Establishing a business in South Africa

A Q&A guide to establishing a business in South Africa.

This Q&A 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.

To compare answers across multiple jurisdictions, visit the Establishing a business in... Country Q&A Tool.

This article is part of the multi-jurisdictional guide to establishing a business worldwide. For a full list of contents, please visit www.practicallaw.com/ebi-guide.

Ian Jacobsberg, Natalie Napier and Osborne Molatudi, Hogan Lovells (South Africa) Inc.
Contents

Legal system

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

South African law comprises:

  • Common law (a mixture of Roman-Dutch law and English law).

  • Legislation (statute).

  • Judicial precedent (developed with reference to common law, legislation and developments in other jurisdictions).

  • Customary 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 vehicle used in your jurisdiction? What are the advantages and disadvantages of each vehicle?

A company incorporated under the Companies Act 2008 (the 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:

  • A restriction on the transferability of its securities must be included in its constitutional documents.

  • It may not 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.

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?

Foreign companies looking to establish a business in South Africa generally incorporate a private company as it provides the benefits of limited liability, separate legal personality and perpetual existence despite changes in shareholding, with less arduous responsibilities than public companies in relation to corporate governance and financial reporting.

A foreign company that does not wish to incorporate a separate legal entity can register an external company or branch office in South Africa. An external company is governed by the same founding documents and procedures as its head office (see Question 4).

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

A foreign company that wishes to trade directly in South Africa can register an external company. A foreign company must register itself as an external company within 20 business days after it has begun to "conduct business, or non-profit activities" 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 shareholder 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.

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 Companies and Intellectual Property Commission (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?

Partnership arrangements are governed by the common law. 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.

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, and carried on together for the joint benefit of all the parties.

  • Financial advantage, either in the form of commercial profit or otherwise, [must]be the object of the contract of partnership (that is, the partners must share in the profits and losses of the partnership).

  • It must be formed for a lawful purpose.

A partnership is not a legal entity or persona separate from its members. This means that the rights of a partnership are vested in, and the liabilities are binding on, the individual partners. An en commandite partnership can be established where a silent partner wishes to limit its liability to its initial partnership contribution.

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

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

Incorporated JVs are regulated by the Companies Act, but a shareholders' agreement or joint venture agreement is generally concluded by the parties to the joint venture to record additional terms governing the relationship between the joint venture parties.

 
7. Are trusts 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 will be 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 41% and capital gains at an effective rate of 32.8% 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 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 a minister 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

In order 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 prior to their formal incorporation through the persons incorporating them. Under section 21 of the Companies Act, the company will be 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 such higher majority as may be provided in the existing MOI) The amendment/replacment 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. This process takes approximately 30 days from the date on which the amendment/replacement is lodged with 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 those provisions of the Companies Act that are defined as alterable provisions. A company's MOI 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, if such agreements conflict with the MOI, the provisions of the MOI will take precedence.

 

Financial reporting

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

All companies must file an annual return with the Companies and Intellectual Property Commission (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 (calculated with reference to the number of its employees, its turnover, its third party liability and the number of people who have interests in its capital) exceeds the threshold stipulated in the Companies Act, but it can elect to do so. 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 ("Proprietary Limited" or its abbreviation "(Pty) Ltd" for private companies) and if the memorandum of incorporation of a private company prohibits amendments or has provisions which restrict amendments, the letters "RF" (an abbreviation for "ring-fenced") 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 vast majority of contracts need not be concluded in writing. The signatory of a written contract must be authorised to bind the company (whether in terms of the company’s memorandum of incorporation 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.

South African law does not make a general distinction between deeds and underhand contracts. However, certain contracts, including contracts for the sale of immovable property must be registered and executed in the manner prescribed by applicable legislation.

 

Membership

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 in 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?

There are no minimum investment or share capital requirements prescribed for the formation of a company. However, it is important to note that if transfer pricing issues become relevant, a company will have to consider its debt to equity ratios and it will have to be confirmed that these are aligned with the arm's length principle that is applied in the context of transfer pricing provisions contained in the Income Tax Act.

 
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 memorandum of incorporation 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-emption rights.

 

Shareholders and voting rights

15. What protections are there for minority shareholders under local law? Can additional protections be given?

There are various minority protections afforded to shareholders in terms of the Companies Act, and additional protections can be afforded to such minorities by the company's memorandum of incorporation (MOI).

In terms of section 163 of the Companies Act, 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.

Under section 164 of the 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.

Under the Companies Act, certain corporate actions must be approved by a special rather than an ordinary resolution of the shareholders of the company. Such corporate actions 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 may be reduced or increased (see Question 17). The MOI of a company may further 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? Do quorum or voting rights need to 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 memorandum of incorporation (MOI) can set a higher or lower quorum requirement. Subject to a different threshold having been set in the company's MOI, a shareholders' meeting of a company with more than two shareholders cannot commence until at least three shareholders are in attendance.

