Global Outlook: why South African entrepreneurs should consider setting up offshore to attract foreign investment
South Africa boasts the most advanced, broad-based economy in sub-Saharan Africa, which offers a wide range of opportunities to South African business owners and foreign investors alike. South Africa benefits from its position as an entryway to other countries and markets in Africa while also offering sophisticated financial, legal and business services sectors.
South Africa is a destination largely conducive to foreign investment. South Africa has a population of over 60 million and a dynamic business community that is highly market-oriented and the driver of economic growth. Increasingly, the country is acting as a business incubator for new-to-market ideas; business models launched in and from South Africa generally find acceptance in many other markets.
But South African entrepreneurs need to think beyond local borders and certain challenges often restrict business expansion for businesses based in South Africa. The volatile Rand-dollar exchange rate can complicate planning, especially for smaller or new-to-market firms. Businesses with international ambitions can also face limited access to international capital or funding.
In addition, there are restrictions on outward investment, such as a ZAR1 billion (USD83 million) limit per year on outward flows per company. Larger investments must be approved by the South African Reserve Bank (SARB) and at least 10% of the foreign target entities’ voting rights must be obtained through the investment.
Forward-thinking business owners or investors need to consider the impact of these challenges on their operations and potential for expansion locally or abroad. Many business owners turn to offshore jurisdictions in which to establish or structure their interests strategically. This presents an opportunity for the local operations to continue to grow, whilst also leveraging international advantages in respect of global sales opportunities and access to foreign investment.
Regulatory and economic barriers
Frequent policy changes together with cumbersome bureaucracy may hinder planning long-term business objectives. The restrictions placed on the movement of money in and out of South Africa tends to deter foreign investors especially where they have little or no experience in dealing with exchange controls.Further concerns relating to currency volatility and infrastructure challenges contribute to making South Africa less attractive to global investors. An offshore structure or company may help mitigate these risks and offer a more stable business friendly environment for investors.
Credibility and confidence
Many international financial centres (IFCs) are well-regulated, politically stable and offer established legal frameworks that improve the ease of doing business for investors. They are efficient for investors because they offer specialised, up-to-date legal regimes and specific provisions for investment funds. Countries that come to mind include the Isle of Man, Mauritius, Singapore and the United Arab Emirates.South African businesses that establish an entity and presence offshore in a jurisdiction that is secure and transparent may increase the likelihood of securing venture capital, private equity or institutional investments.
Effective intellectual property protection, transparency in government dealings and compliance with international standards in respect of tax and money laundering are also critical to providing investors with peace of mind and confidence. IFCs have legal systems that specialise in relevant areas of law and have passed specialised laws and regulations for business to business transactions. This creates certainty and lowers risks and costs.
Access to international markets
An offshore entity in an IFC can drive economic growth and innovation. These jurisdictions provide specialised services that lower transaction costs, support investment and foster economic development both locally and globally. They provide access to global investment networks and financial ecosystems, as well to advanced banking solutions, different talent pools or customer bases.South African entrepreneurs can position their businesses to operate on a global scale, which includes access to international banks with limited or no exchange controls. The business can continue to benefit from South African talent and resources and contribute to the South African economy according to its needs.
Access to tax benefits
IFCs provide tax neutral platforms for investment, meaning that they will not add an additional layer of tax to that already paid by the investors in their home countries. The result is that IFCs make it easier and cheaper to organise investments.The tax residency of the shareholders, directors and the company may impact on the integrity of the offshore structure. For entrepreneurs and business owners who are tax resident in South Africa, it is essential to take account of South African’s rules relating to Controlled Foreign Companies (CFCs), Place of Effective Management (POEM), Transfer Pricing (TP) and Base Erosion and Profit Shifting (BEPS).
Some offshore jurisdictions impose no or low corporate income tax, no capital gains tax and do not levy any withholding taxes. It is generally the case that entities based in these jurisdictions will not comply with South African tax and exchange control laws, which may result in punitive measures and unfavourable taxation.
Structures for consideration
The correct offshore structure will depend on a variety of factors such as the business’s objectives, operational requirements, taxation and reporting obligations. The jurisdiction of choice will also have to cater for other considerations such as banking, trade and other regulatory or licensing requirements. It is important to remember that the global tax and regulatory environment is subject to constant change.
Depending on the parties involved, the commercial interests of the offshore company may be held by an offshore holding company and/or an offshore trust or foundation. Where the South African business interests are considered, there may be significant advantages for business owners who utilise an offshore holding structure to hold all or some of the shares of the South African entities.
Most South African entrepreneurs wish to remain in and operate in South Africa. The South African company can remain operational locally while the offshore structure can provide for international expansion.
An international market presence can be advantageous to your investors, partners, suppliers and customers because they offer credibility, flexibility and efficiency to their business in new markets worldwide. With proper planning and advice, this can be highly beneficial to the long-term success of the business.
