Multinationals looking to expand to South Africa often decide to send one or two employees on temporary assignment to South Africa, or to employ South African nationals before incorporating a subsidiary or setting up a formal branch office in South Africa. Foreign companies should be aware of the possible tax consequences of their actions.
The Companies Act
Every foreign company carrying on business in South Africa (an external company) must register with the Companies and Intellectual Property Commission (CIPC) within twenty business days after it begins to conduct business in South Africa.
An external company must be regarded as "conducting business" if it is party to one or more employment contracts within South Africa (Scenario 1) or is engaging in a course of conduct or has engaged in a course or pattern activities within South Africa over a period of at least six months, such as would lead a person to reasonably conclude that the company intended to continually engage in business within South Africa (Scenario 2). There is no guidance available in the Companies Act, the regulations thereto or practice notes issued by the CIPC regarding the meaning of Scenario 1 and Scenario 2.
Let us assume for purposes of this discussion that employing South African employees to do sales and marketing in South Africa would be regarded as "conducting business" under either Scenario 1 or Scenario 2.
The Companies Act then requires such a company to continuously maintain at least one office in South Africa and to register the address of such office.
In the past, a foreign company expanding operations in South Africa often used the address of its auditors or attorneys as its registered address if it did not yet have offices in South Africa. The CIPC states in a 2012 practice note, based on a decision of the Western Cape High Court, that companies should not use an address chosen for convenience as its registered office, such as the address of its auditors. Under the Companies Act, a company's registered address must be the address of an office maintained by that company.
If a company does not comply with the provisions of the Companies Act relating to the registration as an external company and the maintaining of an office, the CIPC may issue a compliance notice requiring the company to comply. Should the company fail to comply with such notice, the CIPC may require it to cease carrying on business in South Africa.
Tax Administration Act and Income Tax Act
In terms of SARS' binding private ruling 102 issued on 4 May 2011, the registration of an external company will not automatically result in the creation of a permanent establishment in South Africa. The ruling is not of general application as it is a private ruling and, furthermore, it should be noted that the ruling dealt with registration as an external company under the old Companies Act of 1973.
Despite the provisions of the above ruling, compliance with the Companies Act as described above could have unintended tax implications.
The Tax Administration Act requires each company carrying on business or having an office in South Africa to appoint a public officer. The registration of an external company will trigger the obligation to have an office, which in turn requires that a public officer be appointed for that external company.
A public officer cannot be appointed for a company that is not registered for tax. On this basis, even though an external company may not yet have a permanent establishment in South Africa or earn any income or make any capital gains from a South African source, it will be required to register for tax, because it is required to appoint a public officer.
The public officer will also be considered to be the representative employer for employees' tax purposes, unless the foreign company has appointed an agent with authority to pay remuneration on its behalf, in which case, such agent will be the representative employer.
In the result, a non-resident company that pays South African tax resident employees into their South African bank accounts from a foreign country will be required to withhold employees' tax where it has a public officer in South Africa. As the employees' tax can only be paid from a South African bank account, the non-resident company will be required to open a South African bank account from where the employees' tax can be paid to SARS or appoint a South African agent to pay the withheld employees' tax to SARS (in order for a company to register with SARS, it would be required to have a South African bank account anyway).
It should be appreciated that the registration for tax purposes does not necessarily mean that tax will be payable in South Africa. Non-resident companies are only subject to tax in South Africa on income from a South African source and it will be necessary to assess this on a case by case basis. If South Africa has concluded a double taxation agreement with the country in which the foreign company in question is tax resident, the foreign company would be subject to tax in South Africa only if that company has a permanent establishment in South Africa.
Therefore, each company that is required to register as an external company in South Africa for company law purposes because it carries on business and/or is party to employment contracts in South Africa will have to assess its particular factual circumstances to determine whether or not it has created a permanent establishment for corporate income tax purposes in South Africa.