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Start-ups: go local first, or head offshore?

08 December 2020 Sovereign Trust
Ralph Wichtmann, Consultant at Sovereign Trust

Ralph Wichtmann, Consultant at Sovereign Trust

If you’re an entrepreneur looking to open a business in a post-Covid world, do you launch your business in South Africa first and then expand abroad, or create an offshore operation immediately? That’s the dilemma facing a growing number of local entrepreneurs – and there are pros and cons for both.

Sovereign Trust consultant Ralph Wichtmann says much depends on the company’s target market, 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 clients, and an offshore company to focus on all clients outside the country.

Wichtmann says the number of clients looking to set up offshore operations in jurisdictions like Mauritius, Gibraltar, the Isle of Man, Guernsey and the United Arab Emirates is increasing as businesspeople look for new markets, to organically create wealth overseas, and even provide future residency and immigration pathways.

“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%, the dividend withholding tax is 20% and capital gains tax is 22.4%.
• 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 an 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 abroad from the onset
Pros
• Depending on the jurisdiction, there are various benefits from reduced taxes and no exchange control regulations. The lack of exchange control and double taxation agreements with the offshore jurisdiction could make the start-up more attractive for foreign investment.
• Many jurisdictions also have well-developed legal, financial and banking infrastructure.

Cons
• When choosing an offshore jurisdiction, one must ensure that any IP is created within that jurisdiction. If IP is considered to be created in SA, this can result in it being considered as South African IP, and would require Reserve Bank approval to sell it to a foreign company.

“Before companies choose an offshore jurisdiction, it’s important to have a comprehensive list of double taxation agreements with the countries to which they will license their IP, as they will benefit from reduced withholding taxes payable by clients to whom the IP is licensed. But ultimately, it’s vital that proper structuring advice is obtained prior to any company incorporation, IP being created or any structuring started,” says Wichtmann.

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