:
    • 5% of the consideration payable, if the seller is a natural person;
    • 7.5% of the consideration payable, if the seller is a company; and
    • 10% of the consideration payable, if the seller is a trust.
  • Foreigner entertainers and sportspersons: 15%.

27. What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?

Tax Resident Business

South African tax residents are taxed on their worldwide income and capital gains.

Non-residents generally are taxed on income earned from a source within South Africa and subject to the application of an applicable double taxation agreement, they do not need to have a permanent establishment (PE) in South Africa for a tax liability to arise. A PE will account for South African sourced income, irrespective of the number of employees employed by a PE in South Africa.

Tax Resident

A company is regarded as a South African tax resident if it is incorporated in South Africa or if it has its place of effective management in South Africa. The place of effective management refers to the place where key high-level strategic and commercial decisions that are necessary for the conduct of a company’s business as a whole are in substance made. The facts and circumstances of the particular company must be considered in determining if such company has its place of effective management in South Africa.

Non-tax Resident Business

Non-residents for South African tax purposes are only taxed on income from a source in South Africa. Non-residents are only subject to capital gains tax on immovable property situated in South Africa or an interest in or to immovable property situated in South Africa.

28. What is the tax position when dividends or profits are remitted abroad?

Where a subsidiary is incorporated in South Africa, a withholding tax on dividends at 20% is imposed on payments made to non-residents. This rate can be reduced under a relevant double taxation agreement between South Africa and the country in which the beneficial owner of the dividends resides.

29. What thin-capitalisation rules and transfer pricing rules apply?

Under South Africa’s thin-capitalisation regulations (which also contain South Africa’s transfer pricing provisions), financial assistance transactions are subject to the arm’s length principle.

Any financial assistance to a company (in terms of the amount of the debt and/or the interest rate) that is not at arm’s length is subject to a:

  • Primary transfer pricing adjustment, in the form of a disallowance on the interest deduction.
  • Secondary adjustment, in the form of a deemed dividend in specie (subject to dividends tax at 20%).

The South African Revenue Service requires the taxpayer, among others, to consider the transaction from the perspective of the:

  • Lender, hether the amount could have been borrowed at arm’s length.
  • Borrower, whether the amount would have been borrowed at arm’s length.

The OECD’s international arm’s length principle also applies to all other cross-border related party transactions/interactions. Under this principle, the conditions made or imposed between two connected party enterprises in their commercial or financial relations must not differ from those, which would be made between independent enterprises engaging in similar transactions under similar circumstances on arm’s length terms and conditions.

As with financial assistance, any difference is subject to a primary transfer pricing adjustment, with corporate tax levied, and secondary adjustment, in the form of a deemed dividend in specie (subject to dividends tax at 20%), will apply.

Certain penalties and interest can also be levied by the South African Revenue Service.

For more information on tax on corporate transactions see: Practical Law Tax on Transactions Global Guide.

Grants and tax Incentives

30. Are grants or tax incentives available for companies establishing a business in your jurisdiction?

The Department of Trade and Industry introduced a number of programmes where grants and other incentives are offered to facilitate transformation of the South African economy through the promotion of industrial development, investment, competitiveness and employment creation. Each programme has its own qualifying criteria and the ability to qualify for any grants or incentives is determined on a case-by-case basis.

In addition, the following tax incentives are also available:

  • An investment allowance to support greenfield investments (new industrial projects that utilise only new and unused manufacturing assets), and brownfield investments (expansions or upgrades of existing industrial projects). The incentive offers support for both capital investment and training.
  • The employment tax incentive aimed at encouraging employers to hire young work seekers and a qualifying employer can claim a reduction in the applicable employees’ tax payable.
  • Special Economic Zones are geographically designated areas in South Africa set aside for specifically targeted economic activities. The rate of tax of a qualifying company on income derived from a special economic zone is 15%.

Employment

31. What are the main laws regulating employment relationships?

South African employment laws apply to all persons employed in South Africa, regardless of citizenship or legal status.

The primary laws regulating employment relationships are as follows:

