Doing Business in South Africa

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Contents 1 Fact Sheet

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2 Business Entities and Accounting 2.1 Companies 2.2 Partnerships 2.3 Sole Proprietorship 2.4 Branches 2.5 Trusts 2.6 Audit and Accounting Requirements 2.7 Filing Requirements

4 4 5 5 5 6 6 7

3 Finance and Investment 3.1 Exchange Control 3.2 Banking and Sources of Finance 3.3 Investment Incentives 3.4 Research and Development (R&D) 3.5 Tariffs

8 8 8 8 9 9

4 Employment Regulations 4.1 General Employment Matters 4.2 Visas and Permits

10 10 12

5 Taxation 5.1 Corporate Income Taxes 5.2 Personal Taxes 5.3 Employment Related Costs and Taxes 5.4 Withholding Taxes 5.5 Value Added Tax (VAT) 5.6 Other Taxes 5.7 Tax Incentives for Businesses

14 14 14 15 16 17 17 18

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1 Fact Sheet Geography Location:

Southernmost tip of the African continent

Area: 1,221,037km² Land boundaries:

Botswana, Mozambique, Namibia, Swaziland and Zimbabwe

Coastline:

Indian Ocean to the east, Atlantic Ocean to the west

Climate:

Subtropical along east coast; mostly semi-arid elsewhere

Terrain:

Interior plateau surrounded by hills and narrow coastal plain

Time zone:

GMT +2

People Population:

52.98m (July 2013 est.)

Religion:

Predominantly Christian

Language:

11 official languages; English is widely spoken and is the language of business

Government Country name:

Republic of South Africa

Government type:

Democratic republic

Capital:

Pretoria, although Cape Town is the legislative capital, and Bloemfontein is the judicial capital

Administrative divisions:

South Africa is divided into nine provinces: Eastern Cape, Free State, Gauteng, KwaZulu-Natal, Limpopo, Mpumalanga, Northern Cape, North West, and Western Cape

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Political situation The legislature comprises a bicameral parliament consisting of the National Council of Provinces (NCP) and the National Assembly. Ten members from each province are elected to the NCP for five-year terms. The National Assembly consists of 400 members elected by popular vote for a five-year term. The head of state and of government is the president, who is elected by the National Assembly, again for a five-year term. The president appoints the cabinet.

Economy GDP – per capita:

US$7,508 (2012)

GDP – real growth rate:

2.5% (2012)

Unemployment:

24.7% (Q3 2013)

Currency (code):

Rand (R)

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2 Business Entities and Accounting 2.1 Companies A company is a legal entity separate from its owners (shareholders). The shareholders’ liability for the debts and obligations of the company is limited to their respective capital contributions, unless there has been reckless trading or the signing of outside suretyships. The shareholders and directors of a company are not required to be citizens or residents of South Africa. A company (including a foreign company carrying on business or non-profit activities in South Africa) must have a registered address in South Africa. There are no minimum or maximum share capital requirements. Companies are registered with the Companies and Intellectual Property Commission (CIPC), which maintains records regarding the structure and directors of the company, but not shareholdings. This information can be accessed by the public. The two main company types are private companies and public companies.

2.1.1 Private companies Private companies (identified by the term “Proprietary Limited” or “(Pty) Ltd” in their titles) are commonly used by foreign investors because minimal annual formalities are required. A private company must have at least one director and one shareholder; there is no maximum limit. A private company cannot offer shares to the public.

2.1.2 Public companies Public companies can raise funds by offering shares to the public. A public company must have a minimum of three directors. It must also appoint a company secretary, who must be a permanent resident of South Africa. There is no limitation to the maximum number of shareholders.

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2.2 Partnerships Under common law, an agreement between two or more natural persons, incorporated entities or trusts creates a partnership or joint venture. Such agreements are usually in writing; however, no formation instrument is required and, if a written partnership agreement is made, the document is not public. There is no legal difference between a partnership and a joint venture. A joint venture is often created for one project only, while a partnership generally has a longer duration: but even this difference is not essential or always applicable. A limited partnership (also known as an en commandite partnership) has at least one disclosed partner. A limited partnership is generally managed by the disclosed partner(s) only.

