#0018 Caoilfhionn van der Walt from Regan van Rooy
The Civitas Team
22 ideas on when to set up an international entity structure, the costs involved and IP and tax implications.
Caoilfhionn van der Walt is an international tax partner at Regan van Rooy, a boutique tax and structuring firm which focuses on structuring for Africa, both inbound and outbound. A Civitas team member sat down with Caoilfhionn to discuss what to consider when setting up an offshore entity, when to do it, the costs involved and navigating the tax implications.
Summary of the best ideas from the discussion:
- It's not worth your time to set up an international structure until your business model is proven and you have a good pipeline of non-SA clients.
- The fees to setup and run a structure that works are not small, but nothing compared to the costs if your structure goes wrong.
- Therefore, for small businesses, generally safer to structure slightly too late rather than too soon
- It is a complex process, do it once and do it properly!
- You can no longer simply set up a company in Mauritius, park your IP and think it's outside the net of SARS and SARB.
- Don't start with a management company. End with one, i.e. approach the management company when you have decided exactly what structure you need to set up and how and choose one that wants to understand your business and partner with you.
When to consider an international structure
- It's not worth your time to set up a structure until your business model is proven and you have a good pipeline of international clients. People often set up a business too soon and spend time and money that would be better spent building the business.
- Therefore, for smaller businesses, rather start your structure a little bit later rather than too soon.
- Setting up a company is easy to do. It's like getting married in Las Vegas. You can do it within a couple of weeks, but then you have to live with it 'forever', and to close it down is a complicated and costly process.
- It's less about your turnover being over a hundred million but rather where your clients are, and where the business is at its stage of development, and really understanding the cost-benefit analysis.
- If there is a business that is planning to grow quickly or expects to grow quickly and expects for a lot of its growth to be outside of South Africa. It is definitely worth looking at structure.
- If a business who is growing and is going to have a lot of their business outside of South Africa, then there is a significant benefit to them structuring via a separate jurisdiction.
- If you're buying everything from South Africa or more importantly, you're selling everything in South Africa, if all of your clients are in South Africa, there's not really much you can do in terms of structure.
- If you are looking for a quick fix, rather do nothing because if you don't do it properly, you end up with a world of pain and audits till the cows come home, and a lot of wasted advisory fees.
Costs involved in setting up an international entity structure abroad
- The fees to set up a structure are not small, the fees to run it are not small, and the fees to try and close it down can be very big, the fees to sort out if the structure doesn’t work can also be very big!
- The real cost is not setting up a company in a foreign domain, it is that you have to run the company every year, have board meetings, hire local directors etc.
- The work we do is very, very specialised. Therefore, it's relatively expensive, for small companies.
- There is more to it than opening a company in Mauritius. You need to consider what that company will actually do, and how, and on this basis to analyse the cost-benefit holistically.
Working with management Companies
- Don't necessarily start with a management company. End with one, and choose one who understands your business.
Navigating legal and tax implications
- You cannot simply set up a company in Mauritius, park your IP and think it's outside the net of SARS and SARB - there are many anti-avoidance rules to consider.
- Setting up a business abroad will always be scrutinised by SARS, and you need to show a significant level of substance to avoid having a structure that doesn’t work.
- For instance, where a foreign company is more than 50 percent owned or managed by South African residents, it is a controlled foreign entity which is subject to tax in South Africa unless it meets one of the exemptions.
- The South African tax act is incredibly complex, changes often, and the structure needs to be done carefully.
- The issues and implications are extremely complex and need to be carefully planned for in advance.
Selecting a jurisdiction
- There are many different factors to determine where the most appropriate jurisdiction for your business is, it depends primarily on your activities and your key markets and what you want to achieve long-term, e.g. are you building to sell?.
- Ireland is often a great jurisdiction for South African businesses wanting to expand into Europer, especially if you've got a tech type company (with large R&D) because there are very, very good R&D incentives.
- Mauritius is a great place to do business with a very favourable tax regime, it has a good network of double taxation agreements and is often the first option for SA owned businesses, for good reason.
- Be careful about setting up in the US as it can be extremely complex.