Exchange

Over the past year, the value of South Africa’s currency, the Rand (ZAR) has fluctuated against the US Dollar (USD), trading between [ZAR 16.167] and [ZAR 18.405] to USD 1. Currently (February 2023) the Rand trades at approximately [ZAR 17.57] to USD 1.

The Rand/Euro (EUR) exchange rate has fluctuated to a greater degree over the past year, trading between [ZAR 15.74] and [ZAR 18.76] to EUR 1, and currently (February 2023) trades at approximately [ZAR 18.92] to EUR 1.

Corporate Governance code

The King IV Corporate Governance Code

Current number of listed companies

Approximately 304 (following an uptick of de-listings over the last year)

Listing rules

Johannesburg’s primary exchange is the Johannesburg Stock Exchange (the JSE), previously the only exchange in South Africa. The Listings Requirements of the JSE can be downloaded here. Recent developments have seen new exchanges vying to operate in South Africa’s financial markets (i.e. A2X), but the JSE remains the largest exchange.

Regulatory body or bodies

The Takeover Regulation Panel (TRP), which regulates transactions caught by the Takeover Regulations governing takeovers and affected transactions - visit website here.

The Johannesburg Stock Exchange, in respect of transactions involving listed companies - visit website here.

The Commissioner of the Companies and Intellectual Property Commission (CIPC) - visit website here.

The Competition Commission, which is empowered to investigate, control and evaluate restrictive business practices, abuse of dominant positions and mergers - visit website here.

The Competition Tribunal -  visit website here.

Companies Tribunal, which has the authority to review decisions of the Commission - visit website here.

The Registrar of Securities Services and the Financial Services Board (FSB) - visit website here.

Principal legislation

The Companies Act 71 of 2008

The Financial Markets Act 19 of 2012

Financial Advisory and Intermediary Services Act 37 of 2002

Collective Investment Schemes Control Act 45 of 2002

Takeover / merger regulations

The Companies Act 71 of 2008 and Takeover Regulations

Impact of regulatory regime on business

Mergers must be notified where the value of the merger transaction exceeds the financial thresholds for large and intermediate mergers prescribed by the Minister.

For an “intermediate merger” (the lowest threshold for mandatory pre-notification in South Africa):

• the transferred firm(s) (being the target firm and all firms or businesses controlled by it (directly or indirectly) which are also the subject of the transaction) and the entire acquiring group (being the firm making the acquisition, all firms controlling it (directly or indirectly) and all firms or businesses controlled by it) must have combined South African assets or turnover (as reflected in their last set of audited financial statements) of at least R600 million; and
• the transferred firm(s) must have South African assets or turnover of at least R80 million.

(NOTE: Any combination of assets or turnover can be used to arrive at the thresholds – essentially, the larger of turnover or assets is used in the calculation).

For a “large merger” the above values are replaced by R6.6 billion (combined) and R190 million (for the transferred firm(s)).

Transactions not meeting these thresholds are regarded as “small mergers” and there is no obligation on parties to notify such transactions. However, the parties to a small merger may voluntarily notify the Competition Commission (Commission) of the merger, and the Commission may call for the notification of a small merger within six months from the date of implementation if, in the Commission’s opinion, the merger may substantially prevent or lessen competition, or the merger cannot be justified on public interest grounds.

Over the last few years, the Commission has, in particular, become concerned that mergers in the digital space are escaping regulatory scrutiny due to acquisitions taking place at an early stage in the life of the target, and before sufficient turnover is generated to trigger the thresholds for mandatory merger notification. It is in this context that the Commission has issued the revised Small Merger Guidelines during 2021. In terms of the Small Merger Guidelines, the Commission retains its previous guidance to parties to notify all small mergers in which, at the time of entering into a transaction, any of the firms or firms within their group:

(i) are subject to an investigation by the Commission relating to a prohibited practice/s; or

(ii) are respondents to pending proceedings before the Competition Tribunal in respect of a prohibited practice/s.

