Why do business in South Africa?
If you’re keen to break into the African trading market, South Africa is frequently referred to as the business gateway of the continent. While unemployment figures are undoubtedly high, South Africa enjoys excellent infrastructure and an outstanding finance industry.
However, due to these aforementioned unemployment statistics, any business idea that creates jobs for the local population will be welcomed with open arms. Once up and running – which should not take long, as South Africa ranks highly on the ease of doing business scale – you will quickly start to see rewards.
World Bank Ease of Doing Business Ranking (1-190)
Tax rates 2020
How to set up payroll in South Africa
Opening a business and setting up a payroll in South Africa is comparatively simple and pain-free. Your business will be ready to start hiring and trading within 12 weeks – 8 if you are lucky.
The process for opening a business and setting up a payroll in South Africa is as follows:
- Obtain a South Africa business visa
- Choose your company structure (a proprietary limited company is usually the most relevant)
- Reserve your company name. This will be held for a maximum of 6 months while you complete the registration process
- Register with the Companies and Intellectual Property Commission (CIPC)
- Register for a taxpayer number with the South Africa Revenue Service (SARS)
When making hires, try to stick with the local labour market. If you are opening a business as a business visa holder, a minimum of 60% of your workforce must be South African. With so many South African nationals unemployed, especially those aged under 35, the Department of Home Affairs is often reluctant to issue working visas to overseas employees without a very compelling reason.
As we’ll discuss in a moment, social security taxes in South Africa are very low at just 2%. Your employees will need to pay income tax, though. As always, this is assigned on a sliding scale depending on the employee’s annual salary.
- Salary up to 216,200 South African Rand (R) – 18%
- Salary between R216,201 and R337,800 – 26%
- Salary between R337,801 and R467,500 – 31%
- Salary between R467,501 and R613,600 – 36%
- Salary between R613,601 and R782,200 – 39%
- Salary between R782,201 and R1,656,600 – 41%
- Salary of R1,656,601 or higher – 45%
The South African tax year runs from March 1 to February 28. These taxes are filed with the SARS by the end of November (October if you are filing in person.)
South African employment law and HR considerations
All employee rights and protections in South Africa are governed by the Basic Conditions of Employment Act of 1997. This government writ places certain restrictions upon employers. For example, staff cannot be asked to work longer than 9 hours on any given day, or 45 hours in a week, without overtime pay. Also, employees that are asked to work on a Sunday are entitled to double their basic salary.
This Act primarily focuses on working hours over benefits. There are comparatively few government-mandated benefits that employers in South Africa must pay. Employer social security payments are just 2% of an employee’s salary. Mandatory benefits granted to South African employees are donations to the following:
- Older Persons’ social grant fund (basically the national pension)
- Unemployment Insurance Fund, or IUF (open to South African nationals that lose their job)
- Skills Development Levy, SDL (training for workplace qualification and self-improvement)
- Compensation for Occupation Injuries and Diseases, or COIDA (a fund for employees injured, disabled or rendered sick at work)
South African employees that work a 5-day week are entitled to 15 days of personal holiday. Some businesses operate a 6-day week, from Monday to Saturday (typically working one less hour each day). Employees of such a business are entitled to 18 holiday days.
Employees in South Africa are entitled to 30 days of paid sick leave for every 36 months of service. Maternity leave entitles an employee to 4 months of time off after the birth of a child, but this is unpaid. Parental leave, including following an adoption, is for 10 days and is again unpaid.
As these benefits are not considered particularly generous, supplementary benefits are a big part of the appeal of employers in South Africa. It is advisable to consider investing the money saved on social security contributions into additional benefits to attract the best staff. Common additional benefits in the country include:
- Enrolment into a private pension scheme
- Private medical insurance
- Disability or sickness cover
- An additional month’s salary, usually paid in December – you may see this referred to as a, “thirteenth cheque”
Any other perks, such as a company car or subsidisation of travel, gym membership or sustenance and additional opportunities for paid leave will also be welcomed.
Setting up a subsidiary entity in South Africa
If you’d like to set a business in South Africa as an entrepreneur, we have good news and bad news.
The good news is that there is no minimum capital requirement, it’s comparatively easy to set up a limited liability company (known in South Africa as a proprietary limited company), and most businesses do not require any special permission to operate. A proprietary limited company in South Africa can also be 100% foreign-owned.
So, what’s the catch? You’ll need a South Africa business visa to open such a business. To obtain this visa, you’ll need to show evidence that you have at least R5 million to support your business and yourself (that’s around £240,000) and prove that your business will create jobs for the local market and hire South African nationals for at least 6 months.
You can apply for this visa through the Department of Home Affairs. The application will cost you around R1,520 (£75). Also, if you are acting as the representative of this business but share ownership, be aware that the visa holder must own at least 25% of the company.
An alternative to this approach is opening a branch of an existing overseas company. The tax implications of this are no different to opening a proprietary limited company – both business structures, as well as a public company, will be liable for business tax rates of 28% on all local profits.
The UK and South Africa have a double tax treaty, so you will not be charged twice. You’ll need at least one resident representative though, and the usual caveats of an overseas branch apply. Your parent company will be responsible for any financial or legal difficulties experienced in South Africa.
Refer back to our previous section on setting up a proprietary limited company in South Africa. You must understand the financial and ownership implications of doing business in this country as the owner of an SME. If you’re confident that you can meet these criteria, you will be fine. There are few other restrictions placed upon business owners in South Africa. You won’t even necessarily need a local bank account.
There are a handful of cultural nuances you should also be aware of when trading in South Africa. A lot of business takes place face-to-face, and a handshake deal is taken seriously, so do not assume that just because something has not been put into writing it has been forgotten. Reneging on your word is a serious breach of trust in South Africa.
Another golden rule is to always demonstrate respect to elders in South Africa. Never demean an older business associate, even if their rank does not approach your own. Dress modestly and conservatively – and be prepared for lengthy negotiation processes. Most of these agreements will not revolve around price haggling though, so do not float drastically larger numbers than you are expecting.
Setting Up in South Africa FAQs
Aside from opening a branch or operating as a sole trader, the core business structures in South Africa are:
• Proprietary limited company (Pty Ltd) – the South African equivalent of a limited liability company
• Public company – floated on the Johannesburg Securities Exchange, and host to at least three resident directors
Both business types can be 100% foreign-owned, but the Pty model is typically more popular. However, it can be tough to start such a business without a South Africa business visa. You will find more information on this document later in these FAQs.
Expect to wait around 12 weeks for your South African business to be ready to trade and make new hires.
Officially, only 1.02% of an employee’s salary – state benefits are few and far between in South Africa. However, do factor in any expense of supplementary benefits as these are a big driving force in an employee’s choice of workplace.
There is no default minimum share capital required to establish an entity in South Africa. You will need significant capital to quality for an entrepreneur visa, however, which is required to open a local business.
No, you can use an overseas bank account as long as it is separate from your personal accounts and those connected to any other business.
The Basic Conditions of Employment Act states that South African employees cannot be asked to work more than 45 hours in any single week. This is typically split over 5 days of 9 hours each. Overtime requests must be formally agreed in a legal document and limited to 3 hours in a day and 10 hours over a week.
Mandatory benefits are very limited in South Africa, so talented employees often choose a workplace based on supplementary benefits. Common examples of these include a private pension, private health and medical insurance, insurance policies against death in service or disability and a bonus month’s salary (often referred to as a, “thirteenth cheque”) paid in December. Many employers also offer additional benefits to attract and retain employees, such as company cars and gym memberships.