FOREIGN COMPANIES ESTABLISHING A BRANCH OR SUBSIDIARY IN SOUTH AFRICA

The Companies Act, 2008 (“Companies Act”) defines a company that is incorporated outside of South Africa as a “foreign company”. Should such foreign company wish to establish business operations in South Africa, it may be required either establish a branch of the company by registering the foreign company as an “external company” in terms of the Companies Act or by incorporating a wholly-owned subsidiary of the foreign company.

An external company must be registered in South Africa if the foreign company is party to one or more employment contracts in South Africa or if the foreign company is engaging in a course of conduct or pattern of activities that would lead a person to reasonably conclude that the company intended to continually engage in business within South Africa.

The Companies Act provides that the registration of an external company must occur 20 business days after the foreign company first begins to conduct business in South Africa. Registration of an external company is done by way of application in the prescribed form to the Companies and Intellectual Property Commission (“CIPC”) and the payment of a prescribed fee.

A failure to register an external company, even after a compliance notice to do so has been issued by CIPC may lead to the foreign company being requested to cease carrying on its business activities in South Africa.

It is important to note that an external company registered in South Africa is not a new legal entity, instead, the foreign company remains one and the same legal entity which is merely registered in two countries.

As an alternative to establishing an external company or branch, a foreign company may instead elect to incorporate a subsidiary which will be a legal entity separate from its holding company and capable of entering into agreements in its own name without requiring the assistance of the foreign holding company, as would be the case with the external company.

Should a foreign company wish to incorporate a subsidiary company, it can do so either by acquiring a shelf company that has already been formed or by incorporating a private company a fresh.

The tax implications are different for a registered external company and a subsidiary incorporated as a private company in South Africa.

The following tax consequences would apply to the branch of the foreign company, established as a registered external company in South Africa:

Capital gains tax (“CGT”) would apply to both branch (i.e. registered external company) and private company (i.e. incorporated subsidiary) situations. CGT would apply to all disposals of assets by a private company. It would apply to disposals by a branch to the extent that the assets disposed of relate to the permanent establishment in South Africa. In respect of a private company, the non-resident parent would not (unless the subsidiary is a fixed property rich company) be subject to CGT on the sale of shares in the subsidiary, whereas in the branch situation the sale of the branch business would trigger CGT because that transaction would comprise the disposal of the assets of a permanent establishment in South Africa.

Exchange Control Regulations, which restrict the free flow of capital in and out of a country, exist in South Africa. The Exchange Control Regulations have been significantly relaxed in the recent past. Investments into South Africa must, however, be reported to the Financial Surveillance division (“FinSurv”) of the South African Reserve Bank (“SARB”), which administers exchange control issues.

South African subsidiaries and registered external companies are considered to be South African residents and, therefore, subject to exchange control. Foreign party loans require approval (although permission is usually granted).

When investments are made by non-residents into South Africa through the acquisition of shares, the corresponding share certificates must carry a non-resident endorsement. The endorsement will enable:

Certain restrictions limit the extent to which foreign owned subsidiaries (being 75% or more foreign owned) and registered external companies may borrow money locally in South Africa. In essence, local borrowings may not exceed certain limits that are determined with reference to the extent to which the borrowing company has been capitalised by its foreign owners.

Although the South African Exchange Control Regulations are more relaxed these days, there are a number of other, very important, substantive issues to consider when deciding the manner in which to structure businesses in South Africa. There are also strict formalities that a foreign company must comply with in order to validly establish businesses in South Africa. Whilst we have not addressed it in great detail in this paper, there are strict transfer pricing provisions to comply with when a foreign company and a related South African company trades with each other. These provisions are becoming more and more stricter.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)