In South Africa, a foreign company is a company incorporated outside the country, regardless of whether it is a profit or non-profit company or carrying on business in South Africa or not.
In terms of the 1973 Companies Act, a foreign company was required to register itself as an external company when it “establishes a place of business” which was seen as a very loose phrase and caused a good deal of litigation. This debated topic has now been somewhat clarified in the Companies Act 71 of 2008 (the Act”) and the Companies Amendment Bill (B40 of 2010).
The law now provides that when a foreign company is “carrying on business or non-profit activities” in South Africa, it must register with the Companies and Intellectual Properties Commission (“CIPC”) as an external company (section 23). It has 20 business days to do this after first beginning to perform its business or activities in the country.
The Act clarifies what constitutes “carrying on a business or non-profit activities” by stating that if it is a party to one or more employment contracts within South Africa or is engaging is a course of conduct, or pattern of activities within the country over a period of six months, that would lead a person to reasonably conclude that the company intended to continually engage in business or non profit activities within the Republic, it would be deemed to be an external company.
The law proceeds to state that a foreign company will not be deemed to be an external company merely because it is or has engaged in one or more of the following activities:
- holding shareholders or board meetings;
- having a South African bank account;
- having share transfer offices in South Africa;
- creating debts, mortgages or security interests in property in South Africa;
- securing or collecting debt in the country;
- enforcing any mortgage or security interest;
- entering into employments contracts; or
- acquiring any interest in property in South Africa.
Although the position is now relatively clear and what the head draftsman of the Act, Mr Phil Knight intended, in its original form before it was amended the Act actually stated the opposite. Thankfully the Amendment Bill has rectified what may have been detrimental to the economy by driving away casual and short-term engagements of foreign companies in South Africa.
Regardless of whether an external company is registered under the previous Act or the current one, only specific sections of the new Act apply to it. If a section of the Act does not specifically state that the provision applies to external companies then it will be irrelevant for the purposes of that external company. By way of a few examples, the below provisions do state that they are applicable to external companies and therefore they will apply:
- maintaining an office (see section 23);
- registering the address of its office (or principal office if it has more than one) (see section 23);
- filing annual returns (see section 33(2));
- providing its full registered name or registered number to any person on demand (see section 32); and
- not permitting any misstatements of its name or registration number (see section 32).
It is also possible under the Act for foreign companies to be “localised” under section 13 of the Act as amended, whereby it can cancel its foreign registration and transfer it to South Africa in accordance with the specific provisions.
In this regard, it will need to, amongst other matters, obtain shareholders approval in the form of a special resolution, ensure that all or most of its assets and undertakings are within South Africa (other than subsidiary’s that are incorporated outside South Africa) and that the majority of its shareholders are resident in South Africa and that the majority of its directors are or will be South African citizens.
There are important taxation issues and financial obligations imposed on external companies and therefore if advice is required in order to determine whether a company must be registered under the Act or which sections of the Act actually apply to external companies or how to “domesticate” a foreign company, please contact either Paula Kennedy-Smith or Ryan Dingley.
This article should not be used or relied upon as professional advice and is for information and marketing purposes. Please consult with one of our attorneys should you need legal assistance relating to this area of law.