Setting Up a Subsidiary in South Africa

South Africa has emerged as a top choice for foreign investors to start business operations in Africa. The country’s strategic location, competent workforce, and well-established infrastructure make it an appealing destination for businesses of all kinds.

As per the World Bank’s Ease of Doing Business Report 2020, the country ranks 84th out of 190 economies. It allows easy business set up and provides great support to minority investors. The growing number of foreign entrepreneurs starting businesses in South Africa suggests it is a profitable market.

South Africa is a gateway to entering the African market. Establishing a business here will provide entry into a bigger African market with a consumer base of 1.4 billion. Companies can tap into this opportunity and establish a subsidiary here. 

Learn more about how to register a subsidiary company in South Africa. 

What Are the Types of Subsidiaries in South Africa?

When setting up a subsidiary company in South Africa, you can choose from the following options:

Limited Liability Partnership (LLP):

• An LLP is a partnership where partners have limited liability and are not personally responsible for the partnership’s debts.
• A partnership agreement governs it and requires at least two designated partners.
• Profits and losses are shared among partners, and an LLP is a distinct legal entity from its partners.
• LLPs are commonly used in professional services firms such as law, accounting, and consulting firms.

Public Limited Company (PLC):

• Public Company (Ltd) is a for-profit company that allows offering shares to the public.
• One or more individuals can form a PLC.
• The minimum requirement for a Public Company is three directors and one member, but there’s no maximum limit on shareholders.
• A PLC must have a company secretary and hold an Annual General Meeting (AGM).
• Auditing is a mandatory requirement for a PLC.
• The Johannesburg Stock Exchange (JSE) and Companies and Intellectual Property Commission (CIPC) govern the regulation of a Public Company.

Private Company (Pty) Ltd:

• Private companies trade for profit but do not offer their shares to the general public.
• One or more individuals can establish a private company.
• It requires at least one director and one shareholder, with a maximum limit of 50 shareholders.
• Private company directors are not required to be South African citizens or residents.

Partnership: 

• A partnership in South Africa is a business arrangement where two or more individuals jointly own and share profits. 
• The Partnership Act of 1890 regulates partnerships in South Africa.
• Each partner has to contribute to the fund, services, or products in return for profits. These profits between partners as per the contract signed by them while forming a partnership. 
• It is one of the cheapest options to start a subsidiary in South Africa. 

The incorporation of foreign subsidiaries in South Africa takes place with the CIPC. The subsidiary will be under the Companies Act of South Africa and must comply with all applicable laws and regulations.

How to Set Up Subsidiary in South Africa?

If you are going through the incorporation of a wholly-owned subsidiary in South Africa, you’ll need to be ready for some aspects that may affect your choice.

Step 1: Company name registration

• Start the process to register your subsidiary with company name registration. 
• Plan at least three company names for the South African subsidiary. 
• Once the name is confirmed, you can perform a name search with the Companies and Intellectual Property Commission (CIPC). 
• If the name is available, reserve the company name. 

Step 2: Registered office

• All companies must have a registered and legal office address from the date of incorporation. 
• In this company address, all the official correspondence is sent. 
• You must own a physical or virtual office in South Africa.

Step 3: Appoint Public Officer

• It is a statutory requirement to appoint a public officer who is a tax resident of South Africa. 

Step 4: Submit documents

• Now, submit all the required documents to the Companies and Intellectual Property Commission (CIPC). 
• Along with this, fill up the company incorporation application form and submit it to CIPC. 

Step 5: Income tax filling

• After company incorporation, register for income tax and e-fillings with South African Revenue Service (SARS). 

Benefits of Setting Up a South Africa Subsidiary

Some benefits of a subsidiary company in South Africa are as follows:

• Having subsidiaries makes acquiring potential advantages and incentives easier as establishing contractual agreements with other companies based in South Africa and Africa.
• Unlike branches, subsidiaries propose excellent stability and permanence, more significantly influencing suppliers and customers.
• In South Africa, the foreign-owned subsidiary functions under the Companies Act as a distinct legal entity independent of the parent corporation. As a result, the subsidiary, not the parent firm, is in charge of all liabilities.
• Subsidiaries in South Africa enjoy several tax benefits.
• Setting up a subsidiary in South Africa allows greater operational efficiency through management style.
• Subsidiaries are separate legal entities from their parent company providing brand recognition. Parent companies enjoy reduced financial risks as it creates a legal separation of entities. 

