It has become relatively common for multinational companies to do business in South Africa without having to set up a formal subsidiary. The question then arises as to whether an external company or colloquially a branch in South Africa must be registered. Both company law and tax law must be taken into account.
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Company law requires an assessment of whether registration as an “external company” is required, while corporate tax law requires an assessment of whether a permanent establishment (PE) exists in South Africa. Depending on how you look at it, the two tests are not mutually exclusive, but the boundary is not always clear. For example, you can have an external company registration in South Africa without having a PE, but if you have a PE in South Africa you would then need to register an external company in the country. Essentially, it comes down to the threshold for each test, with the threshold for requiring an external company registration being lower than the threshold required to be considered a permanent establishment holder in South Africa.
From a South African company law perspective, Section 1 of the Companies Act 2008 (Companies Act) defines an “outside company” as a foreign company doing business in South Africa, subject to certain exceptions. “Management” includes the following:
- be a party to one or more employment contracts in South Africa; or
- Attending a course of conduct or participating in any course or pattern of activity within South Africa over a period of six months that would lead a person to the reasonable conclusion that the Company intends to conduct business in South Africa on an ongoing basis.
From the above it can be seen how easy it is to conclude that a foreign company is doing business in South Africa and that external company registration is then required.
From a corporate tax point of view, the focus is on whether there is a permanent establishment. A permanent establishment can be described as a tax treaty concept used to determine when an individual has a sufficient connection with another country (the source country) to enable that country to tax income earned there.
It is generally accepted that a permanent establishment means “a fixed place of business through which all or part of the business of a company is carried on”. A general principle to be followed in determining whether a permanent establishment exists is that the place of business must be fixed, meaning that the enterprise’s use of that building or other physical location will be more than temporary. Establishing a PE in South Africa would generally require operating from identifiable premises established in a specific location and with a certain degree of permanence. This implies that persons dependent on the non-resident would need to conduct that non-resident’s business from that ‘fixed’ place of business in South Africa for a permanent establishment to exist. However, the mere fact that a company has a certain area that is used for business activities is sufficient to establish a permanent establishment. Therefore, no formal legal right to use this place is required.
You can then see that a number of factors and in particular a “fixed place of business” in South Africa must be taken into account for the existence of a permanent establishment. This is not an easy test, but one is always looking for that “steady place of business” that is not easy to find, especially in the ever-evolving world of e-commerce.
Foreign companies should therefore take this into account when doing business in South Africa and not assume that a foreign company registration automatically means a permanent establishment in South Africa. More importantly, foreign companies should not assume that they won’t, but should seek advice on the matter.