In addition, the Guideline suggests that the Commission be informed of all small mergers and share acquisitions where the acquiring firm’s annual turnover in, into or from RSA or asset value in RSA exceeds ZAR 6.6 billion in the preceding financial year; and (i) the consideration (or purchase price) for the acquisition or investment exceeds ZAR 190 million; or

(iii) the consideration for the acquisition of a part of the target firm is less than ZAR 190 million but ‘effectively values’ the target firm at ZAR 190 million or more.

The Small Merger Guidelines provides that where the above criteria are met, merging parties are required to inform the Commission, in writing, of their intention to enter into the transaction. Within 30 business days thereafter, the Commission will indicate, in writing, whether or not a full merger notification (in the prescribed manner and form) is required.  

The merger filing fees are as follows:

• for a small merger, ZAR 0
• for an intermediate merger, ZAR 165,000
• for a large merger, ZAR 550,000.

A small or intermediate merger must be approved, conditionally or unconditionally, or prohibited by the Commission within 60 business days. In the case of a large merger, the Commission must make a recommendation to the Tribunal to approve, conditionally or unconditionally, or prohibit the merger, within 40 business days (this period may be extended, on application to the Tribunal, by 15 business days at a time). Thereafter a hearing is held before the Tribunal and the Tribunal makes the final decision.

Legislation

The relevant legislation is the Competition Act 89 of 1998, as amended (the Act) and the regulations promulgated in terms of that Act.

Scope

All “mergers” meeting the thresholds (turnover and asset-based) are covered. A merger is any transaction involving the direct or indirect acquisition or establishment of control by one or more persons over the whole or part of the business of another firm. The Act contemplates that control may be achieved in any manner.

Note that:

Offshore acquisitions of control are covered where the thresholds are met.

Acquisitions of both positive and negative control are covered as well.

Pharmaceutical regulation

Legislation

The Medicines and Related Substances Act 101 of 1965 (Medicines Act) and the regulations published under the Medicines Act.

The Pharmacy Act 53 of 1974 (Pharmacy Act) and the regulations published under the Pharmacy Act.

Scope

In order to conduct business in South Africa as a manufacturer, importer or exporter, wholesaler or distributor of medicines or medical devices, various licences and registrations are or may be required in terms of the Medicines Act and the Pharmacy Act, and the regulations thereto.

Regulatory authority

The existing regulatory authority which administers and enforces the Medicines Act is the South African Health Products Regulatory Agency, while the regulatory authority which enforces the Pharmacy Act is the South African Pharmacy Council.

Foreign / Local ownership restrictions

Within the South African context, there are various proposals to introduce foreign ownership restrictions in various sectors such as, for example, land, telecommunications and security services. There are also existing foreign ownership controls in sectors such as broadcasting and aviation. However, no such foreign ownership restrictions have been discussed or introduced in the pharmaceuticals sector, as yet.

Telecommunications and Broadcasting Regulation

Legislation

The Electronic Communications Act 36 of 2005 (ECA) and the regulations published under the ECA.

The Independent Communications Authority of South Africa Act 13 of 2000.

Scope

The ECA covers, amongst other things, the licensing of broadcasting services, electronic communications services, and electronic communications network services in South Africa, as well as the licensing of radio frequency spectrum.

Regulatory authority

The Independent Communications Authority of South Africa (ICASA).

Foreign / local ownership restrictions.

Broadcasting

In terms of section 64 of the ECA, a foreigner may not, whether directly or indirectly: (1) exercise control over a commercial broadcasting licensee; or (2) have a financial interest or an interest either in voting shares or paid-up capital in a commercial broadcasting licensee, exceeding 20% (twenty percent). Not more than 20% (twenty percent) of the directors of a commercial broadcasting licensee may be foreigners.

Telecommunications

There are, as yet, no specific restrictions on foreign ownership of telecommunication services, although foreign owners are required to incorporate a local company in order to obtain a licence to provide a telecoms service in South Africa. ICASA has indicated that it intends to set foreign ownership restrictions for strategic telecommunications operators in line with the policies adopted by the Department of Trade & Industry. To date, no such foreign ownership restrictions have been set.

