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Registering an external company and a private subsidiary

Private company

  • A private company can be established by one person or a juristic entity.
  • The shares are not freely transferable (unlike a public company) and cannot be offered to the public in general.
  • The shareholders enjoy limited liability.
  • The shareholders appoint a board of directors who are responsible for managing the company.
  • Different classes of share can be created (e.g. classified shares with preferences, rights, limitations and terms or unclassified shares which are subject to classification by the board of directors upon the issue thereof).
  • There is no requirement that a director or shareholder be a South African resident, but the company must appoint a South African resident as “public officer”, who is responsible for ensuring that the company submits its tax returns timeously.
  • An auditor is only to be appointed in the event of the company being required to do so in respect of its financial reporting standards, as prescribed in the Companies Act or Companies Regulations, and only then must the financial statements be audited annually.
  • Companies are currently taxed at a flat income tax rate of 28% plus 15% dividends tax on dividends paid to shareholders (except shareholders that are companies). In addition, 66,66% of the net capital gain of a company per year is included in taxable income.
Branch of an offshore incorporated entity as an external company
  • A foreign company (profit or non-profit) may conduct business within South Africa in its own name through a branch office for which it may register itself as an “external company” within 20 business days of establishing its office. What this means is that the constitution of the foreign company (what is referred to here as “the memorandum of incorporation”) as well as, a register of the directors, public officer and auditor (if applicable), as well as the registered address of the company must be registered with the Companies and Intellectual Property Commissioner.
  • It is noted that a foreign company is not seen as “conducting business” if it is engaged in the holding of meetings, maintaining a bank or any other financial account, maintaining offices or agencies for the transfer, exchange or registration of its own securities, creating or acquiring any mortgages or debt, securing or collecting any debt or acquiring any property within South Africa.
  • An external company must comply with the provisions of the Companies Act (e.g. financial reporting standards).
  • An external company is taxed at the flat income tax rate of 28% on South African source income and income attributable to a permanent establishment in South Africa, but there is no dividends tax payable. The 66,66% inclusion rate in respect of taxable capital gains also applies. Generally, external companies will only be taxed on profits up on the disposal of fixed property in South Africa and upon the disposal of the assets of a permanent establishment of the external company in South Africa.
  • Upon registration as an external company, the shareholders of the foreign company enjoy limited liability
  • A non-profit external company incorporated by a foreign entity or company must appoint a local auditor. A for profit external company is only required to appoint an auditor if it is required to do so in respect of its financial reporting standards, as prescribed in the Companies Act or Companies Regulations.
  • An external company must appoint a resident public officer, a resident individual who will accept documentation on the company’s behalf and a local registered address within South Africa.
  • The foreign company’s assets may be exposed to risk in South Africa (e.g. potential claims).

Apart from the small tax benefit, an external company is more beneficial than a subsidiary, from the point of view that after-tax profits, it can be freely remitted out of South Africa, without Exchange Control approval. Dividends of a company incorporated in South Africa can be remitted to the non-resident shareholder in proportion to the percentage shareholding of the non-resident shareholder in question.
From a financing point of view, both vehicles would require prior approval from the Exchange Control authorities before acquiring loan capital from outside South Africa and for the repatriation of such funds.