- 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 regarded as an “external company” if it establishes a place of business or owns immovable property in South Africa, and must register as such.
- 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 (or other instrument defining its constitution) with the Registrar of Companies, as well as a sworn translation into English where appropriate.
- Two primary requirements for a branch are :
- an annual audit, and
- financial statements must be lodged with the Registrar of Companies. (Financial statements must also be lodged for a company as a whole. 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.
- 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
- South Africa has double tax agreements with several foreign countries including Botswana, Denmark, Finland, France, Germany, Israel, the Republic of Korea, Lesotho, Malawi, Namibia, the Netherlands, Romania, Swaziland, Sweden, Switzerland, Tanzania, Uganda, the United Kingdom, Zambia and Zimbabwe. The treaty with the United Kingdom extends also to Grenada, Mauritius, the Seychelles and Sierra Leone. Limited sea and air transport agreements exist with Belgium, Brazil, Greece, Ireland, Italy, Japan, Norway, Portugal, the Republic of China and Spain. Comprehensive agreements have been ratified in South Africa with Belgium, Hungary and Poland. Comprehensive agreements have been signed but not ratified with Austria, Canada, Italy, Lesotho, Republic of China and the Russian Federation. Comprehensive agreements have been negotiated, or renegotiated but not signed, with Botswana, Croatia, the Czech Republic, Malaysia, Malta, Mauritius, Namibia, Norway, Singapore, Slovakia, Thailand, Turkey and Uganda. Comprehensive agreements are being negotiated or renegotiated but have not been finalised with Argentina, India, Japan, Luxembourg, Portugal, Tunisia, the United States of America and Zimbabwe
- 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.
- A subsidiary is taxed at the rate of 35% on profits derived from a South African source, while 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 assessment (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, for example, loans to shareholders (except when a market-related rate of interest is charged).
The following are some examples of the effective combined rates of taxation for a local company at various levels of dividend distribution.
Percentage of taxed profit distributed Effective combined tax rate (%) 0,00 35,00 10,00 35,72 20,00 36,44 33,33 37,41 50,00 38,61 75,00 40,42 100,00 42,22
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 with effect from 1 October, 1995.
- Taxed profits are, however, remittable in full by the South African branch to the foreign head office without withholding tax being deductible.
- If a subsidiary or branch:
- employs personnel it must register as an employer with the Revenue authorities and deduct tax (PAYE) from remunerations payable to employees
- sells goods or provides services, it must register as a vendor and charge VAT and pay over VAT. The rate is 14%. Exports, certain foodstuffs and other supplies, are zero-rated and certain supplies are exempt (mainly financial services, residential accommodation and public transport).
- All enterprises pay Regional Services Councils levies on gross revenue and salaries. Rates vary between regions but approximate 0,14% and 0,35% respectively, to which VAT must be added.
- At present there is no capital gains tax in South Africa.
- Transfer duty on land and buildings (10% in the case of a corporate purchaser, but exempt if VAT is charged).
- Stamp duty on transfer of shares (0,5%) and on issue of shares (0,25%).
- Stamp duty on certain other agreements, e.g. leases, mortgage bonds.
- Customs and excise taxes.
- Individuals are taxed on a sliding scale with a maximum rate of R34 200 plus 45% of taxable income in excess of R100 000.
- Certain rebates are deductible from the taxes (under 65 years = R2660 and over 65 years R2660 + R2500).
- 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.
- 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.
- 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.
- These are restricted – the maximum is determined in terms of a formula and is linked to the amount of owners’ funds (share capital, loans and accumulated profits).
- In the case of a wholly-owned subsidiary of a foreign company, the maximum local borrowing allowed is an amount equal to 50% of owners’ funds. As local participation in the company increases, so does the permissible ratio of borrowings to owners’ funds. The limits may be temporarily increased in certain circumstances.
Dividends or branch profits
- Freely remittable provided the underlying profits were earned after 1 January 1984.
- Interest on a loan from a foreign shareholder is remittable provided that the rate of interest is reasonable in relation to the currency of the loan. The exchange control authorities require a debt:equity ratio of 3:1 in the local company for remittance of interest.
- South African sourced interest is exempt from tax when received by non-residents.
- Licence 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 upfront 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).
Management and technical fees
- These may be paid to the holding company/head office if reasonable.
- No withholding tax is deductible in respect of management fees.
- Exchange control approval is required, but will not be granted where fees are used to repatriate profits in the place of dividends. Approval will not be granted if the fee is calculated as a percentage of turnover – it must be justified by actual costs and time spent by holding company personnel.
Forward foreign exchange cover
- Obtainable for all foreign liabilities.
Immigrants and contract workers
- Contract workers may freely remit their savings abroad, after paying tax on their earnings.
- Visits – no maximum period
- Argentina, Australia, Austria, Bahrain, Belgium, Bolivia, Brazil, Canada, Cape Verde, Chile, Denmark, Finland, France, Germany, Greece, Israel, Italy, Japan, Liechtenstein, Luxembourg, Netherlands, New Zealand, Norway, Paraguay, Portugal, Singapore, Spain, Sweden, Switzerland, United Kingdom, USA, Uruguay
- Visits – maximum period 30 days/90 days*
- Belize, Benin, Burundi, Comoros, Congo, Cyprus, Czech Rep., Egypt, El Salvador, Fr. Guiana, Gabon, Guatemala, Guyana, Honduras, Hungary, Ivory Coast, Jordan, Kenya, Kuwait, Madagascar, Malawi, Malaysia, Mali, Hong Kong, Malta, Mauritius, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, Poland, Qatar, Rep. of China, Rwanda, Saudi Arabia, Senegal, Seychelles, Slovak Rep., South Korea, Surinam, Thailand, Tunisia, Turkey, United Arab Emirates, Zambia, Venezuela;
* Costa Rica, Ecuador, St. Helena