B-BBEE

B-BBEE is discussed in more general terms in 8 below. As it pertains to telecommunications, in granting licences, ICASA is obliged to take the empowerment of historically disadvantaged persons (HDPs) into account and to ensure that the range of services regulated under the ECA, viewed collectively, is provided by persons from a diverse range of communities in South Africa. Where an application is made for a new individual licence to provide telecoms services or networks of relatively large scope and scale, or to provide commercial broadcasting of national or regional scope, a certain percentage of shares, as specified by ICASA, with a minimum of 30%, are required to be held by HDPs. On 31 March 2021, ICASA published the Regulations in respect of the Limitations of Control and Equity Ownership by Historically Disadvantaged Groups (HDG) and the Application of the ICT Sector Code under the ECA (the Ownership and Control Regulations). The Ownership and Control Regulations and seek to promote the equity ownership of HDG and promote broad-based black economic empowerment (B-BBEE) objectives in South Africa. The category of persons who are regarded as HDGs currently includes, but is not limited to black people (i.e. people previously defined as Africans, Indians and Coloureds). Other persons who potentially fall into this category are women, the youth and disabled persons. The term “Black People” is defined in the Ownership and Control Regulations with reference to the definition of “black people” under the Broad-Based Black Economic Empowerment Act 53 of 2003 (the BBBEE Act) which “…is a generic term [referring to] Africans, Coloureds and Indians…” who are South African citizens.

By 1 April 2024, holders of individual service licences under the ECA must have and maintain a minimum of 30% ownership by HDGs and have and maintain a minimum of 30% ownership by Black People specifically. There is a transitional period of 36 months for large individual licensees (ending 1 April 2024) with an annual turnover of ZAR 50 million or more to comply with the HDG ownership requirement. However, where an individual licence is renewed or amended or there is a transfer of control of the licence (i.e. if someone acquires control of the licensed entity), the HDG ownership requirement is accelerated.

UNAC ratified?

Yes

Ratified?

Yes

Signatories to United Nations Convention Against Corruption (UNAC)?

Yes

Corruption Perception Index rank worldwide for 2022

72

Signatories to the African Union Convention on Preventing and Combating Corruption?

Yes

Corruption Perception Index score for 2022

43

Signatories to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions?

Yes

Arbitration

In line with international trends, arbitration and mediation are increasingly becoming the preferred methods of dispute resolution for parties who wish to settle disputes in a shorter time frame:

South Africa reformed its international arbitration law in December 2017 with the enactment of the International Arbitration Act 15 of 2017 (the IAA). The country now has two principal arbitration regimes: Domestic arbitrations are regulated by the Arbitration Act 42 of 1965 and the common law, while the IAA governs international commercial arbitrations.

With the enactment of the IAA, South Africa has taken several important steps in establishing itself as a safe seat for international arbitrations:

