What SA entrepreneurs should consider before emigrating

There’s a fine line between South African entrepreneurs emigrating to start a new life with the aim of expanding their businesses internationally – and those that end up just taking an expensive holiday.

“Whatever you do, don’t go it alone,” cautions Richard Neal, Director of Sovereign Trust (SA) Limited. “Emigrants working for multinationals can rely on established surroundings when they arrive overseas. They enjoy the benefit of a fully operational office, assistance with visas, a support base and a salary. It’s a much easier transition than the challenges faced by entrepreneurs, who have to make their own way. Proper preparation prior to departure can make or break the success of any overseas business expansion.”

Despite the current ‘great migration’ of South Africans exhausted by political, social and economic instability, South Africans have never shied away from going it alone and heading out to new frontiers. When opportunity knocks, South African entrepreneurs are ever keen to offer their goods or services internationally.

The entrepreneurial nature of South Africans may come out of necessity – being so far removed from the large economies of Europe, the Americas and Asia. Or it could simply be an instinctive “can-do” attitude. Whatever the reason, Neal advises that when South African entrepreneurs consider emigrating as part of their international business expansion, they should have a professional in-depth review of local requirements – and also consider the tax planning opportunities.

Entrepreneurs moving overseas to take advantage of a new market will almost certainly be required to establish a corporate entity overseas, either in the country they are moving to or in another member state of a common market. “Care must be taken in hastily establishing an overseas company – there are pitfalls as well as opportunities in this arena,” says Neal.

Things to consider prior to establishment include determining who is to be a director of any newly formed overseas company. Most entrepreneurs would want to be the listed director, but while they retain their South African tax residency, this move could bring the overseas company into the South African tax net via ‘Place of Effective Management’ (POEM) rules.

“It is far better to enlist the services of a corporate services provider to establish and manage the company until such time as the entrepreneur has lost his or her South African tax residency, at which point they can become the director,” advises Neal.

Some jurisdictions require local residents to act as the director or require two resident directors. Such local management or local shareholding requirements can pose a massive threat if the local provider turns out to be untrustworthy or incompetent. Rather than using local individuals, it is generally safer to use a professional corporate services provider like Sovereign.

This means you will not be dealing with an individual person as a director or shareholder but rather with an international, fully licensed and regulated company that has no emotional ties to the business and no local vested interests. “It gives the entrepreneur piece of mind that the management or ownership will not be usurped,” adds Neal.

Sovereign also has multiple signatories who are available all year round and, as a company, we also provide perpetual succession – your business will not be affected by the ill-health or death of a local individual.

Before entrepreneurs conclude that financial emigration is the only option to escape taxation on their foreign earnings, they will need to brief a tax advisor on the entire situation and consider less drastic and expensive options. For instance, the shareholding structure of an overseas company can offer a great tax planning opportunity because many jurisdictions allow the shares of local companies to be held in foreign entities such as trusts.

“Entrepreneurs are often so focused on the operation of their business that they don’t realise that their new venture is also an opportunity to accomplish dynastic planning,” says Neal. “A new company will start with little or no value and this creates the perfect opportunity to assign the shares to a trust in a stable and low tax jurisdiction.”

There are many benefits to this type of planning, which can include:

• Protection from creditor attack;
• Ability for the dividends declared to be invested tax efficiently;
• Ability for the trust to establish a second overseas operation from funds accrued;
• Looking after the interests of the family; and
• Separation of direct ownership should the entrepreneur wish to return to South Africa.

Saving for retirement is another benefit. Entrepreneurs can consider establishing an overseas retirement plan in a favourable jurisdiction. Guernsey, for example, has legislation that makes it a very attractive jurisdiction in which to establish a private retirement savings plan.

Sovereign offers company and trust formation and management in all major jurisdictions, together with comprehensive advice and support to assist companies of all sizes to establish business operations successfully in foreign markets.

We also provide the administrative support to maximise opportunities and achieve long-term sustainability, from full back-office solutions to assistance with tax and regulatory compliance. This includes accountancy, human resources, pensions, insurance, obtaining local licences and permits, executive relocation and specialist tax advice.

Furthermore, Sovereign Trust has been present in South African for over 20 years and almost exclusively has focused on assisting entrepreneurs to launch and expand their businesses internationally.