South Africa - Doing-Business-in-South-Africa 2012 uhy

DOING BUSINESS IN SOUTH AFRICA

CONTENTS 1 – Introduction 2 – Business environment 3 – Foreign Investment 4 – Setting up a Business 5 – Labour 6 – Taxation 7 – Accounting & reporting 8 – UHY Representation in South Africa

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1 – INTRODUCTION UHY is an international organisation providing accountancy, business management and consultancy services through financial business centres in over 80 countries throughout the world.

Business partners work together through the network to conduct transnational operations for clients as well as offering specialist knowledge and experience within their own national borders. Global specialists in various industry and market sectors are also available for consultation.

This detailed report providing key issues and information for investors considering business operations in South Africa has been provided by the office of UHY representatives: UHY HELLMANN (SA) 1st Floor, 9 Sturdee Avenue Rosebank 2196 South Africa Phone Website

+27 11 447 8447 www.uhy.co.za

You are welcome to contact Carlos Pedregal (carlosp@uhy.co.za) for any inquiries you may have.

A detailed firm profile for UHY’s representation in South Africa can be found in section 8.

Information in the following pages has been updated so that they are effective at the date shown, but inevitably they are both general and subject to change and should be used for guidance only. For specific matters, investors are strongly advised to obtain further information and take professional advice before making any decisions. This publication is current at August 2012.

We look forward to helping you do business in South Africa.

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2 – BUSINESS ENVIRONMENT The South African economy is predominantly based on free market principles, with some areas of state control.

Foreign investment in all facets of the economy is essential and is being actively encouraged by both the private and public sectors.

There is a long history of foreign investment in South Africa, with heavy involvement by British, German and American interests. As the leading economy in Africa, with a welldeveloped infrastructure and established trade links with the rest of the continent, South Africa is a suitable base for generating investment and trade with the rest of Africa, particularly in the sub-Saharan region.

Except in the banking, insurance and broadcasting industries, there are no restrictions on foreign ownership of local companies and businesses. There are, however, initiatives in place for the empowerment of black persons (ie black, coloured and Indian persons). These include increasing ownership of companies by black persons and other forms of empowerment through employment equity and preferential procurement.

Generally speaking, there are few restrictions on investment. No permits are required and, to the extent that government agencies need to be involved, they are reasonably helpful and efficient. Income from an investment may be paid to a foreign investor, and the proceeds of any sale of assets in South Africa may be transferred abroad by a non-resident seller.

RELATIONSHIP OF GOVERNMENT AND BUSINESS The government is committed to providing facilities and opportunities to the communities which were disadvantaged by the pre-1994 apartheid system, and to enabling those communities to share equitably in the resources of the country and its economic activity.

However, the government's Macroeconomic Strategy for Growth, Employment and Redistribution (GEAR) is based on promoting the free market and financial and fiscal discipline, and aims at economic growth, job creation and the development and distribution of basic services to all South Africans.

THE ECONOMY South Africa has the most sophisticated free-market economy on the African continent.

The country represents only 3% of the continent's surface area, yet it accounts for approximately 40% of all industrial output, 25% of gross domestic product (GDP), over half of generated electricity and 45% of mineral production in Africa.

Most of South Africa's economic activity occurs in the four main metropolitan areas (which together represent about 3% of the total land area) – namely the Witwatersrand area surrounding Johannesburg in the Gauteng Province, the Durban/Pinetown area in KwaZulu-Natal, the Cape Peninsula and the Port Elizabeth/Uitenhage area in the Eastern Cape.

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PRIVATISATION The public sector's role in South Africa's economy has historically always been substantial in comparison with the private sector's role.

However, the government is taking steps to commercialise, restructure and increase private sector involvement in government-controlled enterprises.

IMPORTS, EXPORTS AND FREE TRADE AREAS Most of South Africa's exports to industrialised countries consist of primary and intermediate commodities. A large proportion of exports consist of unprocessed raw materials, with the mining industry contributing the greatest proportion of the country's total exports. However, more of South Africa's raw materials are now being processed in South Africa before being exported.

South Africa is a major exporter of gold, diamonds, platinum, wool, sugar, manganese and chrome ores, asbestos, atomic energy materials and base minerals such as coal, antimony, copper and iron ore. The country is also an exporter of deciduous and citrus fruits, as well as animal hides and skins. Exports of chemicals, metal products, machinery, transport equipment and manufactured goods have increased (particularly to the rest of Africa) in recent years.

Imports include mainly capital goods, certain raw materials and intermediate goods, as well as sophisticated consumer goods.

INDUSTRIAL AND TRADE ORGANISATIONS Numerous public and private development agencies, as well as other agencies, provide advice and assistance to further economic development.

BLACK ECONOMIC EMPOWERMENT AND AFFIRMATIVE ACTION Black Economic Empowerment (BEE), a programme which promotes the accelerated integration of black people into the South African economy, has been a policy of the government since 1994. Until 2003, implementation of the policy was not particularly effective.

In 2003, the Department of Trade and Industry published a strategy document for broadbased black economic empowerment, the key theme of which was that empowerment had to be viewed as a broad-based, integrated and coherent socio-economic process. This strategy statement was crystallised in legislation with the promulgation of the Broad Based Black Economic Empowerment Act which came into operation in April 2004. The Act provides the legislative framework for broad-based black economic empowerment (BBBEE) by defining the policy, outlining the mechanisms for the regulation and measurement of BEE, and establishing the Black Economic Empowerment Advisory Council.

BROAD-BASED BEE BBBEE involves the economic empowerment of all black people (which, subject to certain limitations, includes black, Indian and coloured South Africans) within four interrelated contexts:

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 Direct empowerment – increasing the number of black people who manage, own and control enterprises and productive assets  Human resource and skills development – achieving equitable representation in all occupational categories and at all levels of the workforce  Indirect empowerment – promotion of preferential procurement from empowered enterprises and investment in enterprises owned or managed by black people  Socio-economic development initiatives.

IMPLEMENTATION OF BEE Two primary mechanisms have been introduced to ensure that these socio-economic strategies are implemented:  Codes of Good Practice were gazetted in February 2007 by the Minister of Trade and Industry which specify empowerment targets consistent with the objectives of the Act, and the periods within which those targets must be achieved. The public sector is obliged to apply and adhere to the BEE goals and targets set out in the Codes  Sector Codes which may be developed by major stakeholders in various sectors of the economy promoting transformation for that particular sector.

The Sector Codes are industry specific and will bind the signatories thereto and the government, once gazetted. Several ‘Transformation Charters’ have already been concluded, including Mining, Petroleum, Maritime, Agriculture, Health and Tourism, and Information Communications Technology, amongst others, and numerous charters are being negotiated amongst stakeholders on a continuing basis.

In general terms, the ‘Transformation Charters’ do not bind the government when such charters are converted to Sector Codes. If the charters are not converted into Sector Codes, the Codes of Good Practice should be used to measure BBBEE. The Codes define the elements of BEE and specify the key principles relating to the measurement of BEE. A generic scorecard (applicable for Code 000–Code 700) is used to measure progress in achieving the targets set for each of the seven elements contained in that generic scorecard. In turn, each of the elements has its own individual scorecard.

Points are allocated in accordance with prescribed formulae to measure the level of an entity’s compliance with the BEE targets for each element of BEE on the scorecard. The scorecard also provides for the award of bonus points if certain prescribed BEE milestones are attained or if performance is in excess of the requisite targets. The key elements and their respective weightings in the scorecard, being the maximum number of points which may be attained for each element (excluding bonus points), are:  Ownership (20 points) – Code 100  Management control (10 points) – Code 200  Employment equity (15 points) – Code 300  Skills development (15 points) – Code 400  Preferential procurement (20 points) – Code 500  Enterprise development (15 points) – Code 600  Socio-economic development initiatives (5 points) – Code 700.

Code 000 is the Framework Code which sets out the main measurement principles.

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Qualifying small enterprises (with an annual turnover of between ZAR 5 million and ZAR 35 million) have their own scorecard (Code 800). This is distinct from the generic scorecard mentioned above in relation to the weightings given to each element and the measuring principles.

COMPLIANCE All organs of state and various specified public entities shall be obliged to take into account the BEE status of the party concerned when implementing preferential procurement policies, selling state enterprises and entering into public private partnerships, etc.

An entity which attains 100 points or more (made possible by the award of bonus points) on the balanced scorecard will be regarded as a Level One Contributor to BEE, whereas, for instance, a score below 30 points will categorise the entity as a Non-Compliant Contributor.

Exempted micro enterprises (EMEs), entities with annual revenue of ZAR 5 million or less, are deemed to have a BEE status of a Level Four Contributor to BEE. This means that an entity procuring goods from an EME may recognise 100% of its expenditure relating to such procurement for purposes of calculating that entity’s procurement points.

Non-compliance will not result in any criminal sanction but will mean that government support will not be forthcoming. However, a knock-on effect is created in the sense that compliance will require those seeking compliance themselves to enter into business relationships (such as supply contracts) with parties who are in turn compliant.

MULTINATIONALS The Codes define a multinational as an entity which does business in the Republic of South Africa and elsewhere, and maintains its international headquarters outside the Republic of South Africa.

The government has issued a specific statement under Code 100 dealing with the recognition of ‘Equity Equivalents’ for multinationals. Recognising that there are multinationals which look to the government or public entities for work and are unable to sell equity to South Africans, the Minister in the Department of Trade and Industry may approve certain ‘Equity Equivalent Programmes’ after the multinational has consulted with the sector ministry or other stakeholders in any other government department, provincial government or local government with respect to their Equity Equivalent Proposal.

Equity Equivalent Programmes may involve programmes which support the Accelerated and Shared Growth Initiative for South Africa (AsgiSA), the Joint Initiative for Priority Skills and the National Skills Development Strategy. Equity Equivalent Programmes may also involve programmes which promote enterprise creation in respect of co-operatives which meet certain requirements and any other programmes which promote socio-economic advancement or contribute to the overall socio-development of the Republic of South Africa.

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CONCLUSION The implementation of a BBBEE policy means that many foreign investors, who may be wary to sell equity, may now compensate for the ownership requirement by taking part in Equity Equivalent Programmes and placing extra effort in skills development, training, preferential procurement, social responsibility initiatives, promoting ‘representivity’ within human resources and supporting small black businesses. In this way, a foreign investor could potentially be ranked as a good BEE contributor without selling equity to black people. It is fundamental to doing business in South Africa that potential investors and others become familiar with and meet their obligations in terms of the BBBEE laws and regulations.

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3 – FOREIGN INVESTMENT EXCHANGE CONTROL Exchange control is administered by the South African Reserve Bank (SARB) which has delegated powers to Authorised Dealers (banks licensed to deal in foreign exchange).

South Africa does not impose exchange controls on non-residents, but exercises exchange controls over residents and also transactions entered into between residents and nonresidents.

For exchange control purposes, a resident is a person (a natural person or legal entity), whether South African or of any other nationality, who has taken up residence, is domiciled or registered in South Africa.

There are, in principle, no restrictions on foreign investors acquiring companies or businesses in South Africa. The introduction of capital or the acquisition of shares does not require SARB approval. However, the acceptance of foreign loans by South African residents (including a South African subsidiary or branch of a foreign company) is subject to prior approval being obtained. Approval is required for the repayment of foreign loans by South African residents.

The sale or redemption proceeds of assets owned by non-residents may be freely transferred from South Africa. There are no thin capitalisation rules imposed in terms of exchange controls, but the rate of interest payable on foreign loans will be limited by the SARB, although, after approval has been granted, interest is freely transferable from South Africa.