2.3 Sole Proprietorship An individual can engage in business as a sole proprietor. No formation or governance formalities exist. A sole proprietorship is not a legal entity separate from the sole proprietor, and the sole proprietor is liable for all the debts and obligations of the business. A sole proprietor is not required to be a citizen or resident of South Africa.

2.4 Branches Foreign companies wishing to establish a local branch office in South Africa must register the branch as an external company with CIPC within 20 days after it first begins conducting business or non-profit activities in South Africa. Government approval is not required and there is no condition that a percentage of shares be held locally. The liabilities of the branch extend to its foreign parent company.

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2.5 Trusts Generally a trust has a founder (or donor or testator), trustees and beneficiaries, which may be natural persons, incorporated entities or other trusts. The trustees administer the trust for the beneficiaries’ benefit. There is no restriction on the number of trustees or beneficiaries. In general, there are two types of trusts: testamentary trusts and inter vivos trusts. A testamentary trust is created under the will of a deceased person. An inter vivos trust is created by living persons or entities. Where a trustee has discretion whether or not to distribute the income or capital of a testamentary or inter vivos trust, or discretion over which beneficiary will receive the income it distributes, the trust is known as a discretionary trust. A trust is governed by the terms of the will or trust deed. Both must be registered with the Master of the High Court as public documents. Trustees may take no actions until they are issued with letters of appointment by the Master of the High Court. Unless they act negligently, trustees are not liable for the debts of the trust.

2.6 Audit and Accounting Requirements Public companies and larger private companies must present audited accounts. Smaller companies, including owner-managed companies, are exempt from the audit requirement. “Owner-managed” is not defined in the legislation; instead, a “public interest score” is arrived at by taking account of a company’s share structure, size and governance. Owner-managed companies will almost invariably fall below the level of public interest score at which audit is required. All companies must present their annual financial statements in accordance with appropriate financial reporting standards. In practice this means International Financial Reporting Standards (IFRS), regardless of company size. Records must include the company’s assets and liabilities, a fixed assets register, cash receipts and payments, details of goods purchased and sold, and annual inventory statements.

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2.7 Filing Requirements All companies are required to file an annual return with the CIPC, along with their annual financial statements (if required to be audited under the Companies Act 2008 or companies regulation), within 30 business days after the anniversary date of incorporation. These documents must be filed electronically. Once filed, they become public documents. A fee of between R100 and R3,000, depending on the company’s annual turnover, is payable; this increases to between R150 and R4,000 if the annual return is submitted after the 30-business-day deadline. If the company fails to file annual returns and financial statements for two consecutive years, the CIPC can refer the company for deregistration. The company will be requested to confirm whether it is still trading, and/or to file outstanding annual returns. Failure to respond to either can result in the company being deregistered.

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3 Finance and Investment 3.1 Exchange Control South Africa imposes limited exchange controls on current or previous residents of South Africa; very few restrictions apply to non-residents or to funds a taxpayer introduces from outside South Africa. The restrictions relate mainly to the level of local borrowings a non-resident may use.

3.2 Banking and Sources of Finance The South Africa Reserve Bank is the central bank of South Africa and is responsible for monetary policy, systemic stability and payments system regulation. Non-banking financial services are regulated and supervised by the Financial Services Board. Commercial banks operating in South Africa offer loans and mortgages and are free to operate within the framework of the relevant legislation. Branches of some of the major foreign banks are also established in South Africa.

3.3 Investment Incentives The government offers a comprehensive range of incentives, including grants, to both domestic and foreign investors through the Department of Trade and Industry (DTI) and various other supporting bodies. The incentives on offer can broadly be classified into the following 10 categories: • Development finance • Empowerment • Environmental • Export facilitation • Human resources and skills development • Manufacturing investment incentives • Sectoral • Small, medium and micro enterprises (SMMEs) • Technology (research and development) • Tourism. The DTI maintains the Small Enterprise Development Agency (SEDA) as a resource for establishing and developing SMMEs. The SEDA website (http://www.seda.org.za) contains links to sources of finance and other SMME development sites. For tax incentives, see 5.7.

