It has become relatively common for multinational enterprises to seek to do business in South Africa without having to incorporate a formal subsidiary. This then begs the question whether there is a need to register an external company or, as it is colloquially known, a branch in South Africa. Consideration of both corporate law and tax law is required.
Corporate law requires consideration of whether an "external company" registration is necessary, whereas corporate income tax law requires consideration of whether a permanent establishment (PE) exists in South Africa. The two tests are not mutually exclusive, depending on how one looks at it, but the line is not always clear-cut. You may, for example, have an external company registration in South Africa without having a PE, but if you have a PE in South Africa you would then be required 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 one required for being regarded as having a PE in South Africa.
From a South African corporate law perspective, Section 1 of the Companies Act, 2008 ("Companies Act") defines an "external company" as a foreign company that is, subject to certain exclusions, conducting business within South Africa. "Conducting business" encompasses the following:
- Being party to one or more employment contracts within South Africa; or
- Engaging in a course of conduct, or having engaged in a course or pattern of activities within the South Africa over a period of six months, such as would lead a person to reasonably conclude that the company intended to continually engage in business within South Africa.
From the above, one can see how easily it can be concluded that a foreign company is conducting business in South Africa and that an external company registration is then required.
From a corporate income tax perspective, the focus is on whether a permanent establishment exists. A PE can be described as a tax treaty concept used to determine when a person has sufficient connection to another country ("the source state") which allows such country to impose tax on income derived therein.
It is generally accepted that a PE means "a fixed place of business through which the business of an enterprise is wholly or partly carried on." A general principle to be observed in determining whether a PE exists is that the place of business must be fixed, in the sense that a particular building or physical location is used by the enterprise for the conduct of its business, and that it must be foreseeable that the enterprise's use of this building or other physical location will be more than temporary. Generally, in order to create a PE in South Africa, one would need to operate from identifiable premises, which are established at a distinct place and with a certain degree of permanence. This implies that people, who are dependent on the non-resident, would need to conduct the business of that non-resident from this "fixed" place of business in South Africa in order for a PE to exist. However, the mere fact that an enterprise has a certain amount of space at its disposal, which is used for business activities, is sufficient to constitute a place of business. No formal legal right to use that place is therefore required.
One can then see that whether a permanent establishment exists requires consideration of a number of factors and, in particular, a "fixed place of business" in South Africa. This is not a simple test to apply, but one is always searching for that "fixed place of business" which is not easy to find, especially in today's ever-evolving world of e-commerce.
Foreign companies should therefore bear this in mind when doing business in South Africa and should not assume that a foreign company registration automatically means a PE in South Africa. More importantly though, foreign companies should not assume that it does not, rather, advice should be obtained on this issue.
Written by Denny Da Silva, Director Designate, Tax Practice, Baker McKenzie Johannesburg