Investing in South Africa
South Africa, strategically positioned at the tip of Africa, is ideal for accessing countries in Southern Africa and the rest of Africa and making it a good trans-shipment point between emerging markets in South America and industrialised markets of Asia. South Africa is one of the most developed countries in Africa with strong financial, legal, communications, energy, transport, medical and education sectors. Investing in South Africa should be the next thing on your list.
It is ranked as one of the five major emerging economies. It forms part of BRICS (Brazil, Russia, India, China and South Africa); SACU (Southern Africa Customs Union, comprising of Botswana, Lesotho, Namibia, South Africa and Swaziland); the SADC (Southern Africa Development Community, comprising of essentially all African countries south of the equator); and is an observer of the OECD (Organisation for Economic Co-operation and Development). South Africa has an abundance of natural resources such as gold, platinum, diamonds, coal and natural gas. It’s main stock exchange, the JSE Limited, has been in operation for 130 years and ranks amongst the top twenty globally and ranks first in Africa by market capitalisation. Amongst the major macroeconomic challenges facing the country is its high unemployment rate of 26.7%; slow GDP growth rates at around 1.5%; downgrading by rating agencies; and weak rand (ZAR, the currency of South Africa).
Your guide to investing in South Africa
Types of entities
Business can be carried on in South Africa through a number of business entities including a branch of a foreign entity, private limited liability company, public company, trust, partnership, non-profit entity and similar. Businesses must comply with various legislation including Company law, Tax law, Exchange Control, Labour Law, Accounting requirements (International Financial Reporting Standards) and similar.
- Corporate income tax applies at a rate of 28%. The residence basis of taxation is applied to tax residents while the source basis of taxation is applied to non-residents. A corporation would be a resident if incorporated or effectively managed in South Africa. Tax is imposed on income and capital gains. Various exemptions, deductions, allowances and credits are available. Tax incentives are also offered like preferential rates or deductions for small business corporations, research and development expenditure, special economic zones, urban development, carbon-reductions and others. A special holding company regime is also offered. General and specific anti-avoidance legislation are in place; including transfer pricing rules which require arm’s length principles to be adhered to, and controlled foreign company rules which apply to entities in which South African residents hold more than 50% voting or participation rights. Group taxation does not apply to South Africa.
- Withholding taxes apply to certain income streams, the main ones being dividends(at a rate of 20%), royalties (at a rate of 15%)and interest(at a rate of 15%). The rates may be reduced under an applicable double taxation treaty. South Africa has a network of approximately 80 treaties.
- VAT applies at a rate of 15%, with certain zero-rated or exempt transactions. VAT is levied on the supply of goods and services and the importation of goods. VAT levied by suppliers can be claimed back as a credit. VAT registration is compulsory where more than R1 million supplies are made annually (for e-commerce services the threshold is R50 000).
- Payroll and social security taxes apply at 1%. Withholding obligations also apply to employers in respect of employees’ tax (PAYE) and other payroll contributions.
- Property taxes apply to real property. Transaction based taxes are levied and include stamp duties on the transfer of securities like shares, transfer duties on the transfer of real property, donations tax on gratuitous disposals, customs duties on the importation of goods and excise duties on certain products.
- Tax administration: The tax year of a company is its financial year. Bi-annual advance payments must be made for corporate income tax. Monthly, bi-annual or annual filing requirements apply to many of the taxes. Failure to adhere to payment and filing requirements results in interest and penalties. Binding rulings are available from the tax authorities on the application of certain tax provisions.
- Personal income tax applies at progressive rates ranging from 0% to 45%. The residence basis of taxation is applied to tax residents while the source basis of taxation is applied to non-residents (subject to treaty relief). Tax is imposed on income and capital gains. Various exemptions, deductions, allowances and credits are available. The tax year ends 28/29 February each year. Monthly advance payments must be made by employees (under the employee tax system) while bi-annual advance payments must be made in other cases. Filing requirements also apply. Individuals are also subject to transaction-based taxes and in many cases ultimately bear withholding and other taxes.
Exchange Control Regulations are administered by the South African Reserve Bank, which regulates the flow of capital into and out of the Common Monetary Area (consisting of South Africa, Lesotho, Namibia and Swaziland). Authorised dealers are certain identified major commercial banks which assist in administering exchange control, and thus applications are generally made through those banks.
The labour market in South Africa is a highly unionised environment and collective bargaining also takes place; through which annual salary adjustments, benefits and any changes to working conditions within an industry will be negotiated. There are a number of legislative and regulatory requirements.
Broad-Based Black Economic Empowerment
B-BBEE is a South African government initiative to promote the economic transformation to enable meaningful participation in the South African economy by black people. It is regulated by the B-BBEE Act, Amended Codes of Good Practice and various Sector Codes for different industries. There is no penalisation for a low B-BBEE score or not embracing B-BBEE but this may impact the awarding of contracts and licences by the government and private sector.
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How can we help you to start investing in South Africa?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.