Dividends declared by South African subsidiaries of foreign companies and profits distributed by a branch of a foreign company operating in South Africa may be remitted abroad, provided that the dividend has been declared out of (or the branch profits distributed from) realised reserves. Residents, including resident entities, may effect payment for services actually rendered by non-residents, provided that the fees payable are not calculated on the basis of a percentage of turnover, income, sales or purchases, nor may payments be made in respect of cost-sharing or cost-allocation arrangements.

The remittance of licence fees / royalties is subject to approval being granted by the SARB and / or Department of Trade and Industry (DTI).

Payment for imports may be made through an Authorised Dealer, against the submission of customs stamped documentation evidencing the receipt of the merchandise in South Africa. The receipt of export proceeds by residents is controlled.

Foreign currency export proceeds must be repatriated and offered for sale to an Authorised Dealer within 30 days of receipt. Exporters may grant credit of up to 180 days where it is the norm and on application to the Authorised Dealer, credit terms may be extended.

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Residents (natural persons) over the age of 18 years may avail themselves of a single discretionary allowance of up to ZAR 1,000,000 per calendar year which may be utilised for any one of or all of the following categories of allowances:  Travel  Holiday and business travel  Maintenance payments  Gifts or loans to non-residents.

Residents (natural persons) under the age of 18 years, may avail themselves of travel facilities within a limit of ZAR 200,000 per calendar year. Individuals resident in South Africa, who are taxpayers of good standing and over the age of 18 years, are permitted to remit capital abroad to invest within a limit of ZAR 4 million in aggregate, or alternatively hold foreign currency deposits with an Authorised Dealer.

Foreign nationals temporarily resident in South Africa may, subject to completing formalities through an Authorised Dealer, conduct their affairs on a resident basis while resident in South Africa and may expatriate accumulated earnings or capital introduced.

TABLE 1 Restrictions on earnings or capital EARNINGS/CAPITAL Listed securities Real estate Equity investment Loans

No restrictions No restrictions No restrictions All foreign loans subject to approval

Local borrowing (excluding normal trade credit) of a South African company in which nonresidents have at least 75% ownership or controls, is limited to a percentage of effective capital employed, calculated as follows: [(SA interest % / Non-resident interest %)100X] + 300%.

Please note: The above restriction was abolished in October 2009.

This formula does not apply to emigrants, the acquisition of residential properties by nonresidents or affected persons, and any other financial transaction, such as portfolio investments by non-residents, securities lending, hedging, repurchase agreements etc. In these cases a ratio of 100% applies.

INWARD INVESTMENT The Johannesburg Securities Exchange (JSE) is a valuable commodity in South Africa’s economic landscape. As South Africa’s only full-service securities exchange, it connects buyers and sellers in five different markets:  Equities − Including a primary and secondary board  Equity derivatives  Agricultural derivatives  Interest rate instruments.

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The JSE holds a treasured position as one of the top 20 exchanges in the world in terms of market capitalisation.

The JSE provides companies with the opportunity to raise capital in a highly regulated environment through its markets – the Main Board and the Alternative Exchange (AltX).

The Main Board is for established larger companies and the AltX is the breeding ground for vigorous younger companies which are to become the powerhouses of the future.

Listing on the JSE can provide a company with many benefits including access to capital to grow the business, an enhanced public profile, an ability to attach a value to the company, the facilitation of black economic empowerment deals and, if an international company, a listing which can be used as a springboard into the rest of Africa.

The JSE is regarded as a mature, efficient, secure market with world class regulation, trading, clearing, settlement assurance and risk management. It has harmonised its listing requirements, disclosure and continuing obligations with those of the London Stock Exchange (LSE) and offers superb investor protection.

REPATRIATION OF FUNDS TABLE 2 Repatriation of funds FUNDS Dividends Interest Royalties Equity investments Loans subject to approval

No restrictions No restrictions** 12% withholding tax* No restrictions** Readily granted**

* Assumes no double tax treaty relief exists ** Provided exchange control approval was obtained on initial investment TYPE – DIVIDENDS Dividends can be freely remitted (provided the shares are endorsed ‘non-resident’ and the dividend will not cause the business to be ‘over-borrowed’). The remitting bank may call for an auditor’s report.

TYPE – INTEREST Provided that exchange control approval has been obtained in advance in respect of the loan and the interest payable (ie approval is required for the receipt of the loan) and if prior approval for a loan has been obtained, interest may be paid without separate approval. Repayment of capital is subject to separate approval.

TYPE – ROYALTIES Earnings from royalties may be remitted provided that a royalty agreement has been approved by the SARB and / or the DTI, and provided the application for approval to remit the royalty is supported by the auditor’s certificate.

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TYPE – MANAGEMENT FEES For exchange control purposes, management fees can be freely remitted, provided that the fee is not based on a percentage of sales, turnover, purchases, etc. A detailed invoice specifying the services and the basis of the fee must be submitted to the entity’s bankers when effecting payment.

INVESTMENT INCENTIVES – RESEARCH & DEVELOPMENT SUPPORT PROGRAMME FOR INDUSTRIAL INNOVATION (SPII) Objective – This is to promote technology development in South Africa through provision of financial assistance to all South African registered enterprises in manufacturing or software development, engaging in the development of innovative, competitive products and/ or processes.

SPII – MATCHING SCHEME Applicability – The Matching Scheme is exclusively available to all South African registered small and medium-sized enterprises (SMEs) (with <200 employees, a turnover < ZAR 51 million and assets < ZAR 19 million) which are engaged in manufacturing in the private sector or in an information technology related project.

Benefit – A grant is available of between 50% and 75% of the qualifying cost incurred during the technical development stage, up to a maximum of ZAR 5 million per project:  For enterprises with a <25% black shareholding, the grant amount is 50%  For enterprises with a >25% to ≤50% black shareholding or >50% women/physically challenged shareholding, the grant amount is 65%  For enterprises with a black shareholding >50%, the grant amount is 75%.

SPII – PARTNERSHIP SCHEME Applicability – This applies to all private sector enterprises engaged in a manufacturing or information technology related project.

Benefit – A conditional repayable grant is available of 50% of the qualifying cost incurred during the development activity, with a minimum grant amount of ZAR 10 million per project, repayable on successful commercialisation of the project.

SPII – PRODUCT PROCESS DEVELOPMENT SCHEME Applicability – This applies to all small and micro private sector enterprises (with <50 employees, turnover < ZAR 13 million and total gross assets < ZAR 5 million) whose members are actively involved in the management of a business which is engaged in a manufacturing or an information technology-related project.

Benefit – A grant is available of between 50% and 85% of the qualifying cost incurred during the technical development stage with a maximum grant amount of ZAR 2 million per project:  For enterprises with a <25% black shareholding, the grant amount is 50%  For enterprises with a >25% to ≤50% black shareholding or women/physically challenged shareholding, the grant amount is 75%  For enterprises with a black shareholding >50%, the grant amount is 85%.

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TECHNOLOGY AND HUMAN RESOURCES FOR INDUSTRY PROGRAMME (THRIP) Objective – This programme aims to boost South African industry by supporting research and technology development, and by enhancing the quality and quantity of appropriately skilled people.

Applicability – The THRIP supports all companies undertaking science, engineering and technology (SET) research collaboration with educational institutions with the aim of addressing the technology needed within the participating firms. THRIP also encourages and supports the development of research personnel and students among participating organisations.

Benefit – THRIP will contribute between 30% and 50% of the funds invested by a company in research projects. The maximum level of THRIP funding per grant holder is set at ZAR 8 million across any number of projects per annum.

INNOVATION FUND (IF) Objective – The aim of the IF is to promote technological innovation within the research community and cross-sector collaboration, and to support the protection and commercialisation of innovations emanating from South African enterprises.

Applicability – This applies to companies which undertake research and development in all economic sectors. The IF provides funding through the following different programmes:  Technology advancement programme  Missions in technology programme  Patent support fund, Seed fund and Patent incentive fund.

Benefit – The maximum grant is limited to ZAR 15 million over a three-year period.

OTHER INVESTMENT INCENTIVES MANUFACTURING INVESTMENT PROGRAMME (MIP) Objective – The aim of the MIP is to encourage local and foreign capital investment in productive qualifying assets (plant and machinery, land and buildings either owned or rented, commercial vehicles).

Applicability – This applies to enterprises investing capital in new projects or expanding an existing project, with special rules for clothing and textile manufacturers.

Benefit – A tax exempt cash grant is available of between 10% and 30% of the qualifying investment cost up to a maximum grant of ZAR 30 million.

FOREIGN INVESTMENT GRANT (FIG) Objective – The aim of the FIG is to encourage foreign businesses to invest in manufacturing companies by assisting in the cost of transporting productive qualifying assets to South Africa.

Applicability – This applies to South African incorporated companies with a foreign direct shareholding of at least 50% and for qualifying costs associated with transporting new plant and machinery (excluding vehicles) from abroad. A FIG is conditional on the approval of a project under the MIP.

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Benefit – A grant is available towards the actual qualifying transportation costs or 15% of the cost of new plant and machinery acquired abroad, whichever is lower, and is limited to ZAR 10 million.

INDUSTRIAL POLICY PROJECTS (IPP) Objective – The aim of IPP is to promote local and foreign direct investment in industrial policy projects in South Africa (intended to replace the former Strategic Industrial Project Programme (SIP) under section 12G of the Act).

Applicability – This applies where manufacturing assets are used in South Africa and qualify for a deduction in terms of section 12C(1)(a), 13 or 13 quat, covering plant or machinery which will be brought into use for the first time by the taxpayer and will be used in a process of manufacture and the cost of the construction or refurbishment of buildings if certain conditions are met. Each project will be evaluated on a point-scoring system.

The minimum investments required to qualify for this incentive are as follows:  ZAR 200 million in the instance of a Greenfield project  The higher of ZAR 30 million or 25% of the value of the manufacturing assets in the case of Brownfield projects.

Benefit – Investors can benefit from an additional tax allowance of:  55% of the cost of any manufacturing asset used in a qualifying industrial policy project determined to have preferred status, or  35% of the cost of any manufacturing asset used in any other qualifying industrial policy project limited to: − ZAR 900 million in the case of any Greenfield project with preferred status − ZAR 550 million in the case of any other Greenfield project − ZAR 550 million in the case of any Brownfield project with preferred status − ZAR 350 million in the case of any other Brownfield project  With regards to the cost of training provided to employees in the furtherance of the Industrial Policy Project, the training allowance may not exceed ZAR 36,000 per employee and ZAR 20 million in the case of projects with qualifying status or ZAR 30 million in the case of projects with preferred status.

INDUSTRIAL DEVELOPMENT ZONES (IDZS) Objective – The aim of the IDZs is to promote manufacturing and increase the competitiveness of South African exports.

Applicability – All manufacturers and exporters located in designated zones are covered.

Benefits – A rebate of customs duties is available on imported goods, raw materials and components used in manufacturing and processing for export.

Following the publication of the Industrial Development Zone (IDZ) Regulations in December 2000, the Coega (near Port Elizabeth), East London, Richards Bay and Johannesburg International Airport have been designated as IDZs.

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The intention of IDZs is to provide investors in the zone with direct links to an international port and the facility to import inputs and goods into the zone free of customs duty and exempt from VAT. Each zone will have dedicated customs support for faster processing of customs documentation.

IDZs are suitable for export-orientated production. Finished goods sold into South Africa could have import status ie they could be subject to the same duties and taxes applicable to any other imports. Investors will qualify for all incentives available to South African companies (other than the Export Marketing and Investment Assistance Programme).

