Brief country profile of South Africa – ease of doing business for foreign investors and the steps to take to establish a business

The elements of this article contain an introduction South Africa to foreign investors and to provide context in terms of the country’s ease of doing business and the first steps of establishing a business in South Africa. We realise that this field of inquiry can vary in complexity and length – this is a snapshot.

Ranked amongst the top 100 economies (84th out of 190) in the World Bank's 2020 Doing Business report, South Africa is the most industrialised economy on the continent that offers a unique combination of first world infrastructure and logistics networks and a diversified emerging market economy. It remains an attractive investment destination for global investors who are looking for opportunities to grow.

Key developments relevant to foreign investment in South Africa

South Africa welcomes foreign investment, in both public and private sectors and in all spheres of the economy.

Although the country faces social challenges in respect of unemployment, a large current account deficit, a volatile currency and slowing demand for commodities, there is significant scope for foreign direct investment in the fast-moving consumer goods, financial services, hospitality, pharmaceuticals, resources, retail, and telecommunications and information technology sectors.

In particular, South Africa offers great value propositions for investing into the country, which include:

  • a diversified and advanced economy
  • abundant natural resources
  • an extensive and modern telecommunications infrastructure
  • a transparent legal system
  • sophisticated banking and fintech sectors
  • trade-to-GDP of close to 60%
  • one of the most open economies in the world.

As a principal manufacturing hub and service destination, South Africa is an ideal jurisdiction to act as a gateway for  investment in the tremendous growth opportunities offered by other parts of Africa.

Important facts and figures about South Africa:

  • South Africa is located at the southernmost tip of Africa, bordering Botswana, Mozambique, Namibia and Zimbabwe, and surrounds the Kingdoms of Lesotho and Eswatini
  • Total Population: more than 59.3 million (2020 estimate)
  • Population in working age category (15–64 years): more than 38.5 million.
  • World ranking for domestic market size: 27th
  • Geography:
    • Area: 1,219,090 square kilometres
    • Agriculture: 81,6% of the total land area
    • Arable land: 12,1% of total land area
  • South Africa has nine provinces: Eastern Cape, Northern Cape, North West, Free State, KwaZulu-Natal, Gauteng, Limpopo and Mpumalanga.
  • Capital: Pretoria (administrative), Cape Town (legislative), Bloemfontein (judicial)
  • South Africa has 11 official languages: Afrikaans, English, Ndebele, Northern Sotho, Sotho, Swazi, Tsonga, Tswana, Venda, Xhosa and Zulu.
  • Total GDP (PPP)US$ 804,688 million
  • GDP Per Capita (PPP)US$ 13,754

Given that South Africa is home to a diverse population in terms of culture and religion, it is difficult to generalise the business etiquette in this region, although it can be said that it largely mirrors that of Western Countries with minimal cultural and religious influence on the manner in which business is conducted.

The quality of services offered by the Government varies from region to region but the general business culture adheres to that of international professional standards

General considerations

Infrastructure and transportation

South Africa boasts a modern and developed transport infrastructure in Africa with the overall quality of transportation infrastructure (details below) ranking (4.51) above the global average of 4.32 according to the World Economic Forum.

In addition, plans to further develop the transport infrastructure are ongoing and will take place in various cities throughout the country.

Various options of transport are available within the country which includes flights, buses, cars and trains.

  • Roads network: close to 750 000km (10th globally; of which 163 472 km are paved roads).
  • Length of railways: 26 000 km (12th globally).
  • Seaports: 8 (2 of world’s top container ports (Durban, Cape Town); world’s second largest dry bulk ports - Richards Bay, Saldanha Bay))
  • Total airports: 144
  • Quality of air transport infrastructure: 25th globally

Telecommunications

The telecoms industry has experienced significant growth in the past decade due, in part, to the increasing mobile phone and broadband penetration in South Africa.

In particular, South Africa’s smartphone penetration reached 91.2% in 2019 according to the Independent Communications Authority of South Africa (ICASA) and boasts one of the most developed telecoms network in Africa.

The four licenced mobile operators in South Africa include: MTN, Cell C, 8ta (a subsidiary of the parastatal Telkom) and Vodacom. Other key facts include:

  • Percentage of individuals using the Internet: 54%.
  • Upload and download speeds in some cities are comparable, if not higher, than some developed economies.

