Here’s how SA startups can legally create an offshore company

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If you are a South African, setting up an offshore company doesn’t have to be a hassle.

In this second article on how to create international business structures (see the first one here), I will explain what the structure of your international business looks like, from an SA perspective.

An international group owned by South Africans will be different from a South African company based in South Africa. This is because South Africans have specific restrictions imposed by exchange controls.

This article explains why the structure will be different and how it can achieve the desired end result anyway.

To start, here is the typical startup:

An offshore company cannot own an SA company

If you (the shareholders) are South African, the offshore company (Offshore Co) cannot own the SA company (SA Co).

This important point must be understood for its disorderly effect on international structures. This means that SA shareholders generally cannot set up an offshore holding company that owns their SA subsidiaries.

Once again, with emotion. Offshore Co cannot be the holding company of SA Co. This is probably the most infuriating law in our otherwise amazing country.

An international group owned by South Africans will look different than a local company, due to exchange control restrictions

So as not to cause anxiety, I will explain the reasons for this structural peculiarity in a future article, which you can read after taking a good dose of anti-anger medication.

For the moment and for the sake of completeness, exceptions exist (a) for employee incentive plans, (b) when less than 40% of the Offshore Co is owned by SA companies (not individuals) and (c) in the case of technology companies establishing to set up offshore subsidiaries for fundraising purposes.

Assuming those exceptions don’t apply, the solution to this problem is to avoid dealing with it (in this case though, even Sigmund Freud wouldn’t disapprove).

A simple solution

The answer is heavy but simple: all shareholders will have to acquire a brand new offshore company, and then each shareholder will own shares directly in that offshore company.

The result is that you will have of them parallel companies – the SA company (covering all functions of the SA) and Offshore Co (which covers the entire market outside South Africa).

Each of these companies will be directly owned by all shareholders in exactly the same proportional participation (see example below).

This is perfectly legal as there is no restriction on individual SA residents who acquire shares in offshore companies (as long as the offshore companies do not own SA companies).

Exchange control allowances

Strictly speaking, I have to mention here that each SA shareholder has to use their exchange control allowance to finance their purchase of shares in Offshore Co.

The allocation is an annual discretionary amount of R 1 million, and an additional R 10 million with a tax clearance – and since Offshore Co will likely be a shell, it will likely cost a nominal amount to set up.

overseas-business-structures-2

The next step is to contractually link the shares of the two companies, which means that the shares of each of the companies cannot be traded separately.

This is intended to create a single exit or entry point for future investors in the group, and thus synthetically mimicking a conventional “group” holding structure.

This solution is really very simple in concept. It effectively carves out your company’s international operations and puts those operations into a corporate vehicle that can be fully separated from SA tax, currency controls, and political or economic risk – if structured, operated and managed. correctly.

That in itself can be an important qualification, but more on that in the next article.

Read more: The ins and outs of setting up your startup abroad

Adrian Dommisse has extensive experience in commercial and financial transactions in Africa, Europe, Eastern Europe and the Middle East. He founded the law firm Dommisse Attorneys in 2008 and holds three degrees in economics and law.

The selected image: Pexels via Pixabay


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