CUSTOMS AND EXCISE WAREHOUSES These warehouses allow the deferment of payment of customs duties and import VAT on goods subject to customs duty. Payment is only due at the time the goods are removed from the warehouse.

Certain manufacturing operations may also be undertaken in these warehouses subject to special prior approval being received from the customs authorities. Special dispensations are applicable to exporters if the goods are not subject to customs duty.

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4 – SETTING UP A BUSINESS There are a number of ways in which investments may be made by a foreigner or foreignowned company in South Africa.

METHODS OF INVESTMENT FORMING A COMPANY The most common procedure is to form a company in South Africa. This may be whollyowned or held jointly with other local or foreign shareholders.

There are two kinds of companies in South Africa. The first is a public limited liability company which is required to have a minimum of seven shareholders.

The second is a private limited liability company which may have between one and 50 shareholders and in which the right to transfer shares is usually restricted. Offers to the public for the subscription of shares or debentures are prohibited.

There is no requirement that either shareholders or directors be South African citizens or residents.

The methods for setting up companies are discussed later in this section. Once formed, a company can then engage in business by setting up a greenfield operation, buying an existing business or setting up in partnership or joint venture with a South African person or company.

ACQUIRING A COMPANY The investor can buy, or take over, the whole or some of the shares in an existing private or public company which has an established business or yet-to-be-established business.

Such shares can be held directly by the foreign investor. If this happens, the requirements of the Competition Commission referred to earlier in this Guide may have to be met, as well the requirements of the Securities Regulation Panel and the JSE (where applicable).

BRANCH OFFICE The investor can set up a ‘branch office’. This will involve registering the branch as an external company in terms of the South African Companies Act. This is discussed in more detail later in this Chapter.

The investor can form a joint venture with a South African entity, either through a South African subsidiary or directly in partnership.

BUSINESS TRUST The investor can set up a business trust.

PARTNERSHIP/SOLE PROPRIETORSHIP The investor can form a partnership with another investor or with a South African person.

The investor can also establish a business on its own as a sole proprietor.

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Partnerships and sole proprietors do not enjoy limited liability in South Africa.

All of the methods of investment listed above can be used as a way to conduct business in South Africa by an investor. There are also alternative possibilities, such as the granting of licences to South African businesses, entering into management agreements, appointing distributors and agents, and other similar means. These are dealt with later in this section.

ACQUISITIONS BUSINESS AND ASSET ACQUISITIONS If an investor wishes to buy out or buy into an existing South African business, it is possible to acquire the business itself as a going concern from the company or person who owns it, or alternatively to acquire some of the assets of the company.

The acquisition of assets requires the consent (by way of a special resolution which requires a 75% majority) of the shareholders of the seller company, if the assets which are the subject to the sale constitute all or a greater part of the total assets of the seller company. In addition, in certain circumstances, the requirements of the Securities Regulation Panel may be applicable.

SHARE ACQUISITIONS An alternative investment route is to acquire the whole or part of the shares in the company which conducts the business.

The acquisition of shares in private companies is usually achieved by agreement with the shareholders, although it is possible, if there are a number of shareholders, that in order to acquire control of the company, a formal offer may have to be made to all the shareholders. The mechanisms of the Companies Act and the Securities Regulation Code on Take-Overs and Mergers and the Rules of the Securities Regulation Panel (the Code) may have to be complied with.

The acquisition of shares in listed companies is a great deal more complicated. Acquisition can be achieved either by making a formal offer to the shareholders in accordance with the formalities of the Companies Act, when, if 90% of the shareholders accept, it is possible to force the remaining 10% to accept. Alternatively, if the investor does not contemplate a simple acquisition of shares but rather a more complex exchange of shares for other shares or other mechanisms, a scheme of arrangement may have to be proposed. This will be subject to sanction by the High Court of South Africa.

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The Code, administered by the Securities Regulation Panel, regulates certain take-overs.

The aim of the Code is to protect minority shareholders. It applies to all public companies, listed and unlisted, statutory corporations and large private companies (namely, those with more than ten beneficial shareholders and having shareholdersâ&#x20AC;&#x2122; interests and loan capital exceeding ZAR 5 million in value). In general, the Code applies to any transaction in respect of the shares of a company which has the effect of changing control in that company. For this purpose, control is a holding of shares in a company entitling the holder to exercise (or cause to be exercised), directly or indirectly, 35% or more of the voting rights of a company at meetings of that company or any company controlled by it, whether or not such holding confers de facto control. Where any person (or persons acting in concert) acquire or hold more than 35% of the shares in the company, a mandatory offer has to be made to all other shareholders.

If the company is listed on the JSE, the rules of the JSE require that substantial acquisitions or transactions involving related parties and the issue of new shares must be approved by shareholders, and the listing of any new shares issued must be approved by the JSE. REGULATORY AND OTHER ISSUES Acquisitions of businesses, either through the acquisition of shares or assets, may in certain circumstances, require the approval of the Competition authorities.

In acquiring any business or the shares in a company which conducts any business, it is important to be aware of the rights of employees. In the case of an acquisition of shares in a company, the target company continues in existence with all its rights and obligations, including its employee relationships.

This is not automatically the case with an acquisition of a business. But if the purchaser of a business does not provide for the continued employment of employees subsequent to the acquisition, on the same basis as their previous employment, this is likely to result in industrial action.

Retrenchments following an acquisition have to be carefully handled in order to avoid findings of unfair dismissals. The labour legislation (see Section 5 â&#x20AC;&#x201C; Labour) protects employees in a take-over situation.

It is also necessary to ensure that existing pension fund rights and rights in respect of an existing medical aid scheme be preserved and if either pension funds or medical aid schemes are to be merged into those of the acquirer, care must be taken to ensure that the existing entitlements are passed across to the acquirer in whole or any part of the business or funds.

Where the undertaking is transferred as a going concern, the contracts of employment of the employees, unless otherwise agreed, will continue in rights and obligations as if they were new employer and employee. This is effectively a transfer of employment agreements by operation of the law.

In addition to the above, the acquisition of banks, pharmaceutical companies, insurers and aircraft transport companies, entail special requirements and conditions.

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EXTERNAL COMPANIES (BRANCH OFFICES) The term ‘external company’ means a company or other association of persons incorporated in another country.

For purposes of South African company law, the existence of an external company becomes relevant only when it establishes a place of business in South Africa or engages in a transaction in South Africa.

RECOGNITION IN SOUTH AFRICAN LAW The Companies Act, 1973, provides that where a company or other association of persons incorporated outside South Africa has established a place of business within South Africa, it must be registered with the Registrar of Companies as an external company and observe the provisions of the Companies Act relating to external companies. A company incorporated outside South Africa, and every director, officer or agent of it, commits an offence if it establishes a place of business in South Africa and fails to obtain registration with the Registrar of Companies in terms of the Companies Act. An external company does not have separate legal personality. However, for the purposes of taxation and exchange control regulations, an external company is treated as having a separate legal personality.

REGISTRATION Registration of an external company is affected by lodging the following documents with the Registrar of Companies within 21 days after the establishment of a place of business:  A certified copy of the memorandum of association of the company, and if the memorandum is not written in one of South Africa’s official languages, a certified translation thereof in one of those languages  A notice of the registered office and postal address of the company  The consent of, and the name and address of, the auditor of the company in South Africa  A notice of the financial year of the company  Return of particulars in respect of each director (distinguishing between directors resident in South Africa and non-resident directors), the local manager and secretary  A notice of the name and address of the person resident in South Africa who is authorised by the company to accept, on the company’s behalf, all service of processes and notices.

Thereafter, the Registrar will register the company, allocate a registration number to the company and issue a certificate of registration. This certificate is conclusive evidence that the registration requirements, in terms of the Companies Act, have been complied with.

Any changes to the company’s constitutional documents must be communicated to the Registrar.

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THE COMPANY NAME An external company is required to display its name and country of incorporation outside its places of business in South Africa. Additionally, an external company must have its name, registration number and country of incorporation in all letterheads, notices, advertisements and official publications. Further, an external company must state the names of its directors (and their nationality if not South African), the names of its local managers and its local secretary on all business letters, trade catalogues and circulars bearing the company’s name.

IMMOVABLE PROPERTY Subsequent to registration, an external company is given the same power to own immovable property in South Africa as a local company.

ACCOUNTING The external company is obliged to keep such accounting records as are necessary to fairly present the state of affairs and business of the company in South Africa and to explain the transactions concerning its trade and business and its financial position in South Africa.

Annual financial statements in respect of the company’s business operations in South Africa must be lodged with the Registrar within six months after the end of each financial year. A certified copy of the latest completed annual financial statements of the external company, prepared in accordance with the requirements of the country in which it is incorporated, must also be lodged. It is possible to apply to the Minister of Trade and Industry for an exemption from these requirements and the minister may exempt an external company if the minister is of the opinion that the disclosure of information will be harmful to the company, or will be impracticable, or will be of no real benefit in view of the insignificant amounts involved. This application must be renewed every two years.

TAXATION Branch profits are subject to income tax at 33%, but there is no tax on the repatriation of branch profits.

CONVERSION It is possible to convert an external company into a South African company with uninterrupted corporate existence.

COMPANY FORMATION INCORPORATION Incorporation proceedings in South Africa are relatively straightforward. A private company – designated by the term ‘(Proprietary) Limited’ – must have at least one shareholder, but may have no more than 50.

A public company – designated by the term ‘Limited’ – must have at least seven shareholders and there is no limit on the maximum number. There is no restriction on foreign shareholding levels. Share certificates in respect of shares purchased by foreigners should be endorsed non-resident for exchange control purposes. There is no minimum capital requirement.

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The first shareholders of a company are persons who subscribe to the memorandum and articles of association of the company. For each new company, a memorandum and articles of association must be submitted to the Registrar of Companies, together with certain other statutory forms. The articles of association of private companies generally restrict the transfer of shares to third parties unless they have first been offered to the other shareholders.

TIMING AND COST In the ordinary course of events, incorporation takes approximately two to three weeks after a name has been reserved. But in special circumstances, this process can be affected in a shorter time.

On registration, the Registrar will issue a certificate of incorporation and a certificate to commence business. Only when the latter certificate has been issued, may the company commence business. However, it is possible for pre-incorporation contracts to be concluded by persons acting as trustees for the company to be formed. Any such contract must be in writing, must be disclosed in the memorandum of association and must be ratified by the company on incorporation.

Formation costs are not high and will usually be in the region of ZAR 5,000 to ZAR 10,000, depending on the complexity of the registration.

ONGOING REQUIREMENTS There is no requirement that directors must be South African citizens or residents. A return must be filed in respect of each director stating his/her nationality and place of residence.

All companies have to make an annual return for each financial year and all public companies must also submit a full set of audited annual financial statements for each financial year.

Every company is obliged to have an annual audit and have audited financial statements prepared. However, only public companies and external companies (unless exempted by an application to the Registrar) are required to submit such statements to the Registrar.

Widely held companies are obliged to nominate for appointment as auditor of the company a registered auditor, who in the opinion of the audit committee of the company, is independent of the company.

In addition, widely held companies must appoint an audit committee and the audit committee must have at least two members and consist only of non-executive directors of the company, who must act independently. A director is a non-executive director of the company if the director is not involved in the day-to-day management of the business and has not in the past three financial years been a full-time salaried employee of the company or its group and is not a member of the immediate family of such a person.

A director acts independently if that director expresses opinions, exercises judgment and makes decisions impartially and is not related to the company or any shareholder, supplier, customer or other director of the company in a way which would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of that director is compromised by that relationship.

