Company Formation and Management Services
South Africa is ideally suited to serve as a base for investment into Africa and Sovereign is able to assist with the incorporation of South African companies and trusts. As South Africa has concluded more than 70 double taxation treaties worldwide, many with African countries, it is regarded as a natural holding company gateway into Africa. Some forms of income are exempt from tax or qualify for reduced rates under these tax treaties. These include royalties, dividends and capital gains. Resident companies (i.e. those incorporated or effectively managed in South Africa) are taxed on their worldwide income. Non-resident companies are taxed on their South African-sourced income. A dual system for the taxation of companies exists in South Africa, one part being on taxable income and the other on distributed profits. The tax is levied as follows:
- Corporate Income Tax:
- Companies – 28%
- Personal service provider companies – 28%
- Foreign resident companies with a branch on SA-source income – 28%
- Dividend withholding tax, which is a tax on the beneficial owner at the standard rate of 15%, is subject to numerous exemptions and a reduction in rate in terms of certain double taxation agreements.
- Small Business Corporations:
- R0 to R70,700 = 0% of taxable income
- R70,701 to R365,000 = 7% of taxable income above R70,700
- R365,001 to R550,000 = R20,601 + 21% of taxable income above R365,000
- R550,001 and above = R59,451 + 28% of the amount above R550,000
- Income Tax on South African Trusts:
- Trusts other than special trusts – 40%
- Capital Gains Tax:
- Individuals and special trusts 13.3%
- Companies 18.6%
- Other trusts 26.6%
If the branch of a foreign company establishes a place of business or owns immovable property in South Africa, it is regarded as an “external company”, and must be registered as such. Sovereign Trust (SA), which process we can assist with. There are two types of Private Limited Liability entities in South Africa – the Private Company (PTY) and the Close Corporation (CC). The latter can no longer be incorporated, but existing CC’s may continue to do business in South Africa. Private Company (Pty) – A Private Limited Company is known as a proprietary limited company, abbreviated to “Pty”. A Pty cannot trade its share on the open market and the name must end with the words “(Proprietary) Limited” or “(PTY) Limited”. It is governed by the Companies Act 71 of 2008 and has the following characteristics:
- Shareholders – A minimum of one shareholder is required whose details are filed with the Companies and Intellectual Property Commission (CIPC). Corporate shareholders are permitted and anonymity can be achieved by the use of nominee shareholders. Membership is limited to a maximum of 50 shareholders.
- Directors – A minimum of one director is required and full details of these must be filed with CIPC. No corporate directors are permitted.
- Meetings – An annual general meeting must be held within 18 months of the company’s incorporation. Subsequent AGMs are to be held not later than nine months after the end of each ensuing accounting date (the end of the Financial Year) but still within 15 months of the date of the preceding annual general meeting.
- Annual Reporting – When preparing their Annual Financial Statements, South African companies will fall under three categories depending on their Memorandum of Incorporation and Public Interest Score: statutory audit, independent review or compilation. The Annual Financial Statements are required to be completed within six months of the year end. Companies are also required to file an annual return each year with CIPC, which ensures that company details, including the list of active and past directors, are maintained and updated with the company registrar.
- Taxation – South African taxation changed from source-based to residency-based in 2001. There are three main types current tax applicable to companies:
- Normal tax which is charged at a flat 28% of taxable income;
- Small Business Corporation tax which is charged on a scaling rate depending on the amount of taxable income. The tax rate starts as low as 0% and goes up to 28%;
- Turnover Tax which is charged on a scaling rate based on the amount of turnover. The tax rate starts as low as 0% and goes up to 6%.
- There is also a Dividends Withholding Tax of 15% on dividends distributed to certain shareholders. Although this is an individual’s tax the company distributing the dividend is required to withhold those taxes on behalf of the shareholder.
- Restrictions on Name and Activity – There are restrictions on the use of certain words in the name of a company. Specific permission has to be obtained prior to incorporating the company. Words which are deemed to be “undesirable” or which are “calculated to deceive or mislead the public” are prohibited.
