South Africa - Company Incorporation

Type of Business

A business may be conducted by individuals, partnerships, trusts, close corporations, South African companies, or branches of foreign companies.

  • A close corporation is governed by the Close Corporations Act. It may have only individuals as members and, thus, is not usually a suitable vehicle for foreign investors.
  • A South African company may be public (name ends in 'Limited') or private (name ends in '(Proprietary) Limited'). Both private and public companies are governed by the Companies Act. There is no minimum equity capital requirement for companies.
  • The private company is the most common vehicle for operating a business in South Africa. It may have only one member and director. There need not be any South African resident directors.
  • A subsidiary of a foreign company is regarded as a South African company. The legal liability of the parent company is limited to the amount of capital committed (together with any guarantees provided).
  • A branch of a foreign company is registered as an external company if it establishes a place of business or owns property in South Africa.
  • The legal liabilities of a branch are not limited to the extent of its South African assets.
  • Both a South African company and a branch operation are subject to the provisions of the Companies Act.
  • A branch is obliged to lodge a certified copy of its Memorandum and Articles of Association with the Registrar of Companies, as well as a sworn translation into English where appropriate.

Branch

Two primary requirements for a branch are :

  • Annual audit.
  • Financial statements must be lodged with the Registrar of Companies. Exemptions, renewable every two years, may be obtained in certain circumstances.

Locally registered private companies are also required to be audited but are not required to lodge their annual financial statements with the Registrar of Companies. In certain instances it may be more beneficial to register a South African company, for an enhanced image and easier access to credit facilities. It may also be an advantage when obtaining Government contracts.

Company Tax

  • The basis is territorial as opposed to a residence or worldwide basis.
  • In the main, only income arising from a South African source is taxed.
  • Trading profits will be taxable in South Africa if the business is conducted in South Africa.
  • Income from services is sourced in South Africa if the services are rendered there.
  • There are certain deemed source rules.

Avoidance of Double Tax

In terms of these agreements, the foreign resident undertaking will only be taxable in South Africa if it conducts business in South Africa through a permanent establishment.

Tax Rates

  • A subsidiary is taxed at the rate of 35% on profits derived from a South African source. A branch is taxed at the rate of 40%.
  • Foreign income is not subject to South African tax.
  • Three provisional tax payments are made in respect of each tax year. Any balance is payable on after an annual tax return is lodged and will carry non-deductible interest running from six months after the year-end. Overpayments are refunded with taxable interest.
  • A secondary tax on companies (STC) is levied on the company (i.e. not on shareholders) at the rate of 12.5% of the excess of dividends declared over dividends received. Branch profits are exempt from STC. STC is payable at the end of the month following the month in which the dividend is declared. Any excess of dividends received over dividends declared may be carried forward and offset against future dividends declared to arrive at the net amount subject to the 12.5% tax.
  • Certain distributions made by companies will be deemed to be dividends for STC purposes.

Dividends and branch profits

  • South African resident shareholders are exempt from tax on dividends.
  • Dividends payable to non-resident shareholders are not subject to a withholding tax.
  • Taxed profits are, however, remittable in full by the South African branch to the foreign head office without withholding tax being deductible.

Incentives- Regional Incentives

  • Tax-free grants and subsidies, geared towards manufacturing, processing or assembling operations achieving value-added of at least 25%. This is payable in the form of a two-year establishment grant of 10.5% of total operational assets (as defined) - maximum assets R15 million, or R1 575 000 per annum.
  • Thereafter a three year profit/output incentive is payable in terms of a formula based on pre-tax profit and return on assets.
  • Maximum of both grants is R7 875 000, which is only likely to be achieved by profitable companies.
  • The subsidy is not available in the Johannesburg region and is only 60% available in Cape Town and Durban metropolitan areas, but a company in any region may be eligible for a relocation grant of a maximum of R1 million.

Export Incentives

  • Taxable export subsidy. This subsidy is payable under the General Export Incentive Scheme (GEIS). Maximum is currently 6% of the FOB value of exports. The actual rate will depend on the degree of processing in South Africa and the local content. The higher the degree of either or both, the greater the subsidy.
  • The export of primary products attracts no subsidy, as does a manufactured or processed product with a local content of less than 35%.
  • There is currently no subsidy on the export of services, but this being researched.
  • Finance at reduced interest rates can be obtained from the Industrial Development Corporation for creating additional productive capacity for exports.
  • The State will, in certain instances, subsidise expenses relating to primary export marketing research, outward selling trade missions and inward buying trade missions and exhibition costs. Subsidies are exempt from tax.
  • It is possible to reclaim the import duty element of manufactured exported goods.
  • An interest subsidy is granted by the Department of Trade and Industry on finance to export capital goods and capital projects.
  • Refunds of the steel levy and financial assistance in respect of certain steel exports is available.

Tax Incentives

  • There are no significant tax incentives as the policy is to provide incentives outside the tax system.
  • Factory and hotel holdings may be written off over 20 years. Other property is not depreciable for tax purposes.
  • Movable, tangible fixed assets may be depreciated on a straight line basis over varying periods (average three to six years). Certain intellectual property may be amortised over the probable duration of use. Goodwill may not be depreciated for tax purposes.

Royalties

  • License agreements must be approved by the Department of Trade and Industry and Exchange Control authorities.
  • Acceptable rates vary - 2% to 4% for manufacture of consumer goods and up to 6% for capital goods. Minimum and/or up front payments (even if recoupable) are not allowed, unless there is immediate benefit, for example, training.
  • The payment is subject to a withholding tax of 12% (unless the rate is reduced or eliminated in terms of a double tax agreement).