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Widely held companies generally include all public companies, but may also include certain private companies and all subsidiaries of widely held companies, which are also classified as widely held companies.

THE COMPANIES BILL A new Companies Bill was adopted by Parliament in late 2008 and became law during 2010.

The Companies Bill overhauled company law in South Africa to bring it in line with international best practice.

Among other things, the bill simplified the incorporation and administration of companies, codified directors’ duties, enabled amalgamations and mergers along the line of those applicable in the US and provided for an efficient new business rescue system for financially distressed companies.

REPRESENTATIVES, DISTRIBUTORS AND FRANCHISERS There is no specific legislation dealing with these areas, which are regulated by common law.

Foreign persons are free to conclude representation, agency, distribution and franchising agreements with local persons. These are common methods for overseas organisations to promote and sell their goods in South Africa.

No formalities are required for the conclusion of such agreements. They may be oral but it is obviously preferable that they be committed to writing. Legal firms should be able to provide all the necessary assistance.

Most contracts tend to be subject to South African law, but there is generally no bar to any foreign law serving as the governing law, as long as there is some nexus between that law and the contract. The parties are free to agree on which court will have jurisdiction, or alternatively, agree that any disputes will be referred to arbitration. In short, the parties have free scope to regulate their relationship as they deem fit.

Commission rates are not regulated and may be freely agreed upon between the parties.

However, the following must be borne in mind:  If the foreign company takes a shareholding in the local company, care must be taken not to fall foul of the transfer pricing provisions of the SA Income Tax Act. Where goods or services are supplied between a resident and a non- resident, and they are a holding company and subsidiary or if one company owns at least 20% of the equity share capital of the other company, and the cost for the goods or service is less than an arm’s-length price, the Commissioner of the South African Revenue Service may, in determining the gross income of either party, adjust the price to reflect an arm’s-length price. Similarly the Commissioner may disallow the deduction of an expense between such parties if the expense is not market-related

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ď&#x201A;ˇ Where a non-resident provides a loan to a locally registered company, in which the nonresident is entitled to exercise 25% or more of the votes or participate in 25% or more of the dividends, capital or profits of the locally registered company, and the Commissioner believes that the financial assistance is excessive in relation to the fixed capital of the locally registered company, the Commissioner may not allow the locally registered company to deduct from its income the interest which it pays on the excessive portion of the loan ď&#x201A;ˇ The exchange control regulations will apply to distribution and franchise agreements if any royalty or licence fee is payable to a foreign person. Where such agreements involve no local manufacturing, the parties will need to apply to the exchange control department of the South African Reserve Bank for approval of the proposed level of licence fee or royalty. Where local manufacturing is involved, the parties will have to make an application to the Department of Trade and Industry (DTI) for such approval. If the DTI gives its approval, the exchange control authorities will allow payments of the licence fee or royalty to be made.

South Africa is a party to the Convention on Agency in the International Sale of Goods of 1983. This treaty provides a uniform approach to situations where an agent of a principal from one treaty country concludes agreements on behalf of that principal with third parties in another treaty country.

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5 – LABOUR Employment in South Africa is regulated by the law of contract and by statute.

There is a network of legislation providing minimum protection for employees out of which employers and employees cannot contract. This legislation is found in a number of Acts which regulate, inter alia, maximum hours of work, overtime rates, minimum periods of leave, notice of termination, organisational rights in respect of trade unions, strike law, rights and responsibilities of employers and workers in the event of retrenchments, insolvency and transfers of businesses, protection from unfair dismissal and the prohibition of unfair discrimination.

THE LABOUR RELATIONS ACT The Labour Relations Act (LRA) of 1995 is possibly the most important and far-reaching labour law statute in South Africa.

It deals most importantly with:  Collective bargaining rights between trade unions and employers  Strikes and lockouts  Dispute resolution  Unfair dismissals  The transfer of a business or a part thereof as a going concern.

Two aspects of the Act require special attention, namely the strike law and the law on unfair dismissals. Collective bargaining is dealt with in a later section below.

In South Africa the right to strike (subject to certain statutory limitations) is protected both in terms of the LRA and the constitution. Subject to employees and/or their trade unions complying with certain preliminary requirements (in particular, a compulsory conciliation meeting), employees have a right to strike and cannot be dismissed for doing so. This protection extends to secondary (sympathy) strikes and protest action to promote or defend socioeconomic interests of workers.

Employees’ contracts cannot be terminated simply by the giving of notice and every employee has the right not to be unfairly dismissed. A fair dismissal is one where the employer acts for a fair reason (substantive fairness) and in accordance with a fair procedure (procedural fairness). Broadly, three reasons are recognised as fair reasons for dismissal, namely:  Misconduct on the part of the employee  Incapacity (poor work performance or inability to perform due to ill-health or injury)  The operational requirements of the employer.

In addition, the LRA protects employees against other forms of unfair labour practice, including unfair conduct of the employer relating to demotion, suspension or the provision of benefits.

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The statutory dispute resolution system provides employees with reasonably easy access to a body known as the Commission for Conciliation, Mediation and Arbitration (CCMA), which has far-reaching powers to order reinstatement or compensation.

A Labour Court (which has High Court status) and a Labour Appeal Court also form part of the dispute resolution system. Private dispute resolution is becoming increasingly popular, but it requires the agreement of both parties to the dispute.

Investors must be aware that the LRA provides for the purchaser of a business (or part of a business or service) sold or transferred as a going concern to assume automatically (ie by operation of law) the contractual obligations of the seller to its employees.

THE BARGAINING AND STATUTORY COUNCIL SYSTEM An important method of regulating conditions of employment in South Africa is the Bargaining Council system which divides industries into specific areas of specialisation ie construction, motor manufacturing, engineering, etc.

Legislation encourages employers (either directly or through employer associations) and trade unions (representing employees in their specific industry sector) to form what are termed as Bargaining Councils. The formation of these Councils normally requires the support of the majority of the interested parties within the applicable sector or area.

Where a Bargaining Council exists, there is a centralisation of wage bargaining and the bargaining of conditions of employment under the auspices of the Bargaining Council. The collective agreements concluded in the Bargaining Council bind only the parties to the Bargaining Council. These collective agreements can, however, be extended (and usually are) to apply to non-parties who fall within the registered scope of a particular Bargaining Council.

As an employer, the state, together with registered trade unions in the public service, may form a Bargaining Council. Provision is made in the legislation for the creation of a Public Service Co-Ordinating Bargaining Council, which regulates all matters which affect the public service nationally.

As the Labour Relations Act encourages and permits collective bargaining, statutory councils may be formed where there is limited support (ie not less than 30%) of the interested parties in a sector or area. These councils do not have the power to regulate wages and can only deal with certain prescribed matters of common interest between the parties.

Wage bargaining is otherwise dealt with on a voluntary basis at plant level or at a level on a basis agreed between the employer and the employeesâ&#x20AC;&#x2122; collective bargaining agent.

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OTHER EMPLOYMENT ACTS THE BASIC CONDITIONS OF EMPLOYMENT ACT The Basic Conditions of Employment Act, 1997, makes provisions for working hours. It specifies that employees (other than senior managerial employees ie those who have the authority to appoint, discipline and dismiss employees and to represent the employer internally and externally, or persons who earn more than a prescribed amount, currently ZAR 149,736 per year) may not work more than 45 ordinary hours in any week. (It is intended that this amount will be reduced progressively to 40 hours per week.)

Employees may not work more than ten hours’ overtime per week and they must be paid 1.5 times their ordinary wages in respect of any overtime work.

Employees must be paid double their ordinary wage rate in respect of work performed on Sundays, unless they ordinarily work on Sundays, in which case they should be paid 1.5 times their ordinary wage rate. Employees must be paid at double their ordinary wage rate in respect of work performed on public holidays which fall on days when they would ordinarily work.

All employees are entitled to 21 consecutive days’ annual leave per year. During the first six months of employment, employees are entitled to one day’s paid sick leave for every 26 days’ work. Thereafter, they are entitled to 30 days’ paid sick leave during each sick leave cycle of 36 months if they work a five-day week. If they work a six-day week, they are entitled to 36 days’ sick leave in each sick leave cycle.

Female employees are entitled to four consecutive months’ unpaid maternity leave. The Unemployment Insurance Act provides for payment of limited maternity benefits by the state. Subject to certain limitations, all employees and their employers are required to contribute towards the Unemployment Insurance Fund.

Employees who have worked for an employer for longer than four months and who work for four or more days a week are entitled to three days’ paid family responsibility leave per year, which may be taken in the event of the birth or sickness of the employee’s child or in the event of a death in the family.

The Act also governs notice of termination and severance pay in the event of a dismissal due to the operational requirements of the employer.

EMPLOYMENT EQUITY ACT The purpose of the Employment Equity Act, 1998, is to achieve equity in the work place.

Its purpose is to promote equal opportunity and fair treatment in employment through the elimination of unfair discrimination and by implementing affirmative action measures to redress disadvantages in employment experienced by people from designated groups.

The Act aims to eliminate unfair discrimination in any employment policy or practice.

Unfair discrimination, based on a wide number of grounds, including race, gender, sex, age, HIV status, marital status and disability, is prohibited.

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However, the Act makes it clear that it is not unfair discrimination to implement affirmative action measures or to distinguish between persons on the basis of an inherent job requirement or where such differentiation is required for affirmative action purposes in accordance with the Act. The Act prohibits the medical testing of an employee unless this is required or permitted by legislation or it is justifiable in the light of various factors, inter alia, the inherent requirements of a job, medical facts and the fair distribution of employee benefits. Subject to certain exceptions, HIV testing by the employer is prohibited unless permission is obtained from the Labour Court.

The provisions of the Act which deal with unfair discrimination apply to all employees and employers. They also apply to applicants for employment, and unfair discriminatory recruitment practices are accordingly prohibited.

The provisions dealing with affirmative action apply only to designated employers. A designated employer is one who employs 50 or more employees or whose minimum annual turnover is equal to or ranges from ZAR 2 million to ZAR 25 million, depending on the sector in which the employerâ&#x20AC;&#x2122;s business falls.

In order to achieve equity employment, employers are required to put in place an employment equity plan and to implement affirmative action measures, which are measures designed to ensure that suitably qualified people from designated groups have equal employment opportunities and are equitably represented in all occupational categories and levels in the workforce of a designated employer.

Designated groups are black people (Africans, coloureds and Indians), women and people with disabilities. Affirmative action measures include preferential treatment and numerical goals, but they exclude quotas.

In developing an employment equity plan, which should be between one and five yearsâ&#x20AC;&#x2122; duration, the employer should consult with its employees and conduct an analysis of the demographic composition of its workforce in order to determine whether people from designated groups are fairly represented in all occupational categories and on all levels.

The employer is furthermore required to report to the Director General of the Department of Labour on progress made in implementing its employment equity plan. At the same time, an annual report must be made to the Employment Conditions Commission established under the Basic Conditions of Employment Act, which must disclose remuneration and benefits received in each occupational category and level of the workforce.

SKILLS DEVELOPMENT The Skills Development Act, 1998, seeks to develop the skills of the South African workforce.

The purpose of the Act is to increase the quality of working life for employees, to improve productivity in the workplace and to promote self-employment and the delivery of social services.

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This Act provides for the establishment of the National Skills Authority to advise the Minister of Labour on a National Skills Development Policy. It further provides for the establishment of Sector Education and Training Authorities for every national economic sector. Each Sector Education and Training Authority must develop and implement a sector skills plan within the framework of the national skill development strategy.