- Registered Office – As a matter of local company law the company must maintain a registered office address within the jurisdiction of incorporation and, depending on the Memorandum of Incorporation or Public Interest Score, may require an auditor.
South Africa International Headquarter Company Regime – South Africa’s location, economy, political stability, overall strength in financial services and extensive treaty network make South Africa a location in which to establish a regional holding company. In order to promote South Africa as a holding company jurisdiction, and to increase foreign investments into South Africa, an International Headquarter Company (IHC) regime was introduced and came into effect on 1 January 2011. This regime is designed to allow a free flow of funds through South Africa with a minimal tax incidence. This also creates the opportunity for South Africa to act as a gateway into Africa − through providing significant incentives to foreigners, to route their investments via South Africa as a holding company jurisdiction.
- An IHC must be a tax resident company with each shareholder holding a minimum of 20% of the capital and voting rights;
- A minimum of 80% of total assets must be either interest in equity shares or intellectual property licensed by the IHC to a foreign company in which the IHC holds not less than 20% of the capital and voting rights;
- Not less than 80% of total receipts and accruals must consist of dividends, royalties or interest, proceeds from the disposal of equity shares or intellectual property;
- Foreign subsidiaries of an IHC are not considered to be CFCs and their net income will not be attributed to the headquarter company. In relation to South African resident shareholders who hold more than 50% of the voting rights, the foreign subsidiary will be treated as a CFC;
- Any dividends declared by an IHC are exempt from income tax in the hands of the shareholders and are not subject to the Dividends Tax;
- Under the Exchange Control Circular No. 37/2010, IHCs may raise and deploy capital offshore without exchange control approval. An IHC is considered resident for all other exchange control functions.
Once a South African entity is incorporated, we provide a domiciliary service, which includes the provision of company secretarial, registered office and nominee shareholder services. Full management services from our own licensed corporate directors are also available and highly advisable in most cases. Re-mailing services are available at modest cost for all companies established by Sovereign.
Note: Ancillary services
In addition to providing incorporation, domiciliary and management (directorship) services, a range of ancillary services at competitive prices is available on request. These services include, but are not limited to: provision of dedicated telephone lines; office and personnel assistance; designated staff members (temporary or permanent availability); assistance with office relocation, introduction to real estate agents, government agencies and other third parties.
Trust Formation and Trustee Services
Using a trust to own the shares of a South African or offshore company can result in very substantial tax and non-tax related advantages which will accrue both on death and during the lifetime of the trust settlor. These advantages may be summarised as follows:
- Saving on Estate Duty or Inheritance Tax – On death, the estate duty/inheritance tax which would normally be assessed on the value of the shares would generally be eradicated.
- Asset Protection – Assets placed into trust are generally beyond the reach of creditors who might arise as a result of financial difficulties, divorce proceedings, litigation etc.
- Avoidance of Probate – A trust provides a means whereby assets can be smoothly passed on to the next.
Even though the English concept of trusts is foreign to South African law, the use of a trust was introduced in South African law through usage without specific legislative intervention. Currently a trust is defined widely in the South African income tax legislation as meaning any trust fund consisting of cash or other assets that are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person.
The South African Revenue Service (SARS) has introduced a number of measures over the years, which now results in the income of trusts being taxed at 40%, the highest rate applicable to individuals, although the “flow through” principle remains such that income and gains will flow through to the beneficiaries of a trust for tax purposes.
The use of offshore trusts has also been the subject matter of legislative intervention. Essentially income and capital gains are taxable in the hands of a South African resident to the extent that the resident acquires a vested right to the income or capital of a foreign trust in circumstances where the income or capital gains have not been subjected to tax in South Africa previously.
Sovereign has extensive experience of dealing with the establishment and administration of trusts and appropriate planning for income tax, capital gains tax and inheritance tax purposes. Our knowledge of the tax legislation relating to trusts and the duties and obligations of trustees enables us to ensure that trusts are properly managed – dealing with annual accounts, filing tax returns and liaising with beneficiaries over distributions. With our international reach, we can also advise clients with cross border interests and working with other jurisdictions to administer trusts and estates.