South Africa:
Launching a new business – Start locally or head right offshore?
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If you are an entrepreneur looking to open a business in the post-Covid world should you launch your business in South Africa before expanding overseas, or should you find an offshore activity? external installation? That’s the legacy facing a growing number of local entrepreneurs – and there are pros and cons to each model.
Sovereign Trust adviser Ralph Wichtmann says much will depend on where the industry’s target market is located and where the company’s intellectual property (IP) is listed. Many new companies register a company based in South Africa to serve local customers and an offshore company to focus on overseas customers.
A growing number of clients are looking to establish offshore activity in jurisdictions such as Mauritius, Gibraltar, the Isle of Man, Guernsey and the United Arab Emirates, Wichtmann said. This is because of the flexibility they offer in terms of new markets, the ability to organically generate wealth abroad and even provide routes for residency and immigration. Another key consideration is to maximize profit when you come out. Many entrepreneurs expect the maximum payout to come when their venture is bought by a multinational corporation. Buyers of IP-owned companies pay a base price for well-structured jobs, established in jurisdictions with low corporate taxes and without exchange controls, Wichtmann said.
“At the same time, South Africa still has a large infrastructure and the potential to be one of the highest growth markets in the world. On the other hand, the establishment of an offshore company enables easy trading, with the ability to pay suppliers and receive money in foreign currency without having to go through a Reserve Bank license every time. It all depends on your goals, ”says Wichtmann.
Launching business in South Africa first
Pros
- South Africa has a good legal, financial and banking infrastructure, with a vibrant start-up community, including the likes of Snapscan, Luno, Pineapple, Ozow, Ukheshe, Yoco and Sweepsouth.
- More and more venture capital is available from major investors such as the Naspers venture capital arm, Naspers Furnace, and the U.S. Reserve Bank of USA’s Global Fintech Hackcelerator @Southern Africa contest.
- South Africa has an improved intellectual property (IP) infrastructure that protects new and small businesses.
Cons
- U.S.-based businesses are governed by the U.S. tax system and potentially tight exchange control rules, especially for start-ups. U.S. profits are taxed at 28%, while share holdings and capital gains tax rates are 20% and 22.4% respectively.
- Foreign investment, through a loan or share capital, required a Reserve Bank license, as would an IP sale to an offshore company. This can be very difficult and expensive.
“A potential solution is to create a US-based startup with a U.S. headquarters company, which will benefit from smooth exchange control rules and tax reductions. However, this has specific requirements that need to be met around equality sections, voting rights and how the costs of the assets are met, ”said Wichtmann.
Many local companies provide professional services under the direction of an offshore company. In these cases, it is clear that the management and design requirements came from the offshore company that owns the IP. Therefore, the local company is only a professional service provider.
Launching business overseas from scratch
Pros
- According to the sovereignty, there could be a number of benefits from lower taxes and a lack of exchange control rules. This could make the startup much more attractive for overseas investment.
- Many jurisdictions also have improved legal, financial and banking infrastructure.
Cons
- When choosing an offshore jurisdiction, it is important to ensure that any IP is created within that jurisdiction. If IP creation is considered in the US, it will be considered as South African IP and then Protection will be required
“Before choosing offshore sovereignty companies, it is important for them to review the extensive list of double taxation agreements available with the countries to which they allow their IP. These will benefit from lower withholding fees payable by IP-approved messengers. Getting proper structural advice is essential before starting any company, IP creation or structure, ”says Wichtmann.
The content of this article is intended to provide general guidance on the subject. Specialist advice should be sought about your particular circumstances.
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