Guidance for external company.
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Guidance for external company.
External Company
Guidance with regards to the documents that need to be lodged with the Registrar for an external company in terms of the regulations.
For many foreign companies that are expanding their operations into South Africa the most appropriate structure is that of an external company in South Africa.
Sometimes known as a branch, a foreign company is a company that is carrying out profit or non profit related activities within South Africa. As a basic example Company XYZ is incorporated in India but has won a tender in South Africa. It now wishes to set up a company structure within South Africa to employ appropriate skills and fulfil its contract.
One of the choices it will have is to register as a foreign company by establishing a branch in South Africa but remaining incorporated in India. In order to do this Company XYZ will need to engage in profit or non profit related services such as having in place one or more employment contracts or engaging in a pattern of activities during the last 6 months.
Registration
Foreign companies with business or non-profit activities in South Africa may be required to register with the Companies and Intellectual Properties Commission (CIPC) as an external company. Section 23 of the Companies Act 2008 provides that a foreign company must register within 20 business days of first beginning to “conduct business” in South Africa.
A company will be considered to be conducting business in South Africa if it is:
• either a party to one or more employment contracts within South Africa; or
• engaging in conduct or has engaged in a pattern of activities within South Africa over a period of at least six months that would lead a person to conclude reasonably that the company intends to engage continually in business activities in South Africa.
A company will not be considered to be conducting business in South Africa if it merely engages in certain limited activities such as holding shareholder or board meetings in South Africa or otherwise conducting any of the company’s internal affairs within South Africa, having a South African bank account, creating, acquiring, securing or collecting any debt or acquiring or securing a property interest in South Africa.
The external company is not a new legal entity separate from the foreign company. The foreign company remains one and the same legal entity, registered in South Africa and in its place of incorporation. There will not be a separate board of directors in South Africa nor will it have a separate existence from its foreign operations. Should the registered external company be sued, the foreign company itself will be sued.
The external company’s liability is therefore not limited to its South African operations. Should the external company become insolvent the entire estate of the external company (including its overseas assets) will be susceptible to creditors.
If an external company has failed to register within three months after commencing its activities in South Africa, the CIPC may issue a compliance notice requiring the foreign company to register or if it fails to do so within the time prescribed, cease to carrying on its business or activities in South Africa.
If the foreign company operates as an external company in South Africa and at all times retains its effective management offshore, it will remain a non-resident in South Africa for income tax purposes. As a result, its income will only attract tax if the originating cause of the income is considered to be in South Africa, subject to any double taxation agreement between South Africa and the country in which the foreign company is incorporated.
An external company must obtain exchange control approval before it remits funds out of South Africa to any non-resident or obtains funding from a non-resident, depending on the terms.
A registered external company must continuously maintain at least one office in South Africa.
An external company will also be required to comply with ongoing administrative requirements set out in the Companies Act including filing annual returns and notifying the CIPC of changes to the company for example the composition of its board.
Tax Issues Pertaining to External Company in South Africa
• The corporate tax rate for an external company is currently 28% of taxable income derived from the South African Branch.
• The distribution of profits by local branches of foreign companies is not subject to the normal 15% dividend withholding tax. There is no further tax payable on the remittance of South African branch profits offshore. These profits will have been taxed in South Africa.
• Capital gains tax is an effective rate of 18,6%.
Shareholding and Director Issues
Where a South African branch (external company) is selected, although the branch is registered within the jurisdiction of South Africa, there is no need for shareholders or Directors to be and they remain in the company’s country of origin / incorporation.
The international company’s “Memorandum of Association” is also registered in South Africa and the company would have to operate according to the rules laid out by this framework.
The Appointment of a Responsible Person
Whilst no Shareholders or Directors need to be in South Africa there is a requirement for a South African resident to be appointed and registered with the corporate registration authority (CIPC). The appointed person will be responsible for the operations and compliance of the South African branch.
Shareholder and Director Meetings
Shareholder meetings are not required since no shares can be issued by the South Branch. If there are no locally appointed Directors there is also no requirement for Directors’ meetings.
Is an Auditor Required?
The appointment of an auditor is compulsory but the scope of an audit is limited to the income statement of the South African Branch.
Transferring of Profit overseas
So long as the South African branch has paid all its taxes, profit can flow freely from the South African Branch to the International company.
What is the Legal Status of an External Company in South Africa?
The external company (branch) is granted its own legal status due to its need to register as an external. It is not, however, separate legal status except in the matter of exchange control. The branch does obtain a South African registration number.