  • Labour Relations Act No 66 of 1995 (LRA): the primary objective of the LRA is to give effect to and regulate the constitutional right to fair labour practices. The LRA applies to all employees except for members of the Defence Force and the State Security Agency and seeks to protect all employees and persons seeking employment.
    The LRA:
    • provides a framework for collective bargaining between employees and their trade unions and employers and employers’ organisations on terms and conditions of employment and other matters of mutual interest;
    • promotes and facilitates orderly collective bargaining as well as the effective and efficient resolution of labour-related disputes;
    • regulates, among other things, disputes about collective agreements, the right to strike and an employer’s recourse to lock-out, dispute resolution mechanisms, unfair dismissals and labour practices and non-standard employment;
    • establishes the Commission for Conciliation, Mediation and Arbitration to resolve employment disputes. The LRA requires all dismissals to be procedurally and substantively fair. Accordingly, employers must follow a fair process and have a fair reason to dismiss employees.
  • Basic Condition of Employment Act No 75 of 1997 (BCEA): the BCEA prescribes the minimum standards of employment and regulates matters regarding working hours (including pay for overtime, Sunday work and public holiday work), leave (annual, sick, family responsibility, maternity and paternity leave), remuneration, notice periods applicable in respect of termination of employment, payments on termination and other basic terms and conditions of employment in the workplace.
    The BCEA requires an employer to provide its employees with written particulars of employment when the employee commences work. This does not have to be in the form of a formal contract of employment. The failure to provide an employee with written particulars or a contract of employment does not affect the rights of the employee underany labour laws and does not in itself render the employment relationship non-existent.
  • Collective agreements: Certain industries are subject to sectoral determinations or collective agreements, which further regulate terms and conditions of employment. However, the BCEA will still take precedence and the terms and conditions of employment in set out or agreed upon in sectoral determinations and collective agreements, cannot be less favourable than the basic terms and conditions set out in the BCEA.
  • Employment Equity Act No 55 of 1998 (EEA): the main objectives of the EEA are the promotion of the constitutional right to equality, the elimination of unfair discrimination in the workplace generally to promote equal opportunities and diversity in the workplace.
    It also provides for equal pay for work of equal value. The general prohibition against unfair discrimination in the workplace stipulated in the EEA applies to all employers. Designated employers (as defined in the EEA) have additional obligations and are required to implement affirmative action measures for people from designated groups and to report and account to the Department of Labour on an annual basis in this regard.
    A designated employer is defined as an employer who:
    • employs 50 or more employees;
    • employs fewer than 50 employees but has a total annual turnover equal to or above certain industry-specific thresholds;
    • is bound by a collective agreement under which it is appointed as a designated employer by the EEA.
  • All designated employers must prepare and implement an employment equity plan which will achieve reasonable progress towards employment equity in the workforce.
  • Occupational Health and Safety Act No 85 of 1993 (OHSA): the OHSA sets out the health and safety rights and duties of all parties in the workplace. The OHSA requires employers to designate health and safety representatives.
    Employees must:
    • take reasonable precautions in respect of their own health and safety at work;
    • strictly comply with the policies and procedures set out by the employer.
    • report any unsafe circumstances or accidents to the safety representative as soon as possible.
  • Employers must:
    • provide and maintain, as far as is reasonably practicable, a working environment that is safe and without risk to the health of its employees;
    • ensure compliance with the requirements of OHSA by all persons on its premises.
  • The Minister can designate an inspector to investigate health and safety issues at workplaces. Inspectors have wide powers to enter the premises and search the workplace without prior notice, question persons on the premises, request documentation, require explanations and question the employer and its employees.
    Persons who contravene certain provisions of OHSA can be convicted of an offence and be liable to pay a fine or imprisoned.
    The regulations published under the OHSA govern (among others):
    • general safety;
    • major hazard installation;
    • hazardous biological agents and chemical substances; explosives; asbestos;
    • construction;
    • hazardous work by children;
    • noise induced hearing loss;
    • machinery;
    • certificates of competency;
    • electrical installation.
  • Compensation for Occupational Injuries and Diseases Act No 130 of 1993 (COIDA): COIDA provides that employees who are injured or become ill at, or as a result of, work are entitled to certain benefits.
    Employees (and/or their families or dependants) can claim compensation from the Compensation Fund for work-related injuries or diseases. Compensation is only payable if the injury or disease occurred as a result of the employee acting in the scope of their employment in the interests of or in connection with the employer.
    Employers are obliged to contribute to the Compensation Fund.

32. What prior approvals (for example, work permits, visas, and/or residency permits) do foreign nationals require to work in your jurisdiction?

The most common work permits for those conducting business in South Africa are:

  • General work visa. These visas are issued to foreign nationals where it has been proven beyond reasonable doubt that, despite a diligent search, there is no South African citizen/permanent resident with the necessary skills or qualifications to fill the relevant position. Where this is the case, the Department of Labour issues a certificate stating this fact and confirming that the remuneration of the foreign national is similar to those occupying comparable positions in South Africa. Based, among other things, on this confirmation, the work permit is issued by the Department of Home Affairs.
  • Intra-company transfer work permit. This type of permit must be obtained where a multi-national company wishes to transfer an existing employee to a branch, subsidiary or affiliate based in South Africa.
    Where this is the case, the foreign national can work for up to a maximum of four years and it must be proven that skills will be transferred from the foreign national to a South African citizen or permanent resident.