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3.4 Research and Development (R&D) There are enhanced tax deductions for R&D expenses (see 5.7.1).

3.5 Tariffs South Africa is a member of the World Trade Organisation (WTO) and has undertaken not to raise tariffs above levels agreed in trade discussions. Tariffs imposed on imported goods are usually lower than those per standard WTO commitments.

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4 Employment Regulations For employment tax considerations, see 5.3.

4.1 General Employment Matters 4.1.1 Employment law Employment in South Africa is regulated by the Basic Conditions of Employment Act, the Employment Equity Act and the Labour Relations Act, among others. Together, these laws provide a framework for: • The employment contract and relationship • The eradication of discrimination in employment practices and the implementation of affirmative action policies • The promotion of equal opportunities and affirmative action, while eliminating unfair discrimination, and • Redressing the employment disadvantages of black people, women and those with disabilities.

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4.1.2 Employment contract With few exceptions, employers must provide employees with written particulars of employment, which must state certain information that includes: • The employee’s occupation and a brief description of the work • The place of work • Working hours and days of work • Salary or wage, or the rate and method for calculating the wage • Overtime rates • Benefits in kind and their value • Annual leave entitlement • Notice period for termination of employment • The contract period. Generally, employers cannot require or permit employees to work more than: • 45 hours in any week • 9 hours in any day if the employee works five days or less in a week • 8 hours in any day if an employee works more than five days in a week, or • 10 hours’ overtime in a week. Under the general rules, employees who occasionally work on a Sunday must be paid double their usual wage; those who ordinarily work on a Sunday must be paid 1.5 times their usual wage. Employees are entitled to 21 consecutive days’ annual leave or, by agreement, one day for every 17 days worked, or one hour for every 17 hours worked. There are additional requirements relating to sick leave, maternity leave and compassionate leave.

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4.1.3 Trade unions and employee representation With few exceptions, employees are entitled to join and be active in trade unions. They also have a right to form a trade union. There is specific provision in the legislation that forbids employers from: • Discriminating against employees or job applicants who are members of a union, or who take part in union activities • Offering greater rewards and better conditions to employees or job applicants who are not union members or who do not take part in union activities. Trade unions and employee organisations can form bargaining councils to deal with collective agreements, solve labour disputes, establish various schemes and make proposals on labour policies and laws.

4.2 Visas and Permits The requirements for entering South Africa are: • A valid passport • Where required, a valid visa, and • A yellow fever certificate if the journey starts or passes through a yellow fever belt in Africa or South America. A number of countries are exempt from the visa requirements for visits of 90 days or less, or visits of 30 days or less or in transit. The main types of visa available to foreigners looking to reside and/or work in

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South Africa are the temporary residence visa, and the permanent residence visa, each of which covers a number of permits. Temporary residence visas include: • Business permits for investing in South Africa (ie setting up a business, investing in an existing business) • Work permits for foreigners who have skills not readily available or in short supply in South Africa • Quota work permits (ie a government predetermined number of permits) for foreign workers to fill posts in specific sectors where there is a skills shortage in South Africa • General work permits for foreigners with general qualifications who wish to work in South Africa • Exceptional skills permits for highly skilled or exceptionally qualified foreigners who wish to work in South Africa. Permanent residence visas are: • Direct residence permits for those foreigners already in South Africa on a work permit for a period of five years or more • Residency-on-other-grounds permits for foreigners who meet certain criteria, including a permanent job offer, exceptional skills or qualifications, wanting to set up business in South Africa, financial independence or relatives of a South African citizen or a permanent resident.