In terms of the Skills Development Levies Act, 1999, a compulsory levy, equivalent to 1% of the payroll of all companies, is paid by all employers to fund the activities of the Sector Education and Training Authorities.

UNEMPLOYMENT INSURANCE There is no broad-based national insurance scheme in South Africa (as there is, for example, in the United Kingdom and Europe).

However, the Unemployment Insurance Act, 2001, established the Unemployment Insurance Fund to provide for the payment (from the Fund) of unemployment benefits to certain employees, and for the payment of illness, maternity, adoption and dependentâ&#x20AC;&#x2122;s benefits.

In terms of the Unemployment Insurance Contributions Act, 2002, all employees and their employers make contributions to the Fund and, for example, in the event of losing their jobs and being unable to find other employment, or where an employee takes maternity leave, the employee can draw benefits from the Fund.

OCCUPATIONAL HEALTH AND SAFETY The law of health and safety at work in South Africa can be divided into two categories, namely those laws that are designed to compensate victims of occupational injuries or diseases and those which are designed to create a safe working environment.

The Compensation for Occupational Injuries and Disease Act, 1993, provides for compensation for disablement or death caused by occupational injuries or diseases sustained or contracted by employees in the course of their employment. The Act sets in place what is, in effect, a statutory insurance scheme for employers. Claims by employees for damages arising from injuries or illness endured in the workplace lie against the compensation fund established in terms of this act. No claims of this nature will lie directly against employers, who are required only to pay the required assessments towards the fund.

The Occupational Health and Safety Act, 1993, and the regulations passed in terms of this act, set out minimum rights and duties of employers and employees to maintain a healthy and safe working environment. Employers are required to ensure the health and safety not only of their employees, but also of all persons who may be directly affected by their activities. Employment in South Africa is regulated by the law of contract and by statute.

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REGULATORY ENVIRONMENT There are a number of other acts which are relevant to the general operation of companies.

In addition to the primary governing statutes, retirement funds and medical schemes, boards, administrators and subscribers are regulated by the Financial Institutions (Protection of Funds) Act, the Financial Advisory and Intermediary Services Act, the Financial Services Board Act, the constitution and to some extent, the Labour Relations Act and the Employment Equity Act. Besides these legislative enactments, there are also regulations, notices, practice notes and circulars issued by the Financial Services Board (FSB) or the Registrars of Pension Funds and Medical Schemes from time to time.

The retirement fund industry is regulated by the FSB and the Registrar of Pension Funds.

Certain complaints relating to retirement fund administration may be brought before specialist tribunals, including the Pension Funds Adjudicator, the FSB Appeal Board and the specialist tribunal on surplus apportionments, rather than the High Court or the Labour Court.

The medical scheme industry is regulated by the Council for Medical Schemes. It has a standing Appeal Committee to hear complaints against schemes or the Registrar of Medical Schemes, and also an Appeal Board constituted in terms of the empowering legislation.

OTHER EMPLOYEE BENEFITS There are a number of other employee benefits in existence.

These include share incentive schemes, housing and building loans, HIV/Aids education and treatment programmes, and post-employment medical subsidisation, among others.

They are generally dealt with in accordance with the ordinary common law principles of contract or trust law, but in a number of important respects they are subject to the provisions of the Labour Relations Act, the Employment Equity Act, the Basic Conditions of Employment Act and the Constitution, especially with regards to anti-discrimination provisions.

The Labour Relations Act contains provisions similar to those provided for in the European Unionâ&#x20AC;&#x2122;s Acquired Rights Directive. In that respect, the Labour Relations Act has significant consequences for the treatment of employees in relation to the variation of retirement funding arrangements and other employee benefits in the context of the transfer of businesses as going concerns.

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6 – TAXATION THE TAX SYSTEM AT A GLANCE With effect from 1 January 2001, South Africa moved away from a source-based income tax system to a residence-based income tax system.

Under the residence-based income tax system, South African residents are taxed on their worldwide income. For non-residents, the source of any income is relevant because nonresidents are taxed only on income from a South African source, or a deemed South African source.

Taxes imposed in South Africa include direct and indirect taxes. Direct taxes include:  Income Tax  Capital Gains Tax (CGT)  Secondary Tax on Companies (STC), which was recently replaced by Dividends Tax (DT).

Indirect taxes include:  Value Added Tax (VAT)  Securities Transfer Tax (STT)  Transfer Duty.

Income tax, CGT and STC are imposed under the terms of the Income Tax Act (ITA) No. 58 of 1962.

TAX RATES The corporate rate of income tax (for companies and close corporations) is 28% of the taxable income. In addition, STC is imposed at a rate of 10% (until 31 March 2012) on the net amount of dividends declared by any South African company. The combined effect of the corporate income tax rate and STC is that companies which distribute all of their profits by way of dividends, are effectively taxed at a rate of 34.545%.

STC was recently discontinued, with effect from 1 April 2012, at which point the DT came into effect. DT is a tax imposed on shareholders at a rate of 15% on receipt of dividends, whereas STC was a tax imposed on companies on the declaration of dividends.

A non-resident company is taxed at 28%. There is no tax on the repatriation of branch profits, nor is STC/Dividend Tax imposed on dividends distributed by a non-resident company.

A trust is subject to income tax at a rate of 40%.

Individuals pay tax at progressive tax rates depending on their taxable income. A year of assessment for individuals ends on the last day of February each year. For the 2011 tax year (ending on 28 February 2012), the maximum income tax rate was 40% of the taxable income where income exceeded ZAR 617,000 per annum.

DOING BUSINESS IN SOUTH AFRICA 31

Dividends paid by companies resident in South Africa are exempt from income tax in the shareholders’ hands. By contrast, resident shareholders of foreign companies are taxed on the dividends received from such foreign companies, subject to certain exemptions.

Interest received by non-residents is exempt from income tax, subject to certain conditions.

South Africa imposes a withholding tax of 15% on royalties payable to non-residents.

Furthermore, a withholding tax is imposed on the disposal of immovable property by nonresidents at the rate of 5% for individuals, 7.5% for companies and 10% for trusts. A Double Taxation Agreement (DTA) may provide relief from such withholding taxes. As at 25 August 2012, South Africa had concluded 72 comprehensive DTAs, the most recent being the DTA concluded with Rwanda, which came into force on 3 August 2010.

CGT was introduced with effect from 1 October 2001. A percentage of a taxpayer’s taxable gains is included in the taxable income of a taxpayer, with the result that capital gains are subject to CGT at an effective rate of 18.66% for companies and close corporations, 26.66% for trusts and a maximum rate of 13.33% for individuals.

The ITA contains a number of anti-tax avoidance provisions, some specific and others general. Specific anti-tax avoidance provisions aim to counter very specific arrangements described in the provisions which may avoid tax, whilst the general anti-avoidance rules (GAAR) allow the South African Revenue Service (SARS) to attack any scheme which has the effect of avoiding, postponing or reducing tax, unless the sole or main purpose of the scheme, and any of the steps under the scheme, was to obtain commercial as opposed to tax benefits. SARS could also apply the common law doctrine of ‘substance over form’ to attack simulated/artificial transactions.

In general, South African tax legislation does not recognise group taxation. However, provided that certain requirements are complied with, rollover tax relief is made available to group companies in respect of certain inter-group restructuring transactions. For purposes of rollover tax relief, the definition of a ‘group of companies’ is limited and nonresident companies. Public benefit organisations do not form part of a group of companies as defined.

Non-residents are subject to tax in South Africa on income from a source in, or deemed to be in, South Africa and on capital gains arising from the disposal of immovable property situated in South Africa held by that non-resident or any interest or right in immovable property situated in South Africa, as well as in respect of the disposal by the non-resident of any asset which is attributable to a permanent establishment (PE) of that non-resident in South Africa.

Value Added Tax (VAT) is payable on the supply of goods and/or services by a South African registered VAT vendor, or on goods and certain services imported into South Africa. Any person who carries on an enterprise in South Africa, and has taxable supplies which exceed the threshold of ZAR 1 million (excluding VAT) per annum, is obliged to register as a VAT vendor. Taxpayers may voluntarily register as VAT vendors if their taxable supplies exceed ZAR 50,000 per annum. There are certain exemptions from VAT, and on certain transactions, such as the export of goods from South Africa, which are subject to VAT at 0% (referred to as ‘zero-rating’).

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DIRECT TAXATION (INCOME TAX) Residents are subject to South African tax on their worldwide gross income.

The definition of a resident includes the following:  Any natural person who is ordinarily resident in South Africa  Any natural person who is not ordinarily resident, if that person is physically present in South Africa for a prescribed period. This is known as the ‘physical presence’ test, in terms of which three requirements must be satisfied: − Firstly, the person must have been physically present in South Africa for a period exceeding 91 days during the relevant tax year − Secondly, the person must have been present in South Africa for more than 91 days during each of the five preceding years of assessment − Finally, that person must have been present in South Africa for a total of 915 days during those five preceding years of assessment  Any juristic person, incorporated, established or formed in South Africa or having its place of effective management in South Africa.

In the case of a resident, ‘gross income’ includes:  The total amount  In cash or otherwise  Received by or accrued to or in favour of such a resident  During the year or period of assessment  Excluding receipts and accruals of a capital nature, and  Including specified amounts, irrespective of whether they are of a capital or revenue nature.

In the case of a non-resident, ‘gross income’ includes:  The total amount  In cash or otherwise  Received by or accrued in favour of the non-resident  From a source within or deemed to be within South Africa  During the fiscal year or period of assessment  Excluding receipts and accruals of a capital nature, and  Including specified amounts, irrespective of whether they are of a capital or revenue nature.

‘Income’ is calculated by deducting from the ‘gross income’ any income which is defined as ‘exempt income’.

‘Taxable income’ means the aggregate of:  Income less all permissible deductions or allowances, plus  All amounts to be included or deemed to be included in the taxable income of a person in terms of the ITA, such as net capital gains.

DOING BUSINESS IN SOUTH AFRICA 33

INDIVIDUAL TAX In the case of individuals, the normal tax payable on taxable income is calculated at progressive rates and reduced by certain rebates.

During the 2012 tax year, the maximum rate of tax was 40% for individuals who earn a gross income of more than ZAR 617,000 per annum.

The primary rebate for individuals was ZAR 11,440 and the secondary rebate (an additional rebate available to persons aged 65 and over) was ZAR 6,390 (giving a total rebate of ZAR 17,830 to persons aged 65 and over).

Income earned by individuals younger than 65 years of age, who earn less than R 63,556, is not subject to tax. For individuals 65 years of age and older, the threshold is ZAR 99,056.

Income subject to normal tax includes (among other sources) the following:  Salaries  Annuities  Remuneration or other benefits from employment, including lump sums received from pension or provident funds and gains from the sale of equity instruments granted to directors and employees (subject to specific rules regarding the vesting of equity instruments)  Compensation for loss of employment or variation of employment  Restraint of trade payments  Income from sources other than employment, for example, investment income.

Non-cash benefits or ‘fringe benefits’, such as the arrangement between an employee and the employer in terms of which the employee is offered the use of a company car as part of his/ her remuneration package, are specially valued to determine the amount to be included in the employee’s ‘gross income’.

Remuneration from employment is subject to a deduction system known as ‘employees’ tax’ and it is deducted as Standard Income Tax on Employees (SITE) and Pay As You Earn (PAYE). The employer is required to deduct employees’ tax at source and to pay the amount so deducted directly to SARS. Where an employee earns below ZAR 63,556 per annum, only SITE, which is a minimum non-refundable tax, is deducted. If the employee only earns income which is subject to SITE, the employee need not submit a tax return to SARS. PAYE is deducted in respect of income above ZAR 63,556 per annum. From 1 March 2011, the phasing out of SITE began.