• South African arbitration law now incorporates the UNCITRAL Model Law on International Commercial Arbitrations (Model Law). This means that the Model Law, as adapted in Schedule 1 to the IAA, will apply to international commercial arbitrations where South Africa is the juridical seat of the arbitration. This general rule is subject to the provisos that the dispute is capable of determination by arbitration in South Africa, and that the arbitration agreement is consistent with public policy.
• The IAA applies to international commercial arbitrations involving both private and public bodies. The definition of a public body under the IAA adopts the definition of an organ of State in terms of the Constitution of the Republic of South Africa. With an increasingly structurally pluralistic State, a public body may in certain circumstances include a private company where that party exercises a public law power or performs a public function (either in terms of the Constitution or in terms of legislation). This will be subject to section 13 of the Protection of Investment Act 22 of 2015, which deals with applicable disputes between the State and foreign investors.
• The IAA promotes respect for party autonomy in the resolution of disputes and confirms that no court shall intervene in an arbitration except where provided for by the Model Law. In addition to the provisions of the Model Law and the question of enforcement of arbitration agreements and awards, the IAA confirms that arbitration may not be excluded solely on the ground that legislation confers jurisdiction on a court or other tribunal to determine a matter falling within the terms of an arbitration agreement.
• The IAA affords immunity to arbitrators and arbitral institutions in the bona fide discharge of their functions. This is a vital measure to ensure the independence and neutrality of the adjudicators in arbitration proceedings.
  As a general rule, arbitrations involving private bodies may be held in private. This means that the award and all documents created for the arbitration that are not otherwise in the public domain must be kept confidential by the parties and tribunal. This rule is subject to the proviso that the documents or award may be disclosed if required by reason of a legal duty, or in order to protect or enforce a legal right. On the other hand, arbitrations involving public bodies must be held in public unless, for compelling reasons, the arbitral tribunal orders otherwise.
  Parties to an arbitration agreement may refer a dispute covered by the arbitration agreement to conciliation, before or after referring the dispute to arbitration, subject to the terms of the agreement. If so referred, the parties may agree to use the UNCITRAL Conciliation Rules set out in Schedule 2 to the IAA.
  The Arbitration Foundation of Southern Africa (AFSA) is the leading arbitral institute in South Africa and its revised International Arbitration Rules will facilitate the continued growth of its international caseload and ensure that it keeps pace with developments of the rules of other major arbitral centres around the world.
  With an independent judiciary that respects party autonomy; internationally respected arbitrators and arbitral institutions; a constitutional guarantee to fairness in legal proceedings; world-class facilities and amenities; and the reform of its national arbitration law in line with international best practice, South Africa has the potential to become one of the leading centres of international arbitration in Africa.

Enforcement of foreign arbitral awards in South Africa

The other important objectives of the IAA are to provide for the recognition and enforcement of arbitration agreements and arbitral awards, and to give effect to South Africa’s obligations under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (New York Convention).  The IAA repeals and amends the provisions of the previous legislation that dealt with the question of enforcement namely, the Recognition and Enforcement of Foreign Arbitral Awards Act 40 of 1977 (repealed) and the Protection of Business Act 99 of 1978 (amended).

Consistent with the New York Convention, the general rule under the IAA and the Model Law is that an arbitration agreement and an arbitral award, irrespective of the country in which it is made, must be recognised in South Africa. In order to enforce the award, an application must be made to the High Court for a judge to make the award an order of court. The applicant must attach the original award, original arbitration agreement (both of which have to be authenticated) and certified copies of these documents to the application. The court may only refuse to recognise and enforce a foreign award if it would be contrary to public policy or if the matter is not capable of being referred to arbitration in South Africa. Although the IAA does not exhaustively define what public policy entails, it specifically provides that an award will not be enforced if: 

• a breach of the arbitral tribunal's duty to act fairly occurred in connection with the making of the award, which has caused, or will cause, substantial injustice to the party resisting recognition or enforcement; or
• the making of the award was induced or affected by fraud or corruption.
  The party against whom enforcement of a foreign arbitral award is sought is entitled to oppose the application and a court will only refuse to make the award an order of court if it is shown that:
• A party to the arbitration agreement did not have capacity to contract under the laws applicable to that party, or the arbitration agreement is invalid under the laws to which the parties have subjected the agreement.  Alternatively, where the parties have not subjected the agreement to any law, the order can be resisted if the agreement is invalid under the law of the country in which the award was made.
• The defendant did not receive the required notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his or her case.
• The award deals with a dispute falling outside the terms of reference to arbitration.
• The constitution of the arbitral tribunal, or the arbitration procedure, was not in accordance with the arbitration agreement or, if the agreement does not provide for such matters, with the law of the country in which the arbitration took place.
• The award has not yet become binding on the parties, is subject to an appeal, or has been reviewed or set aside in the country in which the award was made.

Enforcement of foreign judgments in South Africa

The general rule is that a foreign judgment is not, on its own, enforceable in South Africa. However, if the foreign judgment is pronounced on by a court of law and certain requirements are met, the foreign judgment will be recognised and enforceable in South Africa.

It is important to note that when a South African court decides whether to enforce a foreign judgment, it will not pronounce on the merits of the case or on any issues of fact or law already tried by the foreign court and will not review or set aside the foreign court’s decision. The South African court will only adjudicate on whether the requirements for enforcement of the judgment have been met.

