Key considerations for incorporating in South Africa
With its world-class business infrastructure, robust regulatory framework and double taxation agreements, South Africa has earned its reputation as the powerhouse of Africa. Here we take a look at critical areas that affect company formation in the country.
In the last few years, South Africa has taken steps to reduce complexity for businesses, dropping down our GBCI (Global Business Complexity Index) report rankings from 23rd most complex jurisdiction in 2018 to 51st in 2023.
While this progress is impressive, certain factors such as government finance, policy issues and business conditions can create a challenging economic environment.
Why do business in South Africa?
As the economic hub of Africa, South Africa is home to some of the world’s biggest corporations and boasts a diverse business landscape. Its world-class business infrastructure supports a robust regulatory framework that governs investment in all sectors of the economy.
Government policy has focused on promoting growth in four sectors:
- infrastructure – unparalleled; an excellent springboard into Africa
- tourism – affected by the economic outlook
- manufacturing – export driven
- agriculture – high employment potential.
South Africa boasts advanced financial centres and banking platforms, and Johannesburg is a natural choice for investors and companies looking to extend their footprint into Africa.
In addition, the country’s digitalisation efforts have resulted in simplified processes and significantly shorter incorporation time frames.
Key considerations for incorporating in South Africa
Legal structures
The following legal structures are available in South Africa:
- private company
- public company
- personal liability company
- partnership
- external company (branch office)
- non-profit.
The first step to incorporation is deciding whether to set up a private company or a branch office. While there are fewer requirements for setting up branch offices, the tax implications for branch offices are more significant than they are for private companies.
We’ve highlighted some of the key differences between private companies and branch offices below.
1. Memorandum of Incorporation (MOI)
The Memorandum of Incorporation, or MOI, sets out the guidelines for a business in compliance with the Companies Act of South Africa. According to South Africa’s company registrar, the Companies and Intellectual Property Commission (CIPC), the MOI sets out default company rules and alterable provisions, which companies may accept or alter as they wish, as long as they adhere to the Companies Act.
You can use a standard MOI, or your company’s legal counsel can prepare a customised version tailored to your business’s needs. All companies need to have a local address for registration.
CIPC has made significant improvements to its systems, allowing for the incorporation of a private company to typically take place within 21 days. Director updates and address changes can be processed almost instantaneously, and income tax registration takes place upon incorporation.
With regard to branch companies, the incorporation/documentation/constitution/memorandum and articles of association/memorandum of incorporation of the foreign parent company must be registered. If these are not available in English, sworn translated versions are required. The company is also obliged to appoint a local representative who is a South African resident. It is mandatory to register all active directors of the parent company as active directors of the branch company in South Africa.
2. Beneficial ownership register
In May 2023, the Companies Act was amended to include the new beneficial ownership register.
The purpose of the register is to:
- have a repository/register of natural persons who directly or indirectly own 5% or more, or who exercise control over legal entities
- assist law enforcement with relevant information when it comes to their investigations into who the ultimate owners of an entity are
- mitigate the risks identified in the national risk assessment where legal persons were identified as vehicles prone to abuse for money laundering and terrorism financing activities.
This makes it compulsory for all companies to maintain a beneficial ownership register and to report beneficial ownership to CIPC.
In terms of the amended regulations, beneficial ownership must be reported:
- within 10 days from the date of incorporation of a new entity
- annually, together with the annual returns and compliance checklist, or
- within 10 days from the date of any change to the beneficial ownership.
Failure to submit the above will result in non-compliance and CIPC can impose fines and penalties on the entity.
3. Annual return
CIPC requires that all companies lodge their annual returns within 30 business days from the anniversary of the company’s incorporation date. The submission of an annual financial statement (AFS) is no longer compulsory for all companies when lodging annual returns, except those that are subject to a mandatory audit. In this case, the company’s latest approved AFS must be submitted to CIPC in iXBRL format.
4. iXBRL reporting
CIPC mandated iXBRL, a digital reporting system, for all qualifying entities in July 2018 to reduce the burden of multiple submissions to different regulators. iXBRL stands for Inline eXtensible Business Reporting Language; this format allows for the electronic communication of business information to CIPC when submitting a company’s annual return, and also offers faster processing in the preparation, analysis and communication of AFSs.
5. Compliance checklist
CIPC has introduced a compliance checklist to ensure compliance with the Companies Act. The compliance checklist became mandatory for audited or independently reviewed companies from January 2020. The checklist ensures that directors are aware of their compliance obligations; it enables CIPC to monitor and regulate compliance, and act accordingly in instances of non-compliance. The compliance checklist must be submitted with the annual return.
6. Financial Intelligence Centre compliance requirements
The Financial Intelligence Centre Act (FIC Act) was amended in December 2022 to include the introduction of new accountable institutions. The list of accountable institutions now includes, but is not limited to, trust companies and credit providers. In terms of the FIC Act, all companies are required to register with the Financial Intelligence Centre (FIC) within a prescribed period. Failure to register will result in a penalty being levied against the non-compliant entity. This has resulted in companies incurring additional compliance costs, even though there is no fee payable to register with FIC.
7. Directorship
A private company must have at least one director. Directors of private companies and branch offices are not required to be South African residents. They do however need to meet the qualification criteria, as required under the Companies Act. Delays may occur when registering foreign directors as original versions of certain documents, such as passports, must be apostilled, notarised or certified as true copies of the original.
8. Public officer requirement
A public officer is your business’s tax representative and must be resident in South Africa. The appointee will act as the liaison between your business and the South African Revenue Service (SARS) and is responsible for your company’s tax returns and filings. The public officer must be registered with SARS and enrol for an eFiling account.
9. How to open a business bank account in South Africa
Your company’s bank account must be opened with a South African bank in order to trade in the country. In the past, original versions of signed documents were required to open a bank account which resulted in delays in cases where the company’s director was based overseas. During the Covid-19 pandemic, banks accepted electronically signed or scanned versions of original documents, but it is unclear whether this trend will persist.
10. Non-resident endorsement
If the shareholder of a South African company is a non-resident, the share certificate that is issued to the foreign shareholder needs to be stamped by the company’s bankers as “non-resident”. This may also require approval by the South African Reserve Bank. This requirement is in the terms of the South African Exchange Control Regulations and is an important consideration when transferring funds or dividends from the South African entity to the offshore non-resident shareholder.
11. Industry body certifications
It’s important to seek legal guidance when evaluating industry body requirements; these requirements will depend on the nature of the business. For example, a property company and a trading company will each have a different set of rules.
12. B-BBEE compliance
South Africa’s Broad-Based Black Economic Empowerment, or B-BBEE, is a requirement for both the public and private sectors. The policy is intended to redress the imbalances created by apartheid. The B-BBEE Act of 2003 was enacted by parliament to promote black economic empowerment through equity ownership, management control, employment, skills development, enterprise development and support, and preferential procurement. It is advisable to obtain a B-BBEE certification when doing business in South Africa.
The legislation has changed over the years, and foreign companies wishing to operate in South Africa must ensure they remain compliant; this extends to suppliers as well.
Talk to us
Our experts on the ground offer services across the three core business lines of accounting and tax, global entity management, and human resources and payroll. In addition to assisting with incorporation procedures, we help you streamline your operations and stay compliant.
To learn more about how we can help you set up a company in South Africa, make an enquiry today.
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