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5 Taxation 5.1 Corporate Income Taxes Resident companies, defined as those incorporated, established or formed in South Africa, or which have their place of effective management in South Africa, are subject to corporate income tax on their worldwide income. Non-resident companies are taxed on their income from sources in South Africa, subject to the terms of any relevant double tax treaty. The general corporate income tax rate is 28%. Small business corporations, as defined, are taxed on a progressive scale from 0% to 21% on income up to R550,000, and 28% thereafter. Micro business corporations are taxed at progressive rates up to 6%. Capital gains are reduced by a third and then taxed at normal corporate income tax rates. Losses can be carried forward indefinitely for relief against future profits. There is no provision for carrying back losses. There is no tax consolidation facility for groups of companies. Companies must file tax returns within 12 months of the end of their financial year, which does not have to be the calendar year. Companies are required to make two payments on account of their tax liability for a tax year, the first no later than six months into the year (ie for February year-end companies, not later than the previous 31 August), and the second by the end of the year. Payments must be based on the estimated tax liability for the year, and penalties are imposed if they do not aggregate to at least 80% (90% for taxpayers with taxable income of up to R1m) of the actual liability. The balance of tax due is payable by assessment after filing the tax return for the year, or within six months after the year of assessment (seven months for taxpayers with a February year-end).

5.2 Personal Taxes Resident individuals are subject to income tax on their worldwide income. Non-resident individuals are taxed on their income from sources in South Africa, subject to the terms of any relevant double tax treaty. For the 2013/14 tax year, the tax rates on income net of personal allowances are as follows:

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Taxable Income

Tax Rate

Up to R165,600

18%

R165,601 – R258,750

25%

R258,751 – R358,110

30%

R358,111 – R500,940

35%

R500,941 – R638,600

38%

R638,601 and above

40%

Capital gains are reduced by R30,000 and the rest by two thirds and then taxed at normal income tax rates. Estate duty is potentially chargeable on the net assets of deceased persons who were ordinarily resident in South Africa. There is an exemption for net assets of up to R3.5m, and any excess is taxed at 20%. Any unutilised portion of the exemption is passed on to the surviving spouse. Bequests to a surviving spouse are free of duty. Resident individuals are liable to a donations tax at 20% on the value of assets disposed of by way of gift. There are exemptions for gifts to spouses, for donations to qualifying charities, and for gifts of up to R100,000 per annum. There is no wealth tax.

5.3 Employment Related Costs and Taxes 5.3.1 Unemployment insurance fund Employers must contribute the equivalent of 1% of their employees’ earnings to an unemployment insurance fund, up to maximum annual earnings of R178,464. They may also contribute voluntarily to other benefit funds, for example pensions and medical aid, with tax relief given for contributions up to a maximum of 20% of employees’ earnings. Employees must contribute 1% of their earnings, up to maximum annual earnings of R178,464, to the unemployment insurance fund. They may also contribute to other benefit funds with their contributions deductible for tax purposes up to prescribed limits.

5.3.2 Fringe benefits Fringe benefits are generally treated in the same way as other earned income, and are subject to the payroll tax rules. Special rules determine the basis for valuing fringe benefits. Examples of fringe benefits are the private use of company cars, contributions to a retirement fund, provision of free accommodation, interest-free or low-interest loans, bursaries, waiver of employee debts, payment of employee debts, subsistence allowances above certain limits, and free services.

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5.3.3 Skills development levy A skills development levy applies to the amount of remuneration paid or payable to employees by most employers. The rate is currently 1% (including VAT) of the total remuneration paid or payable to employees during any month. However, if an employer’s total annual employee remuneration is less than R500,000, it is not required to pay the levy.

5.3.4 Pension and retirement annuity fund contributions Employers, where required or entitled to, must deduct employee contributions to pension funds, subject to an annual deduction limit of 7.5% of remuneration or R1,750, whichever is higher. The annual deduction limit increases to R1,800 for arrear contributions. Retirement annuity fund contributions are subject to annual deduction limits of the highest of: • 15% of remuneration received from non-retirement funding employment • R3,500 less allowable pension fund contributions (see above), or • R1,750. The annual deduction limit is R1,800 for arrear contributions.

5.4 Withholding Taxes 5.4.1 Domestic payments Dividends paid by a resident company, or by a non-resident company in respect of shares listed on the Johannesburg Stock Exchange, to its shareholders are subject to a 15% withholding tax. However, tax does not need to be withheld for dividends being paid to “beneficial owners” that benefit from dividend tax exemption; these include: • Other resident companies • Federal/local government and certain national bodies • Pension, provident and retirement annuity funds • Medical schemes • Micro-businesses to whom the dividend payment does not exceed R200,000 in a year • For dividends paid by a non-resident company, a non-resident payee in respect of locally listed shares and the distribution is an asset in specie.