A claimant seeking enforcement of a foreign judgment in South Africa must apply to a local court for an order recognising the judgment and declaring it to be enforceable in South Africa. At common law, there are four requirements that must be met before a South African court will recognise and enforce a foreign judgment:

• the foreign court making the judgment must have had “international competency” or jurisdiction;
• the foreign judgment must be final and conclusive (not subject to an appeal or suspended pending an appeal);
• the recognition and enforcement of the foreign judgment must not be contrary to public policy; and
• the recognition and enforcement of the foreign judgment must not fall foul of section 1 of the Protection of Businesses Act 99 of 1978 (Protection of Businesses Act).
  
  In terms of the Enforcement of Foreign Civil Judgments Act 32 of 1988, it is possible to enforce final judgments or orders for the payment of money in civil proceedings on registration of the judgment from a designated country by the appropriate Magistrates’ Court in South Africa. However, the Enforcement Act only applies to judgments from countries designated by the Minister of Trade and Industry as published in the Government Gazette. Thus far, only Namibia has been designated. The Protection of Business Act may also be applicable to the recognition and enforcement of judgments sounding in money.
  
  Once a foreign judgment has been recognised by a South African court, the judgment creditor is entitled to issue a writ of execution against the movable property of the defendant.

Enforcement of foreign judgements abroad

Generally, there are no provisions in South African law prohibiting the enforcement of foreign judgments abroad. Therefore, in order to enforce a domestic judgment abroad, a party must consult the laws of the particular foreign jurisdiction for guidance. There are instances, however, particularly with reference to the Enforcement of Foreign Civil Judgements Act 32 of 1988, where South Africa has agreed to reciprocal enforcement of civil judgements with certain countries. Zimbabwe is one such example.

Judiciary

Section 165 of the Constitution of the Republic of South Africa (the Constitution) enshrines the independence of the courts by providing that no person or organ of state may interfere with the functioning of the courts. To this end, the courts are empowered to apply the Constitution and the law impartially and without fear, favour or prejudice.

In addition, the separation of powers doctrine creates a system of checks and balances whereby the three arms of Government (namely, the Legislature, the Executive and the Judiciary) are separated in order to ensure good governance, prevent the abuse of power and enhance State efficiency.

In this way, the Constitution shields the judicial system from undue influence and interference from other branches of Government. While there have been instances, particularly in the last few years, where the independence of the Judiciary has been brought into question, the general perception is that the South African judicial system has successfully managed to maintain its independence and impartiality.

Perception and effectiveness of the local courts

South Africa’s judiciary is perceived as strong, independent, and free of political influence. Litigating in South Africa can often be considered to be costly with the wheels of justice turning slowly.

A matter can take anything from eight months (in instances where the matter is simple and the parties are cooperative) to five years or more (in instances where the matter is complex, the parties are uncooperative, or the matter has been taken on appeal to its highest appealable point – the Supreme Court of Appeal or Constitutional Court, depending on the nature of the matter and the lower court in which it originated).

It is also important to note that South African courts have a backlog of cases, which can create delays in court processes. In many courts, significant steps have been taken to expedite the dispute resolution process, such as encouraging the referral of disputes to mediation, the introduction of interlocutory courts and trial readiness procedures to hear ‘side issues’ that arise in the process of resolving disputes.

The High Court in Johannesburg has a commercial court with particular expertise in the resolution of disputes arising from company law. This court is modelled on international best practice in jurisdictions such as Delaware and London. The creation of the commercial court is aimed at facilitating the efficiency of the courts in hearing matters. An online end-to-end electronic filing and case management system has been implemented in the busiest divisions of the High Court, situated in Johannesburg and Pretoria. The system enables litigants to file and upload pleadings and other documents electronically from which attorneys and the courts are able to access the relevant case and court documents online. As is the case around the world, the various divisions of the High Courts are, wherever possible, conducting court hearings remotely.

