With the number of independent software vendors (ISVs) set to grow ten-fold over the next decade, software development is the fastest-growing segment of the technology industry and a significant driver of digital transformation as the world moves online.
The possibilities are endless – accounting systems, online educational courses, app development and even AI – and the software development sector offers a major opportunity for South Africans looking to start an ‘offshore’ business because the work can be done from anywhere with an internet connection.
The basic premise of an ‘offshore’ business is that it should be ‘non-resident’. In other words, it is managed and controlled in a location that is outside the place of residence of its owner or owners. This can provide a wide range of practical advantages – a more secure and stable political and economic platform, a more robust legal framework, a more beneficial tax system, a wider tax treaty network, an improved regulatory regime, a more effective commercial environment and, of course, it facilitates the diversification of your interests and investments.
Before you take your small software business abroad, it is essential to make sure your intellectual property (IP) is protected. The IP associated with a business name or product can be one of its most valuable assets – but only if it is properly exploited and protected.
Any business that wishes to establish a national or international identity should take steps to protect the use of its name, logo or other IP. This is preferably done at the outset when it is simpler, more efficient and more effective. IP is fast becoming an asset class as it drives enterprise value and economic growth.
Below is a checklist of how to get started ‘offshore’ in software development:
Choose a jurisdiction that’s relevant to your target market
Ask yourself which countries would find your software useful and relevant? At Sovereign, we can incorporate a company in many jurisdictions. Some have better IP regimes than others. If your target markets are European, then Cyprus and Malta could be good options to consider; if Africa is your focus, then Mauritius works well. For a more global focus, Singapore is a good starting point.
Get independent tax advice and a good IP lawyer
This can be a tricky area to navigate. That’s why it’s important to consult a cross-border tax adviser in conjunction with an IP lawyer. These professionals can apply best practice thinking and commercially-minded solutions to a wide range of IP businesses.
Make sure the development work is outsourced and paid for through a new company
It’s extremely important that any contracts with software developers are put in place with a newly-formed international company structure (NewCo), and not a South African company. The entity making the instructions and payments for development work must be seen to be the owner of the resultant IP. The developers can be anywhere in the world – even in South Africa – provided that NewCo holds the contracts with the developers.
Choose a jurisdiction that has signed tax agreements with your target markets
When IP is licensed out or exploited, a royalty is received in return. It is therefore essential to ensure that NewCo is resident in a country that has a functional double taxation avoidance agreement (DTAA) in place with South Africa. Withholding taxes on the royalties that NewCo receives for selling its IP will then be substantially lower under a DTAA, in some cases even reduced to zero.
What if you already have established software IP in South Africa?
One option would be to consult an IP lawyer to help you determine the value of the IP and then apply for SA Reserve Bank clearance to take this IP offshore. This could be challenging.
The other option would be for NewCo to develop a new version of this original software that would be suitable for other markets. So where ‘Version 1’ was suitable for the SA market, ‘Version 2’ would be developed specifically for a European market, for example, creating a new IP in the process.