PARTNERSHIPS Partnerships may be formed by two or more persons up to a maximum of 20 partners.

A partnership is not recognised as a separate legal entity or taxpayer under South African common law.

In terms of the ITA, the partners are subject to tax on the partnership income attributed to them in accordance with their profit-sharing ratios (corresponding expenses of the partnership are allocated to the partners in the same ratio).

DOING BUSINESS IN SOUTH AFRICA 34

Although partnerships are not fiscal entities, there is a technical requirement in the ITA which requires the partnership to submit a joint return in respect of the business.

However, there is no formal partnership tax return. In practice, SARS accepts the accounting records of the partnership, which must be submitted together with the tax return of the managing partner or general partner.

However, for VAT purposes, a partnership is treated as a person and if it has supplies subject to VAT, it may, depending on the value of the supplies, be required to register as a VAT vendor.

CORPORATE TAX TAX ON WORLDWIDE INCOME All resident companies are taxed on gross income, irrespective of where in the world that income is earned. Resident companies are entitled to foreign tax credits for taxes paid or payable offshore, subject to several restrictions. A DTA may provide alternative relief which may be wider in its scope.

TAX EXPOSURE OF FOREIGN COMPANIES Non-resident companies are taxed on income derived from South African sources or sources deemed to be located in South Africa, as well as on capital gains in respect of South African immovable property or rights in immovable property and assets which are attributable to the PE of that company, unless a DTA exists which provides otherwise.

In addition, the ITA contains controlled foreign company (CFC) rules, which may function to attribute an amount equal to the net income of the CFCs to the South African resident shareholders. Several exemptions are available, essentially in respect of a substantial business presence of the CFC offshore.

TAX RATES The corporate income tax rate of companies and close corporations is 28%.

In addition, DT is levied on shareholders at a rate of 15% on receipt of dividends by South African companies. A company declaring all of its profits as dividends thus pays tax at an effective rate of 38.8%.

THE NEW DIVIDENDS TAX The basic legislative framework for the introduction of the dividend tax was enacted during 2008. It is anticipated that further legislative amendments will deal with inter alia specific anti-avoidance concerns and with foreign dividends.

Unlike STC, the dividend withholding tax rate may be reduced in terms of the provisions of a DTA, if applicable. A number of DTAs provide for the reduction of tax on dividends to 0%.

SARS has indicated that it will be renegotiating the relevant articles of these DTAs prior to the commencement of the new regime. It is anticipated that all of the renegotiated DTAs will provide for a reduction to 5%, subject to requirements regarding shareholdings, etc.

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SPECIFIC TAX REGIMES Gold mining companies are taxed according to a formula. The taxable income of oil and gas companies is determined in terms of a separate schedule to the ITA. Diamond and other non-gold mining companies are taxed at the same tax rates applicable to ordinary companies. There are no specific rules which apply to these companies.

The recently promulgated Minerals and Petroleum Resources Royalty Act (MPRRA) will impose a royalty on the transfer of mineral resources. Different rates will apply to refined and unrefined minerals, with a maximum rate of 5% applying to refined minerals and a maximum rate of 7% to unrefined minerals. The royalty is payable by the extractor of the mineral resource as a percentage of gross sales in respect of that mineral resource. The MPRRA became effective on 1 March 2010.

A ‘small business’ may be exempt from the royalty if its gross sales in respect of all mineral resources transferred during that year do not exceed ZAR 10 million, subject to a number of further requirements, such as that the royalties would not have exceeded ZAR 100,000 and that the extractor must be a tax resident.

Farming operations, including game farming, are taxed under very specific provisions of the ITA. FISCAL YEAR AND TAX RETURNS A company’s financial year end may vary, and the year end determines the annual tax period for which the company is assessed for tax. Tax returns for companies must normally be submitted within twelve months after the company’s year end.

SPECIFIC TAX RULES APPLICABLE TO CROSS BORDER TRANSACTIONS Foreign companies carrying on business in South Africa through a branch may be required to register as ‘external companies’ in terms of the Companies Act. They may be required to register as a taxpayer and to submit tax returns if they derive income from a South African source, unless a DTA provides for an exemption eg if the foreign company does not carry on business via a PE in South Africa.

A branch (or PE) of a foreign company is subject to tax at a rate of 33%. There are no withholding taxes on the remittance of branch profits and no STC (or dividend withholding tax) arises. The taxable income of a branch or PE is determined on the basis that income from a South African source will be reduced by corresponding deductible expenses.

However, where a DTA is applicable, the taxable income must generally be determined as if the PE was a separate and distinct person dealing at arm’s length with the head office. In practice, SARS applies the transfer pricing guidelines to determine the attribution of profits to a PE. A subsidiary company registered in South Africa is treated as a separate legal entity and will be subject to the same tax provisions as other companies registered or incorporated in South Africa.

The ITA contains transfer pricing rules which correspond to the rules applicable in most industrialised countries. SARS has issued a Practice Note on the application of the transfer pricing rules, which is based on the OECD Transfer Pricing Guidelines for Multi-national Enterprises and Tax Administrations.

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The ITA also contains thin capitalisation provisions which aim to avoid excessive debt funding of a subsidiary or an associated local company by a non-resident lender. In accordance with the SARS Practice Note on thin capitalisation rules, the basic guideline is that a shareholder’s loan should not exceed the share capital in a ratio exceeding 3:1.

The ITA contains several complex provisions dealing with the taxation of currency gains and losses.

The ITA contains several restrictions on the deduction of payments to a non-resident for the use of intellectual property. Such payments are also subject to withholding tax at a rate of 12%, unless an exemption is applied under a DTA. In the latter case, the licencee must apply to SARS for confirmation that no tax needs to be withheld. The withholding tax is a final tax and the non-resident is not required to render a tax return.

If a resident acquires immovable property or shares in an immovable property company from a non-resident, the purchaser (or his agent) must withhold tax from the payment and pay such tax to SARS. The withholding tax rate in respect of a foreign company is 7.5%. The withholding tax is not a final tax and the non-resident remains liable to render a tax return and to disclose its income and expenses. The withholding tax will then be a credit against its final tax liability or a refund will be granted if no tax was due.

SERVICES COMPANIES Payments to Labour Brokers and Personal Service Providers (‘service providers’) may be subject to the deduction of employees’ tax by the person making the payment, unless the service provider qualifies for the exemption available to independent service providers or under a DTA. Where the service provider is a company, it will be subject to employees' tax withholding at a rate of 33%.

South African employers are obliged to withhold employees' tax from remuneration paid to foreign employees who render services in South Africa. Furthermore, they may also have an employees' tax withholding obligation with respect to a non-resident service provider company for services rendered by that company in South Africa. Payments to independent foreign service providers could present specific withholding tax problems.

Resident independent contractors are not regarded as employees for employees’ tax purposes if they carry on their trade independently, but this exclusion does not apply to non-residents. Furthermore, although there is no prohibition against foreign labour brokers applying for labour broker exemption certificates, it is generally impossible for foreign labour brokers to comply with the requirements for the exemption. Accordingly, payments to foreign service providers could be subject to an employees' tax withholding obligation, unless an applicable DTA provides an exemption.

SMALL BUSINESS CORPORATIONS Small Business Corporations (SBCs) are subject to income tax at progressive tax rates.

Annual income of between ZAR 0 and ZAR 63,556 is subject to income tax at 0%, annual income of between ZAR 63,557 and ZAR 350,000 is subject to income tax at a rate of 7%, while the income in excess of ZAR 350,000 is subject to income tax at a rate of 28%, which is equal to the corporate tax rate.

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A SBC is defined as a close corporation, private company or co-operative which generates no more than ZAR 14 million turnover during the year of assessment. These companies are also required to comply with a number of additional requirements in order to be considered SBCs. A new Turnover Tax system for micro businesses with a turnover of up to ZAR 1 million was introduced with effect from 1 March 2009. It is available to sole proprietors (individuals), partnerships, close corporations, companies and cooperatives. Turnover Tax is calculated by applying a tax rate determined at a sliding scale to ‘taxable turnover’ as determined in terms of the Sixth Schedule to the ITA. An existing qualifying micro business may elect to be registered as a micro business before the commencement of a new tax year, subject thereto that specific provision is made for the 2010 year, since the Sixth Schedule only came into effect on 1 March 2009. New businesses must apply within two months from the date of commencement of business activities. Certain businesses are excluded from the Turnover Tax system.

DIVIDENDS, INTEREST AND ROYALTIES Dividends paid by companies which are tax resident in South Africa are generally exempt from income tax in the hands of the shareholders, subject to certain exceptions eg if the dividends were re-characterised as interest under so-called hybrid equity instruments.

As indicated above, a new Dividends Tax was introduced during 2010. The tax is imposed at a rate of 15% on dividends paid by a company to an individual, a trust or a non-resident. A resident company will be exempt from the tax. A DTA may apply to reduce the rate of withholding tax, typically to 5%, if a foreign company holds at least 10% of the capital of the resident company.

Foreign dividends are subject to South African income tax, unless they qualify for an exemption, for example where the shareholder holds at least 20% of the ordinary shares and voting rights in the foreign company, or where the profits from which the foreign dividends were distributed had already been taxed in South Africa.

In general, interest income is taxed on a yield to maturity basis, subject to various conditions and exceptions. Interest earned by a non-resident from a source in South Africa is exempt from tax provided the foreign lender does not carry on business via a permanent establishment in South Africa or, in the case of an emigrant, he/she did not spend more than 183 days of the fiscal year in South Africa. Further relief may be available under a double taxation agreement (DTA) if the non-resident does not qualify for the domestic law exemption. Interest income is deemed to be sourced in South Africa if the debtor used the funds in South Africa. If the place of use is unclear, the residence of the debtor is deemed to be the source of the interest income.

Payments to a non-resident for the use of intellectual property eg for the use of a patent, design, trade mark or copyright, are subject to a withholding tax imposed at a rate of 12%.

Furthermore, payments for the imparting of knowledge and any connected services are also subject to the withholding tax. The latter provision has been interpreted to include the supply of ‘know-how’ as opposed to ‘show-how’, except to the extent that ‘show-how’ could be connected to the supply of ‘know-how’ services.

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Under certain circumstances, payments of royalties or premiums for the use of intellectual property may not be tax deductible to the South African resident if the payment were made to a non-resident. In particular, if the intellectual property had been developed or previously owned by the South African resident, no deduction will be granted.

Furthermore, a premium which may be regarded as capital in nature, will not be deductible unless the non-resident used such intellectual property in a PE in South Africa.

CAPITAL ALLOWANCES Capital allowances (which are based on the diminution of value of an asset due to wear and tear) are calculated on amounts not exceeding the lesser of the cost of the asset to a connected person or the market value of the asset on the date on which it was acquired. In general, SARS has discretion to determine the rates of the allowance. The depreciation allowance allowed by SARS depends on the type of asset being depreciated.

There is a special depreciation allowance for new or used plant and machinery brought into use for the first time by a taxpayer, and used in a process of manufacture. The writeoff period is either four or five years depending on the nature of the asset:  The four-year write-off period applies to the cost of any new or unused machinery or plant acquired and brought into use by a taxpayer after 1 March 2002, used in a process of manufacture or a similar process, carried on in the course of the taxpayer’s business.

40% of the cost may be written off in the first year and 20% of the cost is written off in each of the three subsequent years  If an asset does not qualify for the four-year write-off period, then the write-off period is generally five years. 20% of the cost of the asset is written off in each of the five years.