Structure of the court system

The Constitutional Court is the apex court in South Africa. Decisions of the Constitutional Court are final and binding on all other courts. The Constitutional Court decides matters involving the interpretation, protection or enforcement of the Constitution and matters of general and public importance are heard on appeal.

The Supreme Court of Appeal is the highest court in respect of all matters other than those involving the Constitution. Apart from the Constitutional Court, no other court may alter a decision of the Supreme Court of Appeal as its decisions are binding on all courts of lower hierarchy.

There are currently fourteen provincial divisions of the High Court of South Africa which have jurisdiction over defined geographical areas. The High Court deals with both civil and criminal matters. The decisions of the High Courts are binding on Magistrates Courts within their areas of jurisdiction. Circuit Courts are also part of the High Court. They sit at least twice a year, moving around to serve more rural areas.

The Magistrates Courts are the lower courts which deal with the less serious criminal and civil cases. They are divided into regional courts and district courts. District courts hear matters up to the amount of ZAR 200 000. Regional courts hear civil matters above ZAR 200 000 up to and including ZAR 400 000. The Minister may change these amounts at any time by notice in the Government Gazette.

Small Claims Courts have jurisdiction to hear any civil matter involving an amount of less than ZAR 20000, and service natural persons are not juristic entities. No legal representation is permitted in the Small Claims Court and certain types of matters are excluded from its jurisdiction (such as matters involving status).

There are also specialist courts/tribunals that have been established for the adjudication of specific matters. These include: the Labour Court, the Labour Appeal Court, the Specialist Income Tax Court, the Electoral Court, the Companies Tribunal, the Competition Commission, the Competition Tribunal, the Competition Appeal Court, the Consumer Commission and the Consumer Tribunal. Each of these specialised courts has been established in terms of legislation governing the subject matter in question.

Foreign investment incentives

South Africa welcomes foreign investment, in both the public and private sectors and in all spheres of the economy. 

Although South Africa faces social challenges in respect of unemployment, a large current account deficit, a volatile currency and slowing demand for commodities, there is significant scope for foreign direct investment in the fast-moving consumer goods, financial services, hospitality, pharmaceuticals, resources, retail, telecommunications and information technology sectors. South Africa has many attractive assets for investors, including a diversified, productive and advanced economy, abundant natural resources, a transparent legal system and a well-established and independent electoral system. 

The current government administration, led by President Cyril Ramaphosa, has continued to emphasize policies and programmes to further encourage foreign investment. To this end, the Department of Trade Industry and Competition (DTIC) offers a wide range of incentive schemes to encourage the growth of competitive new enterprises and the creation of sustainable industries. More information on the various initiatives can be found here.

In addition to this, the current administration published “Investing in South Africa Roadmap 2020", which provides both foreign and domestic investors with a broad overview of the social, regulatory and economic environment in which such investors can expect to operate. The roadmap can be found here.

Introduction – Bilateral Investment Treaties 

Since the end of Apartheid, South Africa had negotiated more than 40 Bilateral Investment Treaties (BITs)   designed to promote and protect foreign investment.

In the early 2010s, South Africa embarked on a review aimed at creating an investment regime that strikes a balance between the interests of foreign investors and the need for the government to implement measures in the public interest (such as promotion of economic opportunities for the previously disadvantaged South Africans).

One of the outcomes of the review was that South Africa either did not renew or terminated many of its BITs with countries such as the United Kingdom, the Netherlands, Switzerland, Germany, France, Cuba, Denmark, Austria, Italy, Sweden, Argentina, Belgo-Luxembourg Economic Union, Finland, Spain and Greece. However, South Africa still has some BITs that remain in force. The BITs concluded with other African States are intended to be replaced by the long-awaited African Continental Free Trade Area’s Investment Protocol.

The other outcome of the review was that South Africa sought to create a domestic legislative regime to promote and protect foreign investments in South Africa.

To this end, the DTIC published the first draft of the Promotion and Protection of Investment Bill for public comment on 01 November 2013, which aimed to, inter alia, affirm that South Africa is committed to maintaining an open and transparent environment for investments, and acknowledging that investment must be protected, in accordance with the law, administrative justice and access to information.