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Headquarter companies also benefit from dividend tax exemption. There are no withholding taxes on interest and royalty payments.

5.4.2 Payments abroad A 15% withholding tax applies to dividend payments made abroad by South African companies. There is currently no withholding tax on interest paid abroad. Royalties and similar payments for know-how are liable to a 12% withholding tax. For payments made to recipients in countries with which South Africa has a double tax treaty, the rates of withholding tax may be reduced under the terms of the treaty.

5.5 Value Added Tax (VAT) VAT is levied on the selling price of goods and services and on the value of goods imported into South Africa. Businesses must register for VAT if their annual sales turnover exceeds R1m. The VAT rate is 14%. Exports, basic foodstuffs and some fuel products are zero-rated. Certain supplies are designated as exempt, including some financial services. Businesses, other than those making exempt supplies, can generally recover the VAT with which they themselves are charged.

5.6 Other Taxes 5.6.1 Property taxes There are local taxes on the occupation of business property. Transfer duty also applies on the transfer of ownership of immovable property and real estate (see below).

5.6.2 Transfer taxes On registration of transfer of ownership of any immovable property or real estate, transfer duty becomes payable based on the unencumbered value of the property or real estate transferred. Where the seller and purchaser are related, the duty is payable on the higher of the stated consideration or the independently determined market value. The transfer duty rates range from 0% to 8%.

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No transfer duty is chargeable on transactions on which VAT is levied, even at a zero rate (eg in a going concern sale), but transfer duty is chargeable if the transaction is VAT exempt. Other exemptions apply to an heir’s acquisition from an estate, an acquisition as part of a rationalisation scheme, an acquisition from the estate of a deceased spouse, and an acquisition by certain tax-exempt bodies. Transfers of listed and unlisted securities are subject to a securities transfer tax of 0.25%.

5.6.3 Excise taxes Excise taxes are levied on selected items (eg tobacco and alcoholic drinks) and on the import of certain luxury goods.

5.7 Tax Incentives for Businesses 5.7.1 Research and development (R&D) expenditure R&D expenses are deductible at a rate of 100% of expenditure. Enhanced deductions of 150% are allowed for certain R&D expenses. The enhanced deduction must relate to R&D pre-approved by the Department of Science and Technology.

5.7.2 Manufacturing To encourage investment in manufacturing and the expansion of existing plants, accelerated depreciation allowances are available on the cost of plant or machinery, implements, utensils and other articles used by taxpayers for the purpose of their trade. For capital expenditure for buildings, plant and machinery brought into use for the first time by the taxpayer, a deduction of 50% of cost is allowed in the first year, 30% in the second year, and 20% in the third year.

5.7.3 Wage incentives Wage incentives encourage job creation by reducing the cost of hiring new workers, offering learnerships and encouraging the formalisation of employment. A learnership is similar to an apprenticeship, and is registered with the appropriate department of manpower/labour. The duration of the learnership depends on the type of industry, the level of skill to be attained, etc. Subject to certain conditions, employers can take an additional deduction for income tax purposes on the signing and registration of a learnership agreement.

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5.7.4 Film production An income tax exemption applies in respect of films for which principal photography commences on or after 1 January 2012 but before 1 January 2022. All receipts and accruals in respect of income derived from the use of, the right to use or the granting of permission to use, an approved film (ie approved as a local production or a co-production) are exempt from normal tax should the income accrue or be received within a 10-year period after the film’s completion date.

5.7.5 Urban redevelopments A special allowance is available for the construction or refurbishment of commercial or residential buildings in certain urban areas demarcated by local municipalities. The allowance can be deducted for income tax purposes in the year the taxpayer brings the constructed or refurbished building into use for trade purposes before 1 April 2020. For new commercial or residential buildings, the allowance is a 20% write-off of costs in the first year and 8% per annum thereafter for the next 10 years. There are also further enhanced allowances where low-cost residential units are erected or improved. For refurbishment of buildings preserving existing structural and exterior framework, the allowance is a 20% per annum write-off of costs for five years. A reduced allowance applies where the taxpayer purchases a building (or part of a building) from a developer.

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