This applies to: − Used machinery and plant acquired by the taxpayer − New or unused machinery which does not fall within the four-year write-off, for example, machinery or plant used by an agricultural co-operative − Machinery, implements, utensils or articles used by a hotelkeeper and ships and aircraft.

100% of the cost of manufacturing plant and machinery owned by, or acquired and brought into use by a SBC for the first time after 1 April 2001, may be deducted if it is used directly in the process of manufacture and for the purpose of the SBC’s trade. Other qualifying assets acquired by a SBC after 1 April 2005 enjoy a three-year write-off period, namely, 50:30:20.

There are also special allowances relating to, among other areas, mining, gas pipe lines, electricity transmission lines and railway lines, renewable energy and to investors in qualifying venture capital companies.

Taxpayers investing in areas which are regarded as urban development zones are entitled to special depreciation allowances for the construction or refurbishment of buildings.

Taxpayers refurbishing a building within a designated zone will receive a depreciation allowance over a five-year period, in which the taxpayer will be entitled to an allowance of 20% in each year. Taxpayers constructing a new commercial or residential building within a designated zone will receive a depreciation allowance over an 11-year period. These taxpayers will be entitled to a 20% allowance in the first year and an 8% allowance in each of the subsequent years.

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A depreciation allowance has also recently been introduced in respect of buildings used for commercial purposes, with a 20-year write-off period.

Taxpayers can deduct 150% of their research and development expenditure, if the expenses were directly incurred in scientific and technological research and development activities in South Africa. Taxpayers may also depreciate the cost of buildings, machinery or plant, utensils and articles used for the purpose of such research and development, over three years at the rate of 50% in the first year, 30% in the next year and 20% in the third year. Other research and development may qualify for a capital depreciation allowance over a four-year period, in the ratio 40:20:20:20.

LOSSES Assessed tax losses of a taxpayer may be carried forward to the succeeding tax year and may increase an existing assessed loss or be set off against taxable income. Losses may be carried forward indefinitely, provided the company continues to trade.

A taxpayer may not set off an assessed loss incurred in carrying on a trade outside South Africa against any amount derived from carrying on trade in South Africa. It is thus important to distinguish whether a person has merely expanded his local trade abroad or whether a separate trade is being carried on outside South Africa.

Compromises or concessions reached with creditors have the effect of reducing the assessed loss in certain circumstances. A specific anti-tax avoidance provision in the ITA counters the trading in assessed losses.

Recent amendments to the ITA provide for the ring-fencing of assessed losses from secondary trades, with the consequence that losses from these secondary trades may not be set off against any income which a taxpayer generates, other than the income from such secondary trades.

These activities include:  Any sport practised by that person or any relative  Any dealing in collectibles by that person or any relative  The rental of residential accommodation, unless at least 80% of the residential accommodation is used by persons who are not relatives of that person for at least half of the year of assessment  The rental of vehicles, aircraft or boats, unless at least 80% of the vehicles, aircraft or boats are used by persons who are not relatives of that person for at least half of the year of assessment  Animal showing by that person or any relative  Farming or animal breeding, unless that person carries on farming, animal breeding or activities of a similar nature on a full-time basis  Any form of performing or creative arts practised by that person or any relative  Any form of gambling or betting practised by that person or any relative.

There are also limitations on the utilisation of losses created by transactions taking place between connected persons.

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OTHER TAXES VAT South Africa levies VAT at 14% on the supply of all goods and services by registered vendors at each stage within the distribution chain. Vendors collect output tax from their customers and are able to claim credits for input tax paid by them. Certain exemptions and zero ratings apply. VAT is also payable on the importation of goods or services, subject to certain exclusions.

SECURITIES TRANSFER TAX (STT) STT will be introduced with effect from 1 July 2009 (to replace stamp duty and uncertificated securities tax on the transfer of listed and unlisted securities).

STT is payable on the transfer of any security at a rate of 0.25% on the greater of the market value or consideration payable. A ‘transfer’ is defined widely to include the sale, assignment, cession or any disposal or cancellation of a security, but excluding any event which does not result in a change of beneficial ownership, any issue of a security, or the redemption or cancellation of a security in the context of the liquidation or deregistration of the company which issued the security.

STAMP DUTY The Stamp Duties Act was repealed with effect from 1 April 2009. However, stamp duty remains payable on leases of fixed property executed before 1 April 2009, at a fixed rate of 0.5% on the quantifiable amount of the lease.

EXCISE AND CUSTOMS DUTIES Excise duties are imposed on the local production of a number of commodities, including alcoholic beverages, motor vehicles and jewellery. Customs duties are payable in respect of imported goods at varying rates.

ESTATE DUTY This is a tax on the transfer of wealth, which is levied at death. The duty is levied at the rate of 20% on the worldwide estates of deceased persons in respect of all property owned by residents and South African property owned by non-residents. A basic deduction of ZAR 3.5 million is allowed from the value of the net estate before calculating estate duty. Further deductions are allowed in respect of, for example, liabilities, bequests to public benefit organisations and property accruing to surviving spouses.

PROVISIONAL TAX Certain taxpayers are required to make advanced tax payments in respect of the normal tax payable for the year. The provisional tax system requires these taxpayers to make payments of their tax in August and February of each year of assessment in accordance with estimates of their liability.

There is also an option for taxpayers to make a voluntary third payment, known as a ‘topup payment’, which, if made, is required to be made in September of each year.

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Employees are generally not required to make provisional tax payments, unless they earn additional income to their remuneration. Directors of companies and members of close corporations are no longer required to register as provisional taxpayers merely by virtue of the fact that they hold office as director or as member.

DONATIONS TAX Donations Tax is imposed in respect of the gratuitous disposal of any property by a South African resident. If SARS is of the opinion that property has been disposed of for a consideration which is not adequate, the property shall be deemed to have been disposed of under a donation (albeit that the actual consideration is deducted when calculating the Donations Tax).

The Donations Tax is payable at a flat rate of 20% on the value of any property donated.

Certain donations are exempt from donations tax, including certain donations between spouses and donations to public benefit organisations or other charitable organisations.

A natural person is entitled to an exemption on donations which are made during the year of assessment of up to ZAR 100,000. Non-natural persons are exempt from donations tax in respect of casual gifts up to a threshold of ZAR 10,000. Non-residents do not pay donations tax, even if they donate South African assets. Public companies which are residents of South Africa are also exempt from paying donations tax.

TRANSFER DUTY Transfer duty is payable on the acquisition of immovable property at the following rates:  10% in respect of corporate entities and trusts (save for special trusts)  In respect of individuals, 3% on the value of property from ZAR 600,001 to ZAR 1,000,000 and where the value of property exceeds ZAR 1,000,000, 5% of that value plus ZAR 12,000. Where VAT is payable, the transaction is exempt from transfer duty. The transfer of shares in a company or interest in a trust, which owns residential property, attracts transfer duty, subject to certain exceptions.

CGT CGT was introduced on 1 October 2001. The net capital gain realised by a resident from the disposal of a capital asset after the effective date is included in the taxable income of such a person for that year of assessment. Death, emigration and donation of an asset by a resident trigger a deemed disposal for purposes of the CGT provisions.

Non-residents are not subject to CGT in respect of the disposal of capital assets in South Africa, other than South African immovable property, shares in certain companies owning immovable property and assets attributable to a PE in South Africa.

The effective CGT rates are:  10% (maximum rate) for individuals  7.5% for the individual policy holder fund of an insurer  0% for the untaxed policy holder fund of an insurer  20% for trusts  14% for companies and close corporations.

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The following capital gains, amongst others, are exempt from CGT:  Primary residence in respect of the first ZAR 1.5 million of the gain  Certain personal use assets of a natural person or a special trust  Compensation for personal injury, illness or defamation  Prizes/winnings from a South African competition  Donations to public benefit organisations.

The ITA does not define when profits will be of a capital as opposed to a revenue nature.

The guidelines developed by the courts must be applied to determine the characterisation.

In view of the uncertainty as to the characterisation in the case of the sale of shares, a safe harbour provision was introduced under a specific provision in the ITA. It provides that the gain from the sale of shares will be deemed to be of a capital nature if the seller held the shares for a period of at least three years. However, there are several conditions for and exclusions from the safe harbour rule.

TAXATION OF PENSION PAYMENTS Receipts by residents from retirement funds may include lump sums, annuities or a combination of both. Annuities are specifically included in the definition of gross income and are therefore subject to normal tax.

In the case of non-residents, only annuities from a South African source are included in their gross income. Emigrants or residents who earned a pension in respect of offshore services may qualify for an exemption from tax on their foreign pension or social security payments, even if they are resident in South Africa for tax purposes.

Lump sums are subject to different provisions. A portion of the lump sum payment is exempt – in the case of withdrawal from a fund, a lifetime exemption of ZAR 22,500 applies, while a lifetime exemption of ZAR 315,000 applies on death or retirement. What remains is taxed at progressive rates varying between 18% and 36%, the latter rate applying to amounts in excess of ZAR 945,000.

A lump sum received by an emigrant or a resident from a foreign pension fund or social security system may also qualify for the exemption.

SKILLS DEVELOPMENT LEVY This levy is imposed on employers at 1% of the gross payroll. It is payable by employers registered for employees tax (PAYE) or by employers who have a payroll in excess of ZAR 500,000 per annum.

DOUBLE TAXATION TREATIES As at 25 August 2012, South Africa had 72 comprehensive DTAs in force. It has signed but not ratified an agreement with one country. Five DTAs have been ratified by South Africa but not yet by the other country. Thirteen agreements are currently being negotiated or renegotiated.

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The status of DTAs is as follows:  Comprehensive DTAs are in place with the following countries: − Algeria, Australia, Austria, Belarus, Belgium, Botswana, Brazil, Bulgaria, Canada, China (People’s Republic), Croatia, Cyprus, Czech Republic, Denmark, Egypt, Ethiopia, Finland, France, Germany, Ghana, Greece, Hungary, India, Indonesia, Iran, Ireland, Israel, Italy, Japan, Korea, Kuwait, Lesotho, Luxembourg, Malawi, Malaysia, Malta, Mauritius, Mexico, Mozambique, Namibia, Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Poland, Portugal, Romania, Russian Federation, Rwanda, Saudi Arabia, Seychelles, Singapore, Slovak Republic, Spain, Swaziland, Sweden, Switzerland, Taiwan, Tanzania, Thailand, Tunisia, Turkey, Uganda, Ukraine, United Kingdom, United States of America, Zambia and Zimbabwe. The treaty with the United Kingdom also extends to Grenada and Sierra Leone.  A comprehensive DTA has been signed but not ratified by South Africa with Oman  The following comprehensive DTAs have been ratified by South Africa, but not yet by the other countries concerned, namely, Democratic Republic of Congo, Gabon, Germany, Kenya and Sudan.  Comprehensive DTAs have been or are in the process of being negotiated or renegotiated but not signed, with Cameroon, Lesotho (renegotiated), Madagascar, Malawi (renegotiated), Mauritius (renegotiated), Morocco, Namibia (renegotiated), Senegal, Zambia (renegotiated) and Zimbabwe(renegotiated); and protocols with Botswana, Mozambique and Swaziland.

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7 – ACCOUNTING & REPORTING INTRODUCTION The Companies Act, 2008 (the Act) constitutes a completely new corporate law for South Africa and will replace the current Companies Act, 1973 (as amended by the Corporate Laws Amendment Act) and amend the Close Corporation Act, 1984. It came into effect on 1 May 2011.