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 voting rights must be proportionate to their shareholding.

 
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 company's memorandum of incorporation (MOI) if 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 of 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 of the company 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 or weighted voting)?

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

In addition, the company's MOI can afford minority shareholders certain protections by providing for an escalation of certain decisions that ordinarily require board approval to the shareholder body, 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, any 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?

In order 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 would depend on the industry 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?

There are no restrictions on foreigners holding shares in companies in South Africa. However, there are restrictions on the percentage of shares in a company that may be owned by foreign nationals where the company requires certain licences and permits in order 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.

A new bill also proposes a restriction on the percentage shares that foreigners can hold in private security companies in South Africa.

If the company wishes to conduct business with the state or state owned companies in South Africa, it must comply with the Broad-Based Black Economic Empowerment Act of 2003 (the B-BBEE Act) which requires black South African ownership.

 
21. Are there any 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 that all funds introduced into South Africa go through the foreign exchange desk of an authorised dealer.

 
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, there are exchange control regulations which restrict the amount of bonds over immovable property granted to non-residents.

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

  • Be registered with the Companies and Intellectual Property Commission as an external company; or

  • 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?

A natural person can be appointed by the board of directors of the company or elected by the shareholders of the company to act as a director.

Persons precluded from acting as directors include:

  • A person declared by court to be unfit to be a director.

  • A court declared delinquent.

  • A rehabilitated insolvent.

  • A person who has been removed from an office of trust on grounds of misconduct involving dishonesty.

  • A person who has been convicted for crimes such as theft, fraud, forgery, perjury or any other offences listed in the Companies Act.

  • A person under the age of 18.

  • A person who is mentally disabled.

  • A 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 memorandum of incorporation (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 Companies and Intellectual Property Commission 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 are members of one board.

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) may be created in terms of the Companies Act.

Every public company and every private company with a public interest score above a 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.

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 in terms of Chapter 6 of the Companies Act.

 

Reregistering as a public company

25. What are the requirements for a business to reregister as a public company?

Membership

A private company can convert to a public company by amending its memorandum of incorporation (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 Companies and Intellectual Property Commission. The amendments to the MOI must be approved by a special resolution of the shareholders of the company and at the very least, requires 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 Johannesburg Stock 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, including reserves but excluding minority interests and revaluations of assets and excluding 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 ZAR500 million, provided that 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 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 in terms of the Income Tax Act 1962 (the 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 41%. Individuals earning less than ZAR75,000 per annum are not obliged to pay income tax.

  • Domestic companies and branches are taxed at a rate of 28%.

  • Trusts are taxed at a rate of 41%.

The principal source of indirect taxation revenue in South Africa is Value-Added Tax (VAT), which is levied at the rate of 14% subject to certain exemptions (mainly certain financial services, residential accommodation and public transport). Certain supplies can be zero-rated. 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 in excess of ZAR1 million in any uninterrupted period of 12 months, it must register as a VAT vendor.

Securities Transfer Tax (STT) is levied at the rate of 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.

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 who pays or is liable to pay remuneration to an employee must contribute a total contribution of 2% (1% contributed by the employee and 1% contributed by the company) on a monthly basis to the Unemployment Insurance Fund. The maximum contribution which can be deducted for employees who earn more than ZAR14,872 per month is ZAR148.72 per month.

Certain payments to non-residents are subject to withholding taxes which can be reduced in terms of the applicable double taxation agreements.

  • Dividends: 15%.

  • Interest: 15%.

  • Royalties: 15%.

  • South African withholding tax, is imposed in respect of 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?

South African residents are taxed on their worldwide income.

Non-residents are taxed on income earned from a source within South Africa and 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 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 management 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

Non-South African residents are only taxed on income from a source in South Africa.

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

In the case where a subsidiary is incorporated in South Africa, a withholding tax on dividends at a rate of 15% is imposed on payments made to non-residents. This rate may be reduced in terms of a relevant double taxation agreement between South Africa and the country in which the recipient of the dividends resides.

Withholding taxes are not applicable where the non-resident has a branch in South Africa. In such case, the branch is taxed in South Africa on its taxable income sourced in South Africa at the corporate rate of 28%.

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

In terms of South Africa's thin-capitalisation regulations, financial assistance transactions are subject to the arm's length principle. To the extent that the financial assistance (in terms of the amount of the debt and/or the interest rate) is not arm's length, a primary transfer pricing adjustment, in the form of a disallowance of interest deductions, and secondary adjustment, in the form of a deemed dividend, will apply.

The South African Revenue Service requires taxpayers to consider the transaction from the perspective of the:

  • Lender, whether 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 associated 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.

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, 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?

