Foreign companies with business or non-profit activities in South Africa may be required to register with the Companies and Intellectual Properties Commission (CIPC) as an external company. Section 23 of the Companies Act 2008 provides that a foreign company must register within 20 business days of first beginning to “conduct business” in South Africa.
A company will be considered to be conducting business in South Africa if it is:
either a party to one or more employment contracts within South Africa; or
engaging in conduct or has engaged in a pattern of activities within South Africa over a period of at least six months that would lead a person to conclude reasonably that the company intends to engage continually in business activities in South Africa.
A company will not be considered to be conducting business in South Africa if it merely engages in certain limited activities such as holding shareholder or board meetings in South Africa or otherwise conducting any of the company’s internal affairs within South Africa, having a South African bank account, creating, acquiring, securing or collecting any debt or acquiring or securing a property interest in South Africa.
The external company is not a new legal entity separate from the foreign company. The foreign company remains one and the same legal entity, registered in South Africa and in its place of incorporation. There will not be a separate board of directors in South Africa nor will it have a separate existence from its foreign operations. Should the registered external company be sued, the foreign company itself will be sued.
The external company’s liability is therefore not limited to its South African operations. Should the external company become insolvent the entire estate of the external company (including its overseas assets) will be susceptible to creditors.
If an external company has failed to register within three months after commencing its activities in South Africa, the CIPC may issue a compliance notice requiring the foreign company to register or if it fails to do so within the time prescribed, cease to carrying on its business or activities in South Africa.
If the foreign company operates as an external company in South Africa and at all times retains its effective management offshore, it will remain a non-resident in South Africa for income tax purposes. As a result, its income will only attract tax if the originating cause of the income is considered to be in South Africa, subject to any double taxation agreement between South Africa and the country in which the foreign company is incorporated.
An external company must obtain exchange control approval before it remits funds out of South Africa to any non‑resident or obtains funding from a non‑resident, depending on the terms.
A registered external company must continuously maintain at least one office in South Africa.
An external company will also be required to comply with ongoing administrative requirements set out in the Companies Act including filing annual returns and notifying the CIPC of changes to the company for example the composition of its board.