The Act is characterised by flexibility, simplicity, transparency, corporate efficiency and regulatory certainty. It is drafted in plain language and is not as detailed and prescriptive as the current Act. Companies are allowed flexibility to change certain requirements to suit their specific circumstances.

DIFFERENT FORMS OF COMPANIES The Act provides for the classification of companies into either profit companies or not-forprofit companies.

Not-for-profit companies, which are the successors to the current section 21 companies, have to comply with a set of principles which relate mainly to the purpose or objects and policies of the company, matters related to directors and members, fundamental transactions and the winding-up of not-for-profit companies. Also, the Act exempts notfor-profit companies from certain provisions.

With regard to profit companies, the Act distinguishes between four different types of companies, namely:  Private companies − Companies which are not state-owned and where the Memorandum of Incorporation prohibits offering securities to the public and restricts the transferability of securities  Personal liability companies − Companies and their directors are jointly and severally liable for any debts and liabilities of the company  State-owned companies − Enterprises, registered as a company, which fall within the meaning of ‘state-owned enterprises’ in terms of the Public Finance Management Act, or are owned by a municipality  Public companies − Companies which are not state-owned companies, private companies or personal liability companies.

TRANSPARENCY AND ACCOUNTABILITY The Act requires companies to adhere to a number of measures to ensure transparency and accountability.

Among these measures, all companies are required to:  Have at least one office in the Republic, and to register the address of such office (or its principal office) with the Commissioner  Keep certain records in written or electronic form for a period of seven years  Keep accurate and complete accounting records

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 Prepare annual financial statements  Submit an annual return, including a copy of the annual financial statements and any other prescribed information. The content of this report will be prescribed in Regulations to the Act. The Act requires public companies and state-owned companies to have audited financial statements. Certain categories of private companies may also be required by the Minister in Regulations to have their annual financial statement audited.

All companies which are not required (either in terms of the Act, or by the Regulations) to have their financial statements audited may opt to either have their annual financial statements audited voluntarily or to have them independently reviewed. Regulations will set out exactly what is meant by independent review, what standards should be used and what professional qualifications are required for reviewers etc.

ENHANCED TRANSPARENCY AND ACCOUNTABILITY Although all companies are subject to transparency and accountability requirements as set out above, public companies, state-owned companies and certain categories of private companies (as determined by the Minister in Regulations) are obliged to appoint a company secretary, audit committee (comprising at least three members) and an independent auditor. All other private companies, personal liability companies and not-forprofit companies may choose to include these enhanced transparency and accountability requirements in their respective Memoranda of Incorporation.

COMPANY FINANCE The authorisation and classification of shares, the numbers of authorised shares of each class, and the preferences, rights, limitations and other terms associated with each class of shares, must be set out in the company’s Memorandum of Incorporation, and may only be changed by special resolution of the shareholders.

However, directors are given special powers, in that the board of the company may (except if the Memorandum of Incorporation provides otherwise) change the number of authorised shares of any class of shares or classify or reclassify any shares. The interests of minority shareholders are protected by requiring shareholder approval for shares and options issued to directors and other specified persons, or financial assistance for share purchases.

CAPITAL ADEQUACY The Act introduces a new arrangement for capital adequacy. This arrangement abolishes the concept of par value shares and nominal value shares, and requires a solvency and liquidity test. In terms of this test, when one considers all reasonably foreseeable financial circumstance of the company at a particular point in time, the company’s total assets, fairly valued, should equal or exceed its total liabilities (including contingent liabilities) fairly valued and it should be clear that the company will be able to pay its debts as they become due in the course of business for a period of 12 months thereafter.

A new framework for debentures provides companies with significant freedom to create financial instruments.

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GOVERNANCE Governance includes a range of matters, including a shareholder’s right to be represented by proxy, notice for and conduct at meetings, election of directors, disqualification of persons to be directors, removal of directors, board committees and board meetings, director’s personal financial interests, standards of directors’ conduct, liability of directors and prescribed officers, and the indemnification of directors.

STANDARDS OF DIRECTORS’ CONDUCT Directors of all types of companies are required to meet the same standards of conduct and behaviour, which are defined in the Act. A person, acting in the capacity of director, must exercise his/her powers and perform his/her functions:  In good faith and for a proper purpose  In the best interests of the company  With a degree of care, skill and diligence which may reasonably be expected of a person carrying out the same functions and having the general knowledge, skill and experience of that director.

DIRECTOR LIABILITY Directors of a company may be held jointly and severally liable for any loss, damage or costs sustained by the company as a result of a breach of the director’s fiduciary duty or the duty to act with care, skill and diligence. In addition, a director may also be held liable where he/she:  Acts in the name of the company without the necessary authority  Is part of an act or omission while knowing that the intention was to defraud shareholders, employees or creditors  Signs financial statements which were false or misleading in a material respect  Issues a prospectus which contains an untrue statement.

The strict standards for directors’ conduct and liability are somewhat tempered by the fact that companies are allowed to advance funds to cover the expense of litigation against directors, to indemnify directors in certain circumstances or purchase insurance to protect either the director(s) or the company. Directors may never be indemnified for liability resulting from wilful misconduct or wilful breach of trust.

ENFORCEMENT The Companies and Intellectual Property Commission (CIPC) is responsible for:  Monitoring proper compliance with the Act by companies and directors  Receiving and investigating complaints concerning alleged contraventions of the Act  Promoting the reliability of financial reports by investigating non-compliance with financial reporting standards  Registering and de-registering companies, directors, business names and intellectual property rights.

The Companies Tribunal is responsible for assisting in the resolution of disputes where any person applies to the Companies Tribunal for relief as an alternative to applying to a court.

An arbitration decision by the Companies Tribunal is binding on the Commission or the Takeover Regulation Panel.

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The Takeover Regulation Panel is responsible for regulating fundamental transactions.

The Financial Reporting Standards Council is responsible for consulting with the Minister of Trade and Industry on the making of Regulations establishing financial reporting standards.

KING III REPORT INTRODUCTION Boards of directors are confronted with many difficult decisions on a regular basis. The right choice is not always obvious. The draft King III Report on Corporate Governance provides a list of best practice principles to assist and guide directors in making the right choices for their company.

These principles have become an indispensable guide on Corporate Governance to directors and regulators alike.

The King III Report provides guidance to all corporate entities on various governance related aspects, including:  Boards and directors  Corporate citizenship, leadership, integrity and responsibility  Audit committees  Risk management  Internal audit  Integrated sustainability reporting and disclosure  Compliance with laws, regulations, rules and standards  Managing stakeholder relationships  Fundamental and affected transactions.

KING III AND THE COMPANIES ACT There is no statutory obligation on companies to comply with King III. The underlying intention of King III is not to force companies to comply with recommended practice (King II required companies to ‘comply or explain’), but rather for companies to ‘apply or explain’.

Directors are accountable to shareholders, and where directors opt not to implement the recommended practices as set out in King III, they should be able to explain their reasoning and motivation to their shareholders. Since directors can be held personally liable for noncompliance with their statutory duties (as set out in the Companies Act), they need to ensure each and every decision they make is taken with care. Every decision counts!

Most, if not all of the recommended best practice principles set out in King III relate to the legislative duties of a director to exercise their powers and perform their functions in good faith and for a proper purpose in the best interests of the company, and with the degree of care, skill and diligence which may reasonably be expected of a director. As such, King III constitutes a valuable guide to directors and other office bearers to ensure compliance with the provisions of the Companies Act. It is recommended that directors pay close attention to the enumerated principles, and aim to apply all such principles.

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8 – UHY REPRESENTATION IN SOUTH AFRICA

UHY HELLMANN (SA) SOUTH AFRICA CONTACT DETAILS

CONTACTS

UHY Hellmann (SA) PO Box 47163 Parklands South Africa Tel: +27 11 447 8447 Fax: +27 11 447 8400 www.uhy.co.za

Liaison contact: Position: Email:

Liaison contact: Position: Email:

Year established: Number of partners: Total staff:

Ralph Hellmann Senior Partner ralphh@uhy.co.za Carlos Pedregal Senior Partner carlosp@uhy.co.za

1983 5 46

BRIEF DESCRIPTION OF FIRM UHY Hellmann’s partners and managers have extensive audit and tax experience in relation to the firm’s clients, whose businesses fall into numerous industries and sectors such as manufacture, wholesale, retail, farming, real estate, technology, finance, leisure and professional services.

SERVICE AREAS Audit and accountancy Corporate secretarial services Due dilligence assignments Estate planning Mergers & acquisitions Payroll services Preparation of business plans Taxation services Winding-up of deceased estates

PRINCIPAL OPERATING SECTORS Manufacturing Wholesale Retail Farming Real estate Technology Finance Leisure Professional services

LANGUAGES Portuguese, Gugerati, Hebrew, English.

CURRENT PRINCIPAL CLIENTS Confidentiality precludes disclosure of clients in this document.

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UHY HELLMANN (SA) SOUTH AFRICA OTHER COUNTRIES IN UHY CURRENTLY WORKING WITH, OR HAVE WORKED WITH IN THE PAST Australia, Portugal, UK, Brazil, US. Spain.

BRIEF HISTORY OF FIRM Ralph Allan Hellmann C.A (SA) – Partner (aged 65).Partner in a medium-sized South African auditing firm for approximately 10 years before starting R A Hellmann & Co in 1983. Senior partner in this firm since 1983.

Carlos F.P. Pedregal B. Com, B. Acc, C.A (SA) – Partner (aged 56) Joined the firm in 1986 and became a partner in 1987. Previously an accountant in commerce. Speaks Portuguese.

Chimanlal Parbhoo-Kanjee. B.Com, B. Bompt (Hons) C.A (SA) – Partner (aged 57) Partner in a small South African auditing firm for approximately 22 years before joining the firm as a partner in 2002.

Speaks Gujerati.

Eric John Moss B. Com, B. Acc, C.A (SA) – Partner (aged 57) Joined the firm as a partner in 1999. Previously an accountant in commerce.

Ridwaan Jeena B.Com, B. Bompt (Hons) C.A (SA) - Partner (aged 32) Joined the firm as a partner in 2012. Previously an accountant in commerce.

The firm joined UHY in 1998.

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DOING BUSINESS IN SOUTH AFRICA 49

APPENDIX â&#x20AC;&#x201C; USEFUL WEB ADDRESSES Department of Trade and Industry:

www.dti.gov.za

Industrial Development Corporation:

www.idc.co.za

South African Revenue Service:

www.sars.gov.za

The South African Reserve Bank:

www.reservebank.co.za

ACKNOWLEDGEMENT Acknowledgement is given to Deneys Reits Attorneys for certain information contained in this document.

LET US HELP YOU ACHIEVE FURTHER BUSINESS SUCCESS To find out how UHY can assist your business, contact any of our member firms. You can visit us online at www.uhy.com to find contact details for all of our offices, or email us at info@uhy.com for further information.

UHY is an international network of legally independent accounting and consultancy firms whose administrative entity is Urbach Hacker Young International Limited, a UK company. UHY is the brand name for the UHY international network.

Services to clients are provided by member firms and not by Urbach Hacker Young International Limited. Neither Urbach Hacker Young International Limited, the UHY network, nor any member of UHY has any liability for services provided by other members.

UHY Hellmann (SA) (the “Firm”) is a member of Urbach Hacker Young International Limited, a UK company, and forms part of the international UHY network of legally independent accounting and consulting firms. UHY is the brand name for the UHY international network.

The services described herein are provided by the Firm and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members.

© 2012 UHY International Ltd

www.uhy.com