Launching a new business – start local or head straight offshore?

If you’re an entrepreneur looking to open a business in a post-Covid world should you launch your business in South Africa before expanding overseas, or should you set up an offshore operation right from the off? That’s the dilemma facing a growing number of local entrepreneurs – and there are pros and cons for both models.

Sovereign Trust consultant Ralph Wichtmann says much will depend on where the target market of the business is based and where the intellectual property (IP) of the company will be registered. Many start-ups register a South Africa-based company to cater for local customers and an offshore company to focus on overseas customers.

An increasing number of clients are looking to set up offshore operations in jurisdictions like Mauritius, Gibraltar, the Isle of Man, Guernsey and the United Arab Emirates, says Wichtmann. This is because of the flexibility they offer in terms of new markets, the ability to generate wealth overseas organically and even to provide future pathways for residency and immigration. Another key consideration is the maximization of benefit on exit. Many entrepreneurs foresee the largest payoff coming when their venture is bought out by a multinational corporation. Buyers of IP holding companies pay a premium for well structured operations, set up in jurisdictions with low corporate taxes and an absence of exchange controls, said Wichtmann.

“On the one hand, South Africa still has great infrastructure and offers the potential to be one of the highest growth markets in the world. On the other, setting up an offshore company facilitates ease of trade, with the ability to pay suppliers and receive funds in foreign currency without having to go through Reserve Bank approval every time. It all depends on your objectives,” says Wichtmann.

Launching a business in South Africa first

Pros

• South Africa has good legal, financial and banking infrastructure, with a vibrant start-up community, including the likes of Snapscan, Luno, Pineapple, Ozow, Ukheshe, Yoco and Sweepsouth.
• There is an increasing amount of venture capital available from large investors such as Naspers’ venture capital arm, Naspers Foundry, and the SA Reserve Bank’s Global Fintech Hackcelerator @Southern Africa competition.
• South Africa has a well-developed intellectual property (IP) infrastructure that protects start-ups and small businesses.

Cons

• SA-based businesses are subject to SA’s tax system and exchange control regulations, which can be stringent, especially for start-ups. Corporate taxes on profits in SA are 28%, while the rates of dividend withholding tax and capital gains tax are 20% and 22.4% respectively.
• Foreign investment, via a loan or share capital, would require Reserve Bank approval, as would the sale of IP to an offshore company. This can be a tedious and expensive process.

“A possible solution for SA-based start-ups is to create a SA headquarter company, which benefits from relaxed exchange control regulations and reduced taxation. However, this has specific requirements that must be met around equity shares, voting rights and how the costs of the assets are attributed,” says Wichtmann.

Many local companies provide professional services under instruction from an offshore company. In these cases, it is clear that the instruction and design requirements came from the offshore company which owns the IP. Thus, the local company is merely a professional services provider.

Launching a business overseas from the onset

Pros

• There may, depending on the jurisdiction, be various benefits from reduced taxes and a lack of exchange control regulations. This could make the start-up much more attractive for foreign investment.
• Many jurisdictions also have well-developed legal, financial and banking infrastructure.

Cons

• When choosing an offshore jurisdiction, it is important to ensure that any IP is created within that jurisdiction. If IP is considered to be created in SA, then it will deemed as South African IP and will then require Reserve

“Before companies select an offshore jurisdiction, it is important for them to review a comprehensive list of the double taxation agreements that are available with the countries to which they will license their IP. These will then benefit from reduced withholding taxes payable by clients to whom the IP is licensed. It is vital that proper structuring advice should be obtained prior to any company incorporation, IP creation or any structuring started,” says Wichtmann.