What you need to know about offshoring your business

How to move one’s business offshore is a popular topic among entrepreneurs – but, says corporate law expert Adrian Dommisse of Dommisse Attorneys, the decision is not as easy as many seem to think.

“There is lots of excitement about Mauritius because their corporate tax rate much lower (potentially just 3% as opposed to 28% in South Africa), but offshoring needs to be a substantial and genuine exercise – just because you think you can avoid tax is the wrong way to go about it,” says Dommisse. “SARS is very aware of this issue. If you have a company registered in Mauritius but all your management and employees are in South Africa, you’re going to attract unwelcome attention.”

Dommisse says there are two good reasons companies should consider establishing an offshore office: If they’re genuinely expanding their activities beyond the borders of South Africa, or to meet the needs of major international investors.

In the first case, says Dommisse, entrepreneurs should be aware that there are major costs associated with setting up offshore.  “There must a real separation between your South African and international operations. You can’t just have a postal address in Mauritius but still run everything from Johannesburg: there needs to be real substance.”

“You will need to prove to anybody enquiring that key management decisions are made in the offshore jurisdiction,” he adds. “That means local offices, resident senior staff and all your board meetings will need to be held there, just for starters. That cost will need to be weighted against the benefits of actually running a business from that office. So if you’re genuinely looking for a good base from which to expand into South Asia, for example, go for it.”

Dommisse also cautions against “loop structures” in which South Africans have an interest in an offshore holding company that in turns owns assets in South Africa. “It’s a fairly obvious way to try and avoid paying tax, and it could make criminals of your entire board,” he says. “It’s a rookie mistake.”

The second reason to consider setting up offshore is to secure a major international investor who is wary of putting money into South Africa because of currency and political risk, the tax regime and exchange control regulations.

“The truth is that investors will only put their capital into a country like South Africa if they can take it out again easily,” says Dommisse. “We see investors who are willing to carry the cost of moving the whole operation offshore to avoid exchange control and political risks.  Obviously that assumes underlying operations that transcend national borders.”

They are also likely to insist that intellectual property be developed outside South Africa, he says. “IP that is developed locally will be classified as a South African asset, which is a  situation that international investors may not accept,” he says. For this reason, a significant part of key development resources will probably have to be located outside of South Africa.

In summary, says Dommisse, “establishing an international office only makes sense if you’re a genuinely international business. Choose your advisors very carefully, and accept that this is not a low-cost exercise. You will need a tax expert with specific experience in this area, as well as good legal advice. “

No need to panic as new Companies Act deadline expires

Adrian Dommisse of Dommisse Attorneys reads the prophesies by near-hysterical commercial attorneys across South Africa with bemusement.  Certainly, the expiry of the deadline for compliance with the “new” Companies Act of 2008 is important, and has consequences, but for most companies there is certainly no need to panic, says Dommisse.

Attorney Tracy Hockly of Dommisse Attorneys says elaborates: “While companies who aren’t yet fully compliant probably have no need to panic, they should use the opportunity to review their founding documents.”

“For many companies this is one of those important-but-not-urgent things that can too easily fall off busy people’s agendas,” says Hockly. “But it’s wise to make some time to deal with it.”

Hockly explains that the new Act “contains some provisions that conflict with what companies may have specified in their old founding documents, such as shareholders’ agreements and the Memorandum of Incorporation (MOI) (previously known as the articles and memorandum of association). The Act provided for a two-year grace period to give companies time to amend all their documents and harmonise these with the Act, which has now expired.”

What this means, she adds, “is that since the deadline passed, anything in your founding documents that conflicts with the unalterable provisions in the new Act is now null and void (unless your MOI imposes a higher standard, greater restriction, longer period of time or any similarly more onerous requirement). Also, importantly, anything in your shareholders agreement that is inconsistent with the Act or the MOI is null and void.”

For many companies the end of the transition period is not too much cause for concern, says Hockly, especially private companies that are owner-managed. It will ultimately be more important to ensure that the unalterable provisions in the Act are being complied with by your directors. Nevertheless, she says, “it’s still a good idea to get your housekeeping in order. The end of the grace period doesn’t mean you can no longer amend your MOI, or that you’ll be charged any penalty for failing to do so (aside from a nominal fee for the amendment, payable to the CIPC). But you do need to know that the assumptions you’re operating under are correct.”

The situation is more urgent for those who have two or more shareholders, especially if there is a difficult relationship between shareholders. If you aren’t completely confident that your rights under old founding documents are adequately protected under the new Act, it’s wise to check with an attorney how best to deal with this as soon as possible. Hockly adds that “we really don’t recommend using a standard-form MOI. They tend to be very sparse and don’t encourage engagement with the issues. Your MOI should be the expression of an agreement all the shareholders have come to after really thinking through the options. The Act lays down the minimum requirements, but you are quite entitled to have more demanding founding documents in place to manage your relationships and avoid future conflict.”

If a company does decide to approach an attorney to review its founding documents, concludes Hockly, “you can shorten the process and manage your costs by preparing a good brief. As well as your existing documents, be sure to include exact details of all your current shareholders and directors, how directors are appointed, how decisions should be made, and any agreements you currently have in place around transfers of shares, loan accounts and so on. If you’re thinking of bringing in an outside investor or selling shares, mention it; and also point out any red flags or areas of actual or potential conflict. Write down all the questions you have before any meeting, and don’t be afraid to ask what might seem like stupid questions. The new Act is in many ways intended to be less onerous and better for business than the old version, so it’s to your benefit to develop a good grasp of the basics.”