Energy supply

Eskom is South Africa’s state-owned utility organisation that is the largest producer of electricity in Africa and responsible for providing the majority of South Africa’s electricity.

South Africa is reliant on coal in generating the electricity which is generally available across the country, except for rural areas that are not connected to the national energy grid.

The electricity supply has experienced significant pressure as a result of increasing population density in cities, urbanisation and decline of existing power stations, leading to intermittent black-outs. This has led the government to divert their focus on diversifying the sources of energy supply in the country by introducing natural gas and renewables (e.g. solar and wind energy both of which are abundantly available) through various policies.

Other Government energy plans including the promotion of nuclear energy as means to not only ensure security of supply of energy, but to also reduce the country’s carbon emissions.

  • Total electricity generation capacity in South Africa: 51.3 MW

Legal system in South Africa

South Africa has a mixed legal system with its doctrines and concepts having been influenced by a number of distinct legal traditions including: Roman-Dutch law, English law and Customary law – the latter system inherited from the various indigenous African tribes. The final Constitution, that replaced the interim Constitution in 1996, is the supreme law in the country.

Establishing a business

Although there are various business entities that can be established in South Africa (e.g. limited liability companies, joint ventures, personal liability companies, partnerships and sole proprietors), the most common form of structure used is a limited liability company, which is governed by the Companies Act 71, 2008 (Companies Act).

Incorporating a new limited liability company.
Company name

Incorporating a new limited liability company requires the reservation of a company name with the CIPC. You may apply for between one and four names during each application process. If the name is available, the approved company name will be retained for six months. Upon application, the retention period can be extended for two months, or the company name can be applied for transfer.

The Notice of Incorporation (NOI)
To incorporate a limited liability company, a notice of incorporation (NOI) must be filed in a Form CoR 14.1 in terms of which the following information is required:

  • Company type
  • Date of incorporation
  • Financial year
  • Registered address
  • Number of directors
  • Company name.

As soon as practicable after the CIPC accepts the NOI, it must assign a unique registration number to the company. Thereafter, a ‘registration certificate’ in the Form 14.3 will be issued and delivered to the company. Section 66(2)(a) of the Companies Act provides that a private company must have at least one director.

A registration certificate is conclusive proof that all of the requirements for the incorporation of the company have been complied with and that the company is incorporated under the Companies Act as from the date and the time, if any, stated in the certificate. A company may begin trading as soon as it has received its registration certificate

Memorandum of Incorporation, MOI

The company registration memorandum CoR 15.1A-E (different company types and their corresponding forms) is the most important document for the management and maintenance of the company.

The main contents include:

  • Details of incorporators
  • Number of directors and alternate directors
  • Total share capital and detailed terms of the memorandum.

At the same time, as long as it does not violate the company law, the company registration memorandum may specify other contents such as the rights, obligations and responsibilities of shareholders, directors and third parties to the company in order to protect the interests of company shareholders. The NOI is lodged together with the MOI.

Registration timeframe

The time to incorporate a limited liability company is usually about 11 to 25 business days, which may depend on CIPC’s backlog and the complexity of the company’s MOI. That is to say a complex MOI may require a greater degree of consideration from the CIPC, which can then take up to 80 business days to register the company.

Reporting requirements for foreign businesses

South Africa adopts a global income tax system. All companies operating in South Africa, including resident companies and non-resident companies, are required to pay income tax in accordance with regulations, with a tax rate of 28%.

Resident companies should pay income tax on their global income, while non-resident companies should pay income tax on their income from South Africa. On October 1, 2001, South Africa introduced capital gains tax. Capital gains tax is a part of income tax and is levied on the taxable part of capital gains.

Restrictions to foreign investments

In South Africa, there are few restrictions on foreign investment where one should take note of tax breaks and incentives that are available for small-to-medium enterprises, strategic industrial projects and exporters.

In spite of the fact that there is no all-encompassing legislation in South Africa that limits foreign ownership of a company, there are however various key regulations that may affect foreign entry and/or ownership in strategic sectors including: agriculture, fisheries, natural resources, telecommunications, transport, broadcasting media, printing media, financial services, business services related to accounting and legal services, nuclear energy, national defence and aerospace etc.