Overview: Foreign investors often face the decision of whether to set up operations in South Africa as a branch or a subsidiary. Each option has distinct legal, tax, and administrative implications.
Key Differences:
| Feature | Branch | Subsidiary |
| Legal Entity Status | Not a separate legal entity. Acts as an extension of the foreign company. | Separate legal entity incorporated in South Africa. |
| Liability | Foreign company is liable for branch activities. | Liability limited to the subsidiary. |
| Tax Rate | 28% corporate tax. No dividends tax. | 28% corporate tax + 15% dividends tax. |
| Registration Requirements | Registered as an external company with CIPC. | Registered as a South African private company. |
| Compliance Obligations | Annual tax returns, provisional tax, PAYE returns, SDL, WCA registration. | Similar compliance obligations but includes audits and independent reviews. |
| Profit Repatriation | No dividends tax. Profits are taxed at source. | Subject to dividends tax (can be reduced by tax treaties). |
Advantages of a Branch:
- Lower tax costs as dividends tax does not apply.
- Simplified compliance compared to a subsidiary.
Disadvantages of a Branch:
- Legal liability extends to the foreign parent company.
- Limited flexibility for structuring ownership or partnerships.
Advantages of a Subsidiary:
- Separate legal entity offering liability protection.
- Suitable for long-term investments and local partnerships.
Disadvantages of a Subsidiary:
- Higher tax burden due to dividends tax.
- More administrative and compliance requirements.
Setting Up a Branch in South Africa
Steps to Register a Branch:
- Register with CIPC: Submit required forms and pay registration fees.
- Appoint a Local Representative: Must reside in South Africa.
- Tax Registration with SARS: Register for corporate tax, PAYE, VAT (if applicable), UIF, and SDL.
- Open a Bank Account: Required for transactions and payroll.
- Obtain Workmen’s Compensation Registration: Ensure compliance with workplace injury coverage.
Compliance Requirements:
- File Annual Financial Statements (AFS).
- Submit annual and provisional tax returns.
- Monthly PAYE returns and bi-annual EMP501 reconciliations.
- Issue IRP5s to employees.
- Maintain accurate bookkeeping.
- Pay CIPC annual fees.
Final Considerations
The choice between a branch and a subsidiary depends on your business goals, tax preferences, and legal liability tolerance. While a branch offers tax advantages and easier setup, a subsidiary provides liability protection and flexibility for long-term growth.
For expert guidance on setting up your business in South Africa, including compliance and tax structuring, contact our team today.
We’ve partnered with EOACC, a local accounting firm, to provide expert guidance and support on these structures.