As the pace of development into the rest of Africa gains momentum, more and more South African companies are considering expanding their businesses into the rest of the continent. There are several legal issues to consider – and some pitfalls of which to beware.
One way to establish a footprint in new territories, if your business is suitable, is via franchising. This helps to mitigate the risks because, provided you choose your local franchisee carefully, they can supply useful local knowledge and networks needed to make the business work. As a franchisor, it gives you a lot of control over the operations and standards of the franchise – if the franchisee doesn’t perform, you can cancel the franchise agreement and their right to use your brand.
The risk here is that a non-performing franchisee could go rogue and dilute your brand, while using your valuable intellectual property and trade secrets. So it is important to conclude a watertight franchise agreement with your local franchisee to protect your interests, while always keeping the legal system of any new territory in mind – will your franchise agreement actually be enforceable?
A second option is to go for it alone and retain complete control over your business – set up your local office, send in some trusted managers, and hire some local staff. But this is only for the brave or the experienced: without deep knowledge of local market conditions and having local connections, there are too many ways to be taken unawares.
Another option is to find a local partner in the foreign territory and set up a new company in which you share equity. This brings the benefits of local knowledge, networks and funding, but in return for losing some control. A lot will depend on the local partner – it is important to choose the right person you can trust and is able to add value to your business through his or her local connections and knowledge.
If you want to make use of your expertise that is based in South Africa, setting up a local entity in a foreign territory that has a services agreement with the home office is a route to consider. Under this system the local entity could, for example, handle all marketing and contracting with local clients in the foreign territory, while the South African company will be appointed by the local entity to render the services to the local clients.
If you decide to go the route of putting a services agreement in place between your South African office and the newly established local entity in the foreign territory, you would need to be able to show that you are not trying to gain tax advantages you aren’t entitled to. If that’s the only reason you’re thinking of setting up somewhere else, think again. The South African Revenue Service (SARS) is very wise to all of these tricks by now. The South African company would need to be able to show SARS that it is charging arms-length prices to the local entity and SARS may well ask to see the South African company’s internal transfer pricing policies that set out exactly how you determine and justify the prices you charge to connected parties. It is important that it is identical to the prices that you would have charged to independent, third party clients who need similar services. If it is not identical, your policy needs to set out defendable reasons why the South African company should charge lower prices to the local entity, than to its other third party clients.
Also beware of using an offshore company with nothing but a PO Box as a way to evade taxes. SARS will consider the place of effective management when it decides who should be paying tax – where are the offices, where do senior managers work, where are decisions made and implemented? If you are effectively managing the offshore entity from South Africa, SARS will view that entity as a South African tax resident, who will then be liable to pay tax in South Africa.
If there’s a genuine business reason to establish a presence in another country – if your intention is truly to grow the business as a fully-fledged, viable entity in a foreign territory – go for it. The opportunities are immense.