Guidance with regards to the documents that need to be lodged with the Registrar for an external company in terms of the regulations.
For many foreign companies that are expanding their operations into South Africa the most appropriate structure is that of an external company in South Africa.
Sometimes known as a branch, a foreign company is a company that is carrying out profit or non profit related activities within South Africa. As a basic example Company XYZ is incorporated in India but has won a tender in South Africa. It now wishes to set up a company structure within South Africa to employ appropriate skills and fulfil its contract.
One of the choices it will have is to register as a foreign company by establishing a branch in South Africa but remaining incorporated in India. In order to do this Company XYZ will need to engage in profit or non profit related services such as having in place one or more employment contracts or engaging in a pattern of activities during the last 6 months.
Registration
Foreign companies with business or non-profit activities in South Africa may be required to register with the Companies and Intellectual Properties Commission (CIPC) as an external company. Section 23 of the Companies Act 2008 provides that a foreign company must register within 20 business days of first beginning to “conduct business” in South Africa.
A company will be considered to be conducting business in South Africa if it is:
• either a party to one or more employment contracts within South Africa; or
• engaging in conduct or has engaged in a pattern of activities within South Africa over a period of at least six months that would lead a person to conclude reasonably that the company intends to engage continually in business activities in South Africa.
A company will not be considered to be conducting business in South Africa if it merely engages in certain limited activities such as holding shareholder or board meetings in South Africa or otherwise conducting any of the company’s internal affairs within South Africa, having a South African bank account, creating, acquiring, securing or collecting any debt or acquiring or securing a property interest in South Africa.
The external company is not a new legal entity separate from the foreign company. The foreign company remains one and the same legal entity, registered in South Africa and in its place of incorporation. There will not be a separate board of directors in South Africa nor will it have a separate existence from its foreign operations. Should the registered external company be sued, the foreign company itself will be sued.
The external company’s liability is therefore not limited to its South African operations. Should the external company become insolvent the entire estate of the external company (including its overseas assets) will be susceptible to creditors.
If an external company has failed to register within three months after commencing its activities in South Africa, the CIPC may issue a compliance notice requiring the foreign company to register or if it fails to do so within the time prescribed, cease to carrying on its business or activities in South Africa.
If the foreign company operates as an external company in South Africa and at all times retains its effective management offshore, it will remain a non-resident in South Africa for income tax purposes. As a result, its income will only attract tax if the originating cause of the income is considered to be in South Africa, subject to any double taxation agreement between South Africa and the country in which the foreign company is incorporated.
An external company must obtain exchange control approval before it remits funds out of South Africa to any non-resident or obtains funding from a non-resident, depending on the terms.
A registered external company must continuously maintain at least one office in South Africa.
An external company will also be required to comply with ongoing administrative requirements set out in the Companies Act including filing annual returns and notifying the CIPC of changes to the company for example the composition of its board.
Tax Issues Pertaining to External Company in South Africa
• The corporate tax rate for an external company is currently 28% of taxable income derived from the South African Branch.
• The distribution of profits by local branches of foreign companies is not subject to the normal 15% dividend withholding tax. There is no further tax payable on the remittance of South African branch profits offshore. These profits will have been taxed in South Africa.
• Capital gains tax is an effective rate of 18,6%.
Shareholding and Director Issues
Where a South African branch (external company) is selected, although the branch is registered within the jurisdiction of South Africa, there is no need for shareholders or Directors to be and they remain in the company’s country of origin / incorporation.
The international company’s “Memorandum of Association” is also registered in South Africa and the company would have to operate according to the rules laid out by this framework.
The Appointment of a Responsible Person
Whilst no Shareholders or Directors need to be in South Africa there is a requirement for a South African resident to be appointed and registered with the corporate registration authority (CIPC). The appointed person will be responsible for the operations and compliance of the South African branch.
Shareholder and Director Meetings
Shareholder meetings are not required since no shares can be issued by the South Branch. If there are no locally appointed Directors there is also no requirement for Directors’ meetings.
Is an Auditor Required?
The appointment of an auditor is compulsory but the scope of an audit is limited to the income statement of the South African Branch.
Transferring of Profit overseas
So long as the South African branch has paid all its taxes, profit can flow freely from the South African Branch to the International company.
What is the Legal Status of an External Company in South Africa?
The external company (branch) is granted its own legal status due to its need to register as an external. It is not, however, separate legal status except in the matter of exchange control. The branch does obtain a South African registration number.
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