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EXTERNAL COMPANY REGISTRATIONS: SOME CLARITY ON WHEN COMPANIES SHOULD REGISTER

Article by listed attorney: NICOLENE SCHOEMAN

 
In terms of the Companies Act of 2008 (the “Act”), a foreign company is distinguished from an
external company by the nature of its registration requirements.
 
A foreign company is defined simply as an entity incorporated in some other jurisdiction
outside the Republic of South Africa.
 
In terms of section 23 of the Act, an external company is incorporated outside the Republic
and conducts its activities within the Republic, irrespective of whether it is a profit-making
or non–profit entity. In this case, the company would need to be registered as an external
company. When a foreign company is registered as an external company in South Africa, it is
given legal recognition in South Africa.
 
According to section 23 of the Act, a foreign company is deemed to be conducting business
or non-profit activities within South Africa if it:
 
(a) is a party to one or more employment contracts within the Republic; or
 
(b) subject to subsection (2A), is engaging in a course of conduct, or has engaged
in a course or pattern of activities within the Republic over a period of at least six
months, such as would lead a person to reasonably conclude that the company
intended to continually engage in business or non-profit activities within the
Republic.
 
A foreign company is conducting business or non-profit activities in the Republic if it has
engaged in or is engaging in one or more of the activities set out in section 23(2)(a)–(f) of
the Act, as listed below. However, these are not the only grounds to regard the company as
conducting its profit or non-profit business:
 
(a) Holding a meeting or meetings within the Republic of the shareholders or board
of the foreign company, or otherwise conducting any of the company’s internal
affairs within the Republic;
 
(b) establishing or maintaining any bank or other financial accounts within the
Republic;
 
(c) establishing or maintaining offices or agencies within the Republic for the
transfer, exchange or registration of the foreign company’s own securities;
 
(d) creating or acquiring any debts, within the Republic, or any mortgages or security
interests in any property within the Republic;
 
(e) securing or collecting any debt, or enforcing any mortgage or security interest
within the Republic; or
 
(f) acquiring any interest in any property within the Republic.
 
This means that sections 23(2) and 23(2A) need to be read together. However, the provisions
of s 23(2), read with s 23(2A), are somewhat more subjective. Various factors need to be
weighed up against an empirical obligation to register as an external company.
 
According to Heather Brownell in de Rebus April 2012, this is particularly challenging when
trying to establish whether the parties entered into an employment agreement. According to
Brownell, because case law on external companies is predominantly English, it is appropriate
to look to English law for guidance, in particular in the case of South India Shipping Corp Ltd
v Export-Import Bank of Korea [1986] 2 All ER 219. Furthermore, s 5(2) of the Companies Act
stipulates that:
 
‘To the extent appropriate, a court interpreting or applying this Act
may consider foreign company law.’
 
This is consistent with our constitutional stance on international law. In terms of our
immigration laws, a company formed by a foreigner should employ South Africans. In
addition, there is no definition of ‘employment contract’ in either the Labour Relations Act 66
of 1995 or the Basic Conditions of Employment Act 75 of 1997. Such legislation does not
appear to provide guidance in interpreting s 23(2)(a).
 
In this decision, the Court of Appeal stated that the main object of the legislature in requiring
a foreign company to register with the Registrar of Companies is to protect the company’s
British creditors. This provides ab initio (from the beginning) the means of serving process
in the United Kingdom (UK) that eliminates the inconvenience of seeking out the foreign
company in its country of incorporation. For process-serving purposes, the foreign company is
placed on the same footing as an English company.
 
These provisions are therefore open to interpretation and presumably the courts will deal with
these aspects on a case-by-case basis.
 
Another aspect to be considered is the company’s obligations to withhold and pay employees
income tax (PAYE), as well as the employee’s own tax obligations. According to Erika
Wessels (de Rebus May 201), a normal tax obligation may arise for non-residents who earn
above the taxable threshold and pass the 183 days presence test.
 
In addition, in terms of the fourth schedule of the Income Tax Act, if the employee is paid
remuneration, the company (employer) is required to withhold tax from an employee’s salary.
This was confirmed by Binding Private ruling 85 of 27 May 2010 (albeit not law).
 
It is therefore imperative to consult with an attorney prior to commencing business activities in
South Africa.

Nicolene Schoeman, Schoeman Attorneys (Cape Town)

Tel: 021 425 5604

Email: enquiries@schoemanlaw.co.za

Website: www.schoemanlaw.co.za