Does it matter in which country you set up shop?

Many people who own business face a frustrating fate every year when the tax man comes a-knocking, as a large portion of their profit is taxed by the South African Revenue Service (SARS). Not only that, but businesses who trade internationally take the brunt of the burden for exchange rate conversions that further diminish their potential revenue.

This is why many business owners have opted to incorporate their businesses offshore, which, at least in the past, have had two main benefits:

1. Lower tax rates in the relevant jurisdiction
2. Lower risk in terms of currency value

Tax laws and anti-avoidance measures have been growing in the past few years globally, with many of the ‘tax-haven’ countries (in which aggressive tax planning was a way to maximise financial gain) putting new laws in place parallel to global reform.

Recently, at the global 2021 G7 summit, world leaders have proposed further measures to curb the trend of large corporate conglomerates establishing their companies offshore. The proposal is that a global minimum tax of 15% be imposed on stateless international corporations, which, more than being an inconvenience to these companies, is aimed at improving global financial equity.

This brings us to the question, “Is it still worthwhile to incorporate a company in an offshore jurisdiction?” The short answer is that it can be — it just depends on your reasoning.

For instance, incorporating a company offshore only to benefit from tax is not a good enough reason. In fact, while you may be paying less tax in certain areas, you may also risk being seen as irreputable and struggle to convince banks or investors to loan you money or invest in your business. The reputability of your offshore business will depend heavily on political and currency stability, as well as the processes followed to promote sustainable, transparent financial practices.

Your decision to establish an offshore company shouldn’t merely be based on tax. Rather, your decision to incorporate your company elsewhere should mainly be focussed on the benefits it holds for your company, which can be numerous.

Establishing an offshore company can often give you access to a greater variety of skilled workers, access to a more stable currency for trading, more reputability (depending on the jurisdiction), greater protection for your assets, less uncertainty based on political circumstances, and access to greater legal freedom in other areas too.

However, for most South African entrepreneurs, incorporating a company through CIPC and establishing a financial history in South Africa will remain their best avenue towards growth and success while also contributing to the creation of jobs and stimulation of the South African economy. It is much easier for South Africans to register a company locally, and there are many benefits to doing so as well.

So, before you make the decision to incorporate your company in an offshore jurisdiction, first consult with your advisers, who will be more than willing to help you figure out which avenue suits your needs best. Incorporating a company requires care and planning. After all, it is your vision that has brought you to a place where you’ve decided to form your own company, don’t compromise its success on bad planning or informal advice.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)