Tuesday, November 08, 2011

Foreign entities wishing to establish a legal presence in South Africa have two options. They can either -

register as an external company or branch in South Africa; or
establish a South African subsidiary company.

In terms of s 23 of the Companies Act 71 of 2008 (the Act), companies incorporated in jurisdictions outside South Africa are required to register as external companies with the Companies and Intellectual Property Commission (CIPC) within 20 business days of starting to conduct business in South Africa.
The Act originally provided a wide definition of 'conducting business or non-profit activities', which was more far reaching than necessary. This was significantly narrowed down in an amendment to the Act, which now provides that a foreign company must be regarded as conducting business in South Africa if it -

is a party to one or more employment contracts in South Africa; or
is engaging in a course of conduct, or has engaged in a course or pattern of activities in South Africa over a period of at least six months, that would lead a person to reasonably conclude that the company intended to continually engage in business activities in South Africa.

By contrast, under the previous Companies Act 61 of 1973 (the 1973 Act), an entity incorporated outside of South Africa was required to register as an external company if it had established a 'place of business' in South Africa.
A 'place of business' was defined as any place the company transacted or held itself out as transacting business, including a share transfer or share registration office, as well as the acquisition of immovable property. 'Establishing a place of business' is different from 'conducting business' and it has been suggested that the latter is much wider in scope than the former.
The Act states in s 23(2A) that a foreign company must not be regarded as conducting business activities in South Africa solely on the ground that the foreign company is or has engaged in one or more of the following activities in South Africa -

holding a meeting or meetings of the shareholders or board of the foreign company, or otherwise conducting any of the company's internal affairs;
establishing or maintaining any bank or other financial accounts;
establishing or maintaining offices or agencies for the transfer, exchange or registration of the foreign company's own securities;
creating or acquiring any debts or any mortgages or security interests in any property;
securing or collecting any debt or enforcing any mortgage or security interest;
acquiring any interest in any property.

Registration as an external company merely confirms that the foreign company in question is present and conducts business in South Africa.
Failure to register as an external company within three months of commencing business or non-profit activities in South Africa could result in the CIPC issuing a compliance notice to the foreign company requiring it to register within 20 business days of receipt of the notice. Alternatively, if it fails to register within this time, the CIPC may require the foreign company to cease carrying on business or activities in South Africa.
Although this still needs to be tested in a court, a mere failure to register as an external company in South Africa would probably not affect the validity of a contract or other transaction entered into with a third party.
The registration of an external company is not a particularly onerous procedure. The company need only register by filing a notice in the prescribed form accompanied by certain other prescribed forms.
In terms of the regulations to the Act, when registering as an external company the following must be provided -

the names of the company's directors at the time;
the address of its principal office outside South Africa; and
importantly, the name and address of the person in South Africa who has undertaken to accept service of documents on its behalf.

Such information will to a certain extent protect employees of external companies and third parties who deal with external companies. The requirements for the use of the name and registration number will also ensure the disclosure of basic information to third parties who deal with such a company. It generally takes between four and six weeks to register an external company. However, the CIPC is currently experiencing delays, so it could take longer. Following registration, a registration certificate will be issued by the CIPC together with a registration number. One of the advantages of registering as an external company is the various provisions that protect the names of registered external companies.
The 1973 Act applied generally to every company, including external companies, but under the new Act only a limited number of provisions of the Act and the regulations promulgated under the Act are applicable to external companies. This means that there are fewer administrative burdens imposed on external companies.
For example, on my reading of the two Acts, under s 325 of the 1973 Act, an external company's annual financial statements had to be audited, whereas s 84 of the 2008 Act does not extend this requirement to external companies. Similarly, under s 329(1) of the 1973 Act, an external company had to keep accounting records, whereas s 28 of the 2008 Act does not contain a similar requirement in respect of external companies.
An external company is also required to appoint a 'public officer' who must reside in South Africa. Essentially, the public officer is the tax representative of the external company and will also be responsible for accepting service of all tax matter processes on behalf of the external company. A public officer is generally responsible for the company's compliance with all of its tax obligations.
Subject to any relief which may be available under any applicable double taxation agreement, the external company will be subject to tax on any South African sourced income it receives or that accrues to it. Assuming the company is not tax resident in South Africa, it will not be subject to South African tax on its worldwide income.
A suggestion with which I agree is that the Act reduces the extent of regulation of external companies, thereby promoting investment in South Africa, while concurrently providing some degree of protection for employees and third parties who deal with external companies.