In 2023, South Africa attracted foreign direct investment (FDI) inflows of nearly R100-billion. However, this was just 1,4% of gross domestic product and South African business owners remain hamstrung, to a large extent, by the regulatory, economic, and infrastructure barriers that deter a greater degree of FDI.
Dani van Vuuren, Business Development Manager at Sovereign Group, says that business owners can mitigate the impact of these challenges, and take advantage of many other favourable elements, by establishing strategic interests offshore. South Africa is home to many global high-growth industries, particularly in sustainability, digital transformation and healthcare innovation, and offshore jurisdictions offer opportunities to attract international capital that supports profit, operations, and the ability to expand.
Van Vuuren outlines the major opportunities that South African business owners can leverage in offshore jurisdictions:
- Regulatory and economic advantages – Frequent policy changes and bureaucratic hurdles hinder long-term business planning in South Africa. In addition, restrictions on money movements often deter foreign investors, especially those that are unfamiliar with exchange controls, and concerns over currency volatility and infrastructure challenges further reduce South Africa’s appeal. Establishing a company in a stable, business-friendly, offshore destination can help to mitigate these risks. Further, offshore structures enable South African entrepreneurs to reap the benefits of international banking systems and relaxed or no exchange controls.
- Credibility and confidence – Favourable destinations, like Mauritius, Singapore, the United Arab Emirates and Isle of Man, are well-regulated, economically and politically stable, and operate under established legal frameworks. This transparency, alongside efforts to curb money laundering and fraud, are critical components of both peace of mind and ease of doing business for South African entrepreneurs. Many of these jurisdictions have well-established and robust intellectual property protection laws, which are a crucial factor for emerging technologies and sectors.
- Access to global systems and resources – International hubs facilitate easier entry into global networks and financial ecosystems, thus fostering growth through international partnerships. When it comes to staffing, operating in a foreign jurisdiction opens up access to a diverse pool of global talent, while still giving South African entrepreneurs the leeway to leverage local resources should they wish to do so.
- Advantageous tax agreements – Many jurisdictions provide tax incentives for foreign-owned businesses, including lower personal and corporate income taxes, and a growing network of tax treaties. However, Van Vuuren cautions that it is critical to understand the tax implications before setting up offshore: “South Africans must take the legal, tax, and regulatory frameworks of their chosen jurisdiction into account while remaining aware of South African requirements. Tax residency is of particular importance as the status of the shareholders, directors, and company affects offshore structures, making it essential to consider local laws on controlled foreign companies, effective management, profit shifting, and transfer pricing. Businesses that do not comply in all respects risk violating South Africa’s tax and exchange control laws, leading to penalties being levied.”
Van Vuuren adds that, depending on the parties involved, the business interests of an offshore company may be held by an offshore holding company, trust, or foundation, and there may be key advantages for business owners who utilise an offshore structure to hold a South African entity’s shares.
“Ultimately, the right offshore structure depends on a variety of factors that, in addition to those outlined above, include business objectives, operational requirements, and reporting obligations. Sovereign Group always advises business owners to partner with professionals in these fields before making any moves,” concludes Van Vuuren.