South Africa is often viewed as a gateway to the African continent and a favoured investment destination. The country has one of the most developed and diversified economies in the region. The authors of this article explain how to set up a company in South Africa, describe the available types of business organization, the process and requirements for starting a company with foreign founders, the timing and costs, accounting and tax regime. Also covered are the requirements for a company's registered office, sectors requiring licences or restricted to foreign founders.
Main legal forms of doing business in South Africa
The first important thing foreign investors and entrepreneurs should do when looking to start a business in South Africa, is to understand the local laws. It is crucial to choose the best form of business structure as it will have implications for the company’s governance, taxation, liability and transaction flexibility.
The South African legal system offers many types of business organization to cater for different needs and objectives. The most popular business structure in South Africa is the private limited company (Pty Ltd) with a stand-alone legal personality under the law. This means that its directors and shareholders are not personally liable for the company’s debts. A private limited company requires at least one director and one shareholder, but does not allow shares to be issued to the general public. This structure is ideal for SMEs or family businesses looking for a balance between operational flexibility and legal protection.
Other business organisation forms in South Africa include public company, personal liability company, non-profit company, sole proprietorship and partnership. A public company, private company, personal liability company and non-profit company require registration with the Companies and Intellectual Property Commission (CIPC). Sole proprietorship and partnership do not require formal registration.
A foreign company can be incorporated (domesticated) in South Africa, while remaining associated with its parent organisation overseas. In this way a foreign investor can do business in South Africa without having to set up a de-jure new local entity and enjoys certain flexibility while exploring the market, although external companies must still operate under the local law.
Company registration and requirements for foreign investors
There are no restrictions for a foreign investor wishing to open a business in South Africa. However, there are certain criteria one must thoroughly meet in order to comply with local regulations.
To register a company, the applicant completes the prescribed forms and submits them with supporting documents such as the passport and proof of residence. Foreign founders are allowed to operate without a local founder or director, thereby acting as sole directors and shareholders of their South African companies and having full control over their operations. Importantly however, although having a local partner or director is not an prerequisite to register a company in South Africa, foreign founders must appoint an authorised public officer resident in South Africa.
To apply for company registration costs approximately $9.39, which includes booking and registering the company’s name. If one needs professional legal or accounting assistance with the incorporation, the fee may range fr om $107,34 to $536,77 depending on the costs incurred. The company incorporation, from name reservation to final registration, takes three to five business days.
No physical presence is necessary to incorporate a company and the entire process happens online. A foreign investor is not obliged to have a South African visa to register a company. However, a foreign national does need a business or work visa to live, work or do business in South Africa. As an alternative, a foreign investor who is the spouse of a citizen or permanent resident of South Africa may use a visitor visa issued under section 11(6) of the Immigration Act to live and work or engage in business activity in the country.
Opening a bank account
In order for a foreign founder to open a bank account in South Africa, he or she must have a valid work or business visa. Therefore, registering a company is not enough. Having a valid work or business visa is an absolute must to open a bank account. To do so, the foreign investor must be physically present at the bank as the process requires verification under the Financial Intelligence Centre Act, and show documents such as passport, visa, proof of address, company registration and tax registration.
Accounting and tax regimes
All registered companies in South Africa are held to have financial year-end accounts. In most companies, financial year ends on 28 February. The founder provides the information of the company's financial year at the time of its registration with the CIPC.
All companies in South Africa must also register with the South African Revenue Service (SARS) to pay income tax. This is in fact an automatic process, and an income tax number is issued to the company when it registers with the CIPC. If a company's annual turnover exceeds ZAR 1 million (equivalent to 53,092.64 USD) in any consecutive 12 months, the company is held to register for Value Added Tax (VAT) payments. If the company's annual turnover is less than ZAR 1 million, VAT registration is optional.
In addition to corporate income tax and VAT, all companies pay a 21.6 per cent capital gains tax on profits from the sale of any asset.
Importantly, South Africa offers tax incentives to encourage and support businesses that contribute to the country's economy. For example, the South African Income Tax Act provides tax incentives that allow a corporate income tax refund in respect of foreign taxes paid on income earned abroad or a deduction from income for foreign taxes paid on income earned in South Africa. In both cases, the taxpayer must be a resident of South Africa, the income must be included in taxable income, and the income must be subject to foreign tax which is not refundable.
Another example of tax incentives are Special Economic Zones (SEZs). They were introduced for companies doing business in specially designated SEZs and include a reduced corporate tax rate of 15%, as well as a 10% rebate on the value of new and unused buildings owned by the relevant company or any new or unused improvements to any building owned by the company. In addition, there are incentives for employers involved in commercial activity in the Special Economic Zones, reducing employee tax in respect of qualified workers within a set monthly lim it. VAT and customs exemptions are also available if the business is located in a customs control zone.
Legal address and regulatory compliance
Under South African law, for the purposes of court jurisdiction, a company must be physically located at its registered office or place of business. All companies therefore need to have a registered office. This address is indicated by the founder when registering the company with the CIPC. It is important to update the address if the company changes its location. The address must always be the one in South Africa. The foreign founder can choose any address for the company's registered office, including a virtual or physical co-working space.
Every registered company is held to comply with the existing regulations to stay in business. For example, all companies must declare their annual returns and beneficial ownership data to the CIPC, otherwise they will be deregistered. The returns declarations prove that the company is operational, while beneficial ownership declarations help establish the company’s ownership structure and its possible changes, in line with South Africa's anti-money laundering and terrorist financing commitments.
Sectors requiring licences
Although the South African government generally encourages foreign investment, most sectors are regulated and require licensing or have certain restrictions related to foreign ownership. Understanding such sectors is critical for a foreign entrepreneur wishing to invest in the South African market. Several sectors are considered strategically important to the security and economic stability of the country. Foreign ownership is limited and licences are required in sectors such as banking and finance, mining, telecommunications, energy, agriculture and fisheries, broadcasting and media, defence and security, and aviation. For example, foreign ownership in national airlines is limited to 25 per cent. A special licence is required for any business selling liquors. A business licence and a food premises certificate of acceptability are required for restaurant businesses.
Popular business area
Popular business areas in South Africa are mining and manufacturing. Tech and IT services are one of the fastest growing industries. Services related to web and app development, cyber security and IT support are in particular demand. As technology advances, they start playing an increasingly significant role expanding business opportunities. Other popular activities include e-commerce and online retail, agribusiness, renewable energy, tourism and hospitality, health and wellness, food and beverage.
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