INTRODUCTION

A number of legal issues have an influence on a foreign investor in South Africa including those that are common to investments in most international ventures such as company structures, taxation, and competition law and employment aspects. More recent developments in the areas of Corporate Governance, Money Laundering and Environmental law have been introduced in South Africa including Black Economic Empowerment.

BLACK ECONOMIC EMPOWERMENT.

One of the major deal drivers in South Africa in recent years has been the empowerment of black South Africans. Black economic empowerment has been driven by legislation in the form of the Employment Equity Act of 1998 and various industry –specific empowerment Charters (effectively agreements between government and sectors of the economy, such as the mining, oil and petrochemical financial services and most recently the information technology sectors), which have placed substantial empowerment requirements on local businesses. These requirements include equity/asset ownership, employment and procurement requirements and targets, and are linked to specific timeframes.

INVESTMENT FORMS AND STRUCTURING (COMPANY STRUCTURES)

As in Europe most common forms of investment include buyouts, mergers, later stage investments and replacement capital. The most common vehicle used is a locally incorporated company that can either be privately held or open to the public (listed and non-listed). A foreign company can also register an External Company, which is effectively a branch office of the foreign registered entity.

Locally incorporated companies do not have any restriction on non SA citizen or resident shareholders and directors save for a few of consequences relating to local borrowing powers, thin capitalization rules and anti transfer pricing provisions.

An External Company must file a copy of its annual financial statements with the Registrar of Companies.

It is important to note that the Companies Act is under review with a view to facilitating foreign investment, including provisions for greater transparency and accountability and to acknowledge the interest of a greater scope of stakeholders including employees and creditors. Finally the new law will be comprehensive forming one reference source in simple language.

EXCHANGE CONTROL

Exchange control regulations, which restrict the free flow of capital in and out of the country, exist in South Africa. These regulations, which until the recent past were rather strict, have been significantly relaxed. The expressed goal of the South African government is the ultimate equal treatment of residents and non-residents in relation to inflows and outflows of capital and the abolition of exchange control measures.

MONEY LAUNDERING LEGISLATION

Although not part of the exchange control system as such, money laundering activities are now controlled by the Financial Intelligence Centre

Act of 2001, the Prevention of Organised Crime Act of 1998, and the regulations published under these Acts.

This legislation, in keeping with worldwide trends, aims at curbing the use of the proceeds of crime and money laundering. Rigorous compliance obligations are imposed on “accountable institutions” in terms of this legislation. An accountable institution includes attorneys such as Christodoulou & Mavrikis Inc. Accountable institutions are obliged to follow ‘know your client’ procedures, namely to:

• identify and verify new and existing clients;

• keep records of identities of clients and all transactions entered into with clients;

• report certain transactions to the authorities;

• train employees; and

• appoint a compliance officer.

FINANCIAL SERVICES AND CONSUMER PROTECTIONS

In terms of recent legislation any person who gives financial advice or who provides an intermediary service to consumers in South Africa must All financial services providers will have to obtain licences for the class or classes of businesses about which they provide advice in accordance with the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS) The FAIS Act is designed to protect consumers and in addition regulates advertising, marketing and canvassing;

Foreign companies operating in south Africa either through permanent representatives and who send representatives on an intermittent basis to visit clients, fall within the ambit of the FAIS Act.

Licensed financial advisers must appoint a compliance office and Christodoulou & Mavrikis Inc are registered by the Financial Services Board to render this service.

COMPETITION

The South African economic system is predominantly based upon the principles of a free market economy. However, as in most developed economies, competition in South Africa is controlled. Competition is regulated both by the common law and the Competition Act, 1998. This legislation aims to control anti-competitive behaviour and applies not only to economic activity in South Africa, but also to all economic activity having an effect in South Africa.

MERGER CONTROL

In terms of the Act, a party to a merger, which is in excess of certain turnover/asset thresholds, is required to notify the South African competition authorities of the merger. Mergers are classified as small, intermediate or large depending on the turnover/asset values of the parties to the transaction. A small merger is one that falls below the thresholds for an intermediate merger. An intermediate merger is one where the “combined figure” is R200 million or more and the assets or turnover of the target firm are R30 million or more. A large merger is one where the turnover or assets of the target firm are R100 million or more and the “combined figure” is R3.5 billion or more. The “combined figure” is the combined assets or turnover in South Africa of the acquiring firm and the target firm, or the assets of the one and the turnover of the other, in whichever combination reaches the highest figure. Both legs of the enquiry must be met.

TAXATION

Residents are taxed on the residence basis, while non-residents are taxed on the source basis. The effect on non-residents is that any income

accruing from a South African source is taxable in the Republic

i) Capital Gains Tax

Since 1 October 2001 a capital gains tax (CGT) has applied in South Africa

The effective rate of tax for companies is thus 15%

ii) Tax Rates

Companies and close corporations are taxed at a flat rate of 30% on income. There is also a Secondary Tax of 12.5% on declared dividends

External companies are taxed on branch profits at a flat rate of 35% on income. The Secondary Tax on Companies does not apply to external companies.

iii) Withholding Taxes

At present only royalties are subject to a withholding tax.

A withholding tax of 12% is deductible from gross royalties payable to non-residents.

A proposed withholding tax is in the pipeline in the case where a purchaser pays a non resident seller for the purchase of a property, the purchaser will be obliged to withhold from the amount that the person must pay, a so-called advance tax of between 5 – 10% of the purchase price.

iv) Double Taxation Agreements

South Africa has concluded bilateral agreements for the avoidance of double taxation with more than 50 countries including Greece and Cyprus and is continually increasing this number. Most of the agreements are comprehensive, while there are several limited Sea and Air Transport bilateral agreements in force.

v) Value Added Tax (VAT)

Value Added Tax (VAT) must be charged and paid over by all suppliers of goods and services (other than very limited exempt goods and services).

The current rate is 14%.

CORPORATE GOVERNANCE

South African business has adopted wholeheartedly a code on corporate governance termed the King I, which advocates principles of openness, integrity and accountability. King II is not a statute but a set of guidelines. Listed companies are however required to disclose in their annual reports the degree to which they have complied with the provisions of King II. Private companies are encouraged but not obliged to comply with the provisions.

King III is in the process of being compiled, which will further enhance the principles of good corporate governance.

EMPLOYMENT

The principle legislation is the Labour Relations Act, 1995 whose aim is to advance economic development, social justice, labour peace and the democratization of the workplace. The LRA is specifically designed to promote orderly collective bargaining at industry level, particularly by means of bargaining councils that have the power to conclude and enforce collective agreements. The LRA also promotes employee participation in decision-making in the workplace through consultation and joint decision-making.

Important amendments to the LRA were introduced during the first half of 2002. The amendments afford greater protection to employees in the event of the transfer of a business or the reduction of staff on the grounds of the operational requirements of the employer.

ENVIRONMENTAL LAW

With the transition of South Africa to democracy, environmental law has undergone a major change in focus to a more coherent, integrated approach towards environmental management and pollution control through legislation, and an environmental right has been enshrined in the Bill of Rights under South Africa’s Constitution. This has created a new form of legal standing for individuals and classes’ of individuals not previously recognized under South African law, and has given the public the tools for enforcement of environmental laws, for example, through class actions.

Contributed By Christodoulou & Mavrikis Inc

Attorneys: Johannesburg & Athens

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