The main laws regulating employment relationships are as follows:

  • Labour Relations Act 1995 (LRA). The LRA is the most significant piece of legislation that governs employment and labour law in South Africa. The LRA applies to all employees except for members of the defence force, three national intelligence agencies and Electronic Communications Security (Pty) Ltd (COMSEC). The Act creates a bargaining-friendly environment between employers on the one hand and employees and their trade unions on the other hand. Essentially, the purpose of the LRA is to give effect to fair labour practice rights entwined in the country's constitution and, amongst others, to regulate the right to strike and to give effect to the public interest in the law obligations of the Republic. The LRA reduces adversarial and promotes joint problem-solving in the workplace.

  • Basic Condition of Employment Act 1997 (BCEA). The BCEA has been passed by the country's Department of Labour mainly to set minimum standards of employment conditions and to regulate matters regarding working hours, leave (including annual, sick, family responsibility and maternity leave), termination of employment, remuneration and other related basic conditions of employment in the workplace. Certain industries can regulate their conditions of employment but cannot contradict terms of the BCEA. The Minister can also issue sectorial determinations in respect of conditions of employment for employees in a particular sector or area.

  • The Employment Equity Act 1998 (EEA). The EEA was enacted to achieve two main objectives, namely the prohibition of unfair discrimination by all employers and the implementation of equal opportunity plans by employers, often referred to as "affirmative action" measures. Designated employers must report annually to the Department of Labour regarding progress made in the implementation of employment equality or of affirmative action measures in their respective workplaces. The key objective of the EEA is the substantive concept of equality embodied in the country's Constitution. Essentially, it aims to promote equal opportunities for all employees and diversity in the workplace, especially those who were classified as previously disadvantaged persons. This new provision deals with equal pay for work of equal value.

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

Foreign nationals who are intending to work in South Africa must obtain a temporary residency and a work permit. The most common types of 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 not a South African citizen/permanent resident who has the necessary skills or qualifications to fill the relevant position. Where this is the case, the Department of Labour will issue a certificate stating this to be true and also 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 will be 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.

 

Proposals for reform

33. Are there any impending developments or proposals for reform?

The main development affecting businesses trading in South Africa is the Protection of Personal Information Act (POPI).Its main purpose is to give effect to the personal right to privacy by introducing measures to ensure personal information of employees in the workplace is safeguarded wherever it is processed by responsible parties, for example HR and payroll personal. POPI regulates the manner in which personal information can be processed by establishing guidelines and requirements that prescribe the minimum threshold for competent processing of employers' personal information. Certain sections of POPI have already commenced, but the majority of POPI will enter into force at a later date, which is yet to be confirmed. Companies will then have 12 months to implement regulations under POPI. Companies can begin to prepare for the implementation of POPI by considering the policies they have in place around the audit process used to collect and store data, the quality of information and how information is transferred outside of the jurisdiction.

 

The regulatory authorities

South African Competition Authorities

Main activities. Regulation of competition law matters including the evaluation of mergers and anti-competitive commercial practices and their adjudication.

Website: www.compcom.co.za or www.comptrib.co.za

Companies and Intellectual Property Commission (CIPC)

Main activities. Registration and the regulation of companies.

Website. www.cipc.co.za

Johannesburg Securities Exchange (JSE)

Main activities. The only securities exchange in South Africa. It regulates the listing and exchange of listed securities.

Website. www.jse.co.za

Takeover Regulation Panel (TRP)

Main activities. The regulation of merger and acquisition activity which falls within the ambit of "affected transactions" (as defined in the Companies Act).

Website. www.trpanel.co.za



Contributor profiles

Ian Jacobsberg, Director

Hogan Lovells

T +27 11 523 6091
+27 11 523 6091
E ian.jacobsberg@hoganlovells.com
W www.hoganlovells.com/en/locations/johannesburg

Professional qualifications. B.A LLB, University of the Witwatersrand; Certificate in Aviation Law, Rand Afrikaans University; Certificate in Essential Copyright Law, University of South Africa; Certificate in Essential Trademark Law, University of South Africa

Areas of practice. Commercial contracts.

Languages. English, Afrikaans, French, German

Natalie Napier, Director

Hogan Lovells

T +27 11 775 6376
E natalie.napier@hoganlovells.com
W www.hoganlovells.com/en/locations/Johannesburg

Professional qualifications. BSc, University of the Witwatersrand; LLB cum laude, University of the Witwatersrand; HDip Tax Law, University of Johannesburg; HDip Company Law, University of the Witwatersrand

Areas of practice. Tax.

Languages. English

Osborne Molatudi, Director

Hogan Lovells

T +27 11 523 6140
E osborne.molatudi@hoganlovells.com
W www.hoganlovells.com/en/locations/Johannesburg

Professional qualifications. BProc, University of Limpopo; LLB, University of KwaZulu-Natal, Unisa

Areas of practice. Employment; executive compensation; employee benefits; share incentives.

Languages. English, Sotho, Zulu


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