Documents to Prepare When Opening a Subsidiary in South Africa

The incorporation of a subsidiary of a foreign company in South Africa requires the following documents:

• Completed Notice of Incorporation form CoR14.1
• Completed forms CoR15.1A or CoR15.18 depending on the type of private company
• A name reservation confirmation certificate (CoR9.4)
• Certified true copies of the national ID/passport of all individual shareholders and directors
• Certificate of incorporation, M&AA, and latest annual return for corporate shareholders
• Power of attorney to authorize the company representative (if applicable)
• VAT101 form to register for VAT with SARS
• EMP101 form to register for PAYE with SARS
• WAs2 form to register for Compensation for Occupational Injuries and Diseases (COID) with the Department of Labour and Compensation Commissioner
• U18 form to register employees for unemployment insurance with UIF.

What Business Forms can South African Subsidiaries Take?

In South Africa, subsidiaries can take various forms depending on the company’s operations. The three types of company structures most prevalent in South Africa are partnerships, public companies, and private firms.

Establishing a partnership is one of the most affordable ways to start a subsidiary business in South Africa. All the partners, ranging from 2-20, must contribute to the capital and shares. 

South Africa Subsidiary Laws

In South Africa, there are different business forms to choose from when setting up a subsidiary, including private companies, public companies, close corporations, partnerships, and joint ventures. 

Close corporations and companies operate under limited liability, meaning they are separate entities from their owners. Close corporations allow up to ten individual shareholders and do not permit organizations as shareholders. 

Private and public companies are incorporated entities that can be established within about two months. There are no specific requirements for local shareholders or directors.

As per the Companies Act of 1973, foreign companies have to register with South African Registrar of Companies in Pretoria as external companies.

The employer must designate a resident South African to accept notices and services of process on behalf of the foreign company. In addition, external companies must have an authorized local auditor.

Post-Incorporation Compliance in South Africa

Foreigners and locals who have set up a subsidiary business in South Africa have the same post-incorporation compliance procedures. 

The Companies and Intellectual Property Commission (CIPC) outlines these requirements, which are mandatory for all South African companies.

Here are some of the post-incorporation compliance requirements that foreigners need to be aware of:

• Annual returns: All companies in South Africa, including foreign-owned businesses, must file an annual return with the CIPC within 20 business days of the company’s incorporation date. The yearly return updates the CIPC on the company’s directors, shareholders, and other vital details.
• Financial statements: International Financial Reporting Standards (IFRS)-compliant financial statements must be compiled and submitted annually to the CIPC by foreign-owned companies. A certified auditor must verify the financial statements.
• Tax compliance: Foreign-owned companies in South Africa must register for tax and follow all tax laws and regulations. It involves the timely filing tax returns and payment of all taxes owed.
• Company records: The company is required to maintain accurate records of all transactions and financial activity. These records need to be kept for at least seven years.

Taxes on Subsidiaries in South Africa

The taxation of foreign subsidiaries in South Africa involves various taxes that apply to such entities. These taxes include:

• A South African subsidiary is taxed at 28% on taxable income.
• A dividend tax of 20% is payable on dividends declared and paid by a South African subsidiary to a foreign shareholder, subject to a reduced rate of 5% under a double tax agreement.
• The capital gains tax rate for a South African subsidiary and a branch is 22.4%.
• Goods and services supplied in South Africa may be subject to VAT of 15%.

Tax Incentives for Companies Setting Up a Subsidiary in South Africa

Some of the tax incentives available to businesses setting up a subsidiary in South Africa include:

• Corporate tax: Compared to many other nations in the region, South Africa has a competitive corporate tax rate of 28%. Businesses can maximize their earnings and reinvest the proceeds as a result.
• Special Economic Zones (SEZs): A variety of tax incentives are available to businesses in South Africa’s SEZs, including lower corporate tax rates, VAT exemptions, and waivers of customs duties on imported goods.
• Research and Development (R&D): Businesses that conduct R&D activities in South Africa may be eligible for tax incentives such as a tax deduction of up to 150% of the expenditure on qualifying R&D activities.

Other Important Considerations

Choosing the appropriate business structure for the subsidiary is one of the most crucial factors. Parent companies and delegates should look for an appropriate entity that best suits their business operation and approved budget. However, the entire process of setting up a subsidiary in South Africa requires dedicated time to complete each phase of the procedure. 

How Multiplier’s Employer of Record Can Help You Hire & Expand in South Africa

Multiplier EOR can assist businesses in expanding into new markets rapidly and affordably without the requirement to establish a legal organization in South Africa.

As a result, businesses can begin recruiting staff and conducting business in South Africa within a few weeks instead of the months it would take to establish a subsidiary.

Employers can reduce the risks related to South African employment laws and regulations using Multiplier. Multiplier assures that all hiring procedures adhere to regional laws and rules, lowering the possibility of legal troubles and fines.