There are three primary ways that a foreign company can establish a business within South Africa. They can register as an “external” company with their own name using a branch office approach. Alternatively, they can create a South African entity or thirdly have an Employer of Record (EOR) partner. All three are subject to South Africa’s tax and labour laws. However, the application thereof differs in a number of ways. Specifically, which tax laws are applicable and where the onus of compliance rests. This means that at a surface level it can seem easy and straightforward to operate as an international employer in South Africa. However, practically it can quickly get complicated. Especially when tax and legal nuances, international agreements and entity specific formulas are applicable. These are some of the key tax and labour law considerations for international employers in South Africa.

Navigating Taxes and Labour Laws

Operating a company within South Africa requires adherence to the South African Revenue Service’s (SARS) regulations and tax laws. Any company or individual who employs someone else is required to follow all applicable labour laws. Ahead of functioning as a business entity in South Africa it is advisable to understand the nuances of tax and labour laws. Once operational, it is imperative to keep abreast of changes to ensure that continuous compliance is achieved.

Examples of Business Taxes

• Income Tax Act (ITA).
• Corporate Income Tax.
• Company’s Contributed Tax Capital (CTC)
• Branch Tax.
• Dividends tax.
• Taxes relating to interest payments and/or royalties.
• Donations tax.
• Securities transfer tax (STT).

Notable is the ITA has multiple subdivisions which need to be adhered to. For example, thin capitalisation rules and restrictions on interest deductibility. Additionally, there are stipulations around allowances and non-deductible items. Likewise other taxes, for example Corporate Income Tax have special formulas that relate to specific business ventures.

Furthermore, South Africa is a signatory to various international regulations. For example, the Multilateral Convention to Implement Tax Treat Related Measures to Prevent Erosion and Profit Shifting (MLI). South Africa has chosen to specifically apply Article 6(3) in its pursuit of Article 6(6) of this agreement. Foreign companies are required to adhere to these and other tax agreements. Another example is the Double Taxation Treaty (DTT).

In addition to tax laws there are also a number of other laws which all businesses operating within South Africa need to uphold. Such as the Companies Act 71 of 2008 and various exchange controls and regulations as well as cross-border payment requirements.

Examples of Labour Laws

• The Basic Conditions of Employment Act (BCEA).
• The Labour Relations Act (LRA).
• The Employment Equity Act (EEA).
• The National Minimum Wage Act (NMWA).
• The Compensation for Occupational Injuries and Diseases Act No 130 of 1993 (COIDA).
• Protected Disclosures Act (PDA).

South African labour laws are designed to protect both employer and employee. They afford a wide umbrella of rights and obligations. The above labour laws work in conjunction with other legal frameworks, such as The South African Constitution. They are non-negotiable and adherence to all of them is therefore mandatory. Violation based on ignorance or misinterpretation of South African labour laws can result in legal action.

Running a Company in South Africa as a Foreign Employer

In South Africa business vehicles are either partnerships (general or limited) or private or public companies. It is possible for an individual or more than one to register and use a trust as a company in South Africa. However, due to the complexities this is an unusual approach for a foreign company to take. Each of these business vehicles are required to register with SARS. To do so there are requirements specific to the type of vehicle being used. For example, the typical requirements of a private company (PTY) limited are formal registration with the Companies and Intellectual Property Commission (CIPC) and a Company Memorandum of Incorporation (MOI).

Operating as an External Company in South Africa

Section 23 of the Companies Act 71 of 2008 outlines the requirements of registering a foreign company in South Africa. An external company is defined as any entity that carries out business or non-profit activities. The threshold for the requirement to register a foreign company is having one or more employment contract based in South Africa. Alternatively, should a company engage in business activities for 6 months they are also required to register. Once registered a foreign company is given legal recognition in South Africa and accordingly is required to follow all applicable tax and labour laws.

South African Requirements for Foreign Employers

There are a number of tax requirements that foreign employers need to adhere to. For example, one of the key tax requirements within South Africa is the registration of employers for employee tax (PAYE). Any remuneration earned in South Africa requires the company to withhold PAYE. Another requirement is that companies contribute to Skills Development Levies (SDL). They are also required to pay towards the Unemployment Insurance Fund (UIF). All companies, including subsidiaries are subject to these requirements.

It is important to remember that South African tax laws are updated from time to time. Accordingly, foreign employers need to take care that they are constantly and continuously compliant. Practically, this usually means employing a specialist business legal consultant which can be a particularly costly solution.

Employer of Record (EOR) Partner

An Employer of Record (EOR) is a third-party organisation that legally employs workers on behalf of another company. This arrangement allows businesses to hire employees in different countries without the need to establish a local entity.

Having an EOR partner greatly simplifies the complexities of tax and labour law considerations for international employers in South Africa. It ensures continual tax and legal compliance, as the EOR partner is responsible for staying abreast of SARS and Labour Department requirements. An experienced EOR partner will also offer their client reporting tools. These provide data that enable an EOR’s partnering client to make informed decisions relating to workforce and operational strategies.

5 Key Features of an EOR Service

1. Legal Compliance.
2. Tax Compliance.
3. Payroll Processing
4. Labour Risk Management and Oversight.
5. Management of HR Processes (Recruitment, vetting, hiring, onboarding, probationary oversight, benefits administration etc).

Within this partnership, the EOR’s partnering client is responsible for day-to-day operations. As such they are responsible for the technical direction and supervision of the personnel deployed to their service.

Partnering with the Key Recruitment Group

Using an EOR partner has been shown to yield many advantages. Key Recruitment EOR services are designed to reduce risk, decrease overheads and expedite the time it takes to be fully functional.

 7 Reasons to use Key Recruitment Group’s EOR Services

1. South Africa has been rated, world-wide, as the most favoured offshore (EOR service) delivery point.
2. Significant cost savings of between 30-60% due to lower employment costs and favourable exchange rates.
3. Proven cost and risk reduction in relation to strategic company expansion.
4. Low-staff turnover.
5. All South African’s are required to learn and speak English throughout their schooling. Furthermore, many are multi-lingual and can provide professional services in, for example, Dutch, French, German, Spanish and Portuguese.
6. South Africa’s geographical location means work hours favourably align with companies across Europe, the UK, the Middle East and Africa. Work hours also overlap with those in the USA, Canada and South America.
7. Access to a sophisticated skills network. 

The Key Recruitment Group has a long-standing record of decreasing client risk and employment related costs. This is because the Key Recruitment Group’s EOR service offers a comprehensive package based on more than 45 years of experience. Our EOR services include procurement of skilled personnel, for example Engineering, IT and back-office administrative professionals.  As well as administering employment contracts, full HR and payroll administration services and securing of premises, setting up of work centres and providing an on-site management presence. Contact Us today for an obligation-free discussion on how we can assist you with your business expansion plans.