The protection of investment Act 22 of 2015

The Protection of Investment Act 22 of 2015 (the PI Act) was passed by the South African Parliament on 3 November 2015. The PI Act provides for the protection of investors and their investments and aims to balance the rights and obligations that apply to all investors.  The PI Act is intended to promote investment by modernising the current investment regime and achieving a balance of rights and obligations that will apply to all investors when investing in South Africa. Unlike BITs, which apply to investors from certain states, the PI Act applies to all foreign investors in South Africa.

Importantly, the PI Act provides a foreign investor with the same rights that a domestic investor enjoys in South Africa, and it states that foreign investors will be treated no less favourably than domestic investors. There has been controversy surrounding the protection standards‚ such as the ability to seek recourse from an international arbitral tribunal and guaranteed market-related compensation for any expropriation. However, the DTIC has defended the PI Act, saying that South Africa has one of the highest levels of investor protection and that foreign investors will always benefit from the legal protection of property rights granted by the South African Constitution. The DTIC has also stated that the PI Act is in keeping with international trends in whereby some countries have terminated their BITs, or adopted BITs which differ markedly from traditional BITs. Indeed, international investment law, particularly investor-state arbitration, is in a state of flux at the moment. Several initiatives aimed at reforming it are currently being pursued.

The PI Act caused controversaries owing to its departure from the standard protections found in BITs, namely: the PI Act is silent on expropriation and the relevant compensatory scheme; the PI Act does not mandate investor-state international arbitration as a dispute resolution mechanism; the PI Act does not explicitly provide that investors are entitled to “fair and equitable treatment”; and provisions of the PI Act can be changed unilaterally by the South African Parliament.

In addition to this, other legislation may regulate foreign investors and their investments in a similar manner (i.e., reducing rights available to foreign investors). For example, the Regulation of Agricultural Land Holdings Bill (the Bill) will, if enacted in its present form, have far reaching consequences on the agricultural sector, affecting all owners of agricultural land and, in particular, foreign nationals and owners of agricultural land holdings determined to be in excess of ‘ceilings’ for land ownership, which excess may be available for redistribution, with or without expropriation. However, at present, this Bill has merely been introduced to Parliament, and no further action has been made to move it along the legislative process to an enforceable Act of Parliament. If it is ever passed, the final version may materially differ from the Bill.

Whilst it seems that the PI Act has diminished certain rights afforded to foreign investors, the general South African legislative landscape offers, and guarantees, rights and protections to foreign investors which are comparable to those found in BITs. For example: the Constitution, guarantees that no one may be deprived of their property arbitrarily, and compensation must be just and fair, reflecting an equitable balance between the public interest and interests of those affected. Recent public discourse in South Africa has contemplated the direction of “expropriation without compensation”. However, it has been argued that it would require an amendment to Section 25 of the Constitution, which currently affords compensation to parties deprived of their property. Such an amendment would require a supporting vote of at least two thirds of parliament and a majority vote from the parliamentary arm of South Africa’s provinces.  In short, amending the Constitution is difficult to do.

The Constitution also provides other guarantees to foreign investors such as the right to administrative action that is lawful, reasonable and procedurally fair and the right to have any dispute resolved in a fair public hearing before a court or, where appropriate, another independent and impartial tribunal or forum. That right is comparable to the often-controversial standard of Fair and Equitable Treatment that is found in many BITs. The legal rights guaranteed by the Constitution, and other legislation, will ensure that foreign investors, and their investments, are treated fairly and equitably under South African law. The Constitution is the supreme law of South Africa, and laws and conduct inconsistent with it is unconstitutional.

The PI Act places an emphasis on dispute avoidance through the use of mediation. It also offers the possibility of State-to-State Arbitration between South Africa and the home state of the foreign investor.

Foreign investment rules

There are few restrictions on foreign investment in South Africa, with tax breaks and incentives for small enterprises, strategic industrial projects and exporters.

Recent amendments to the Competition Act introduced national security provisions in terms of which authorisation must be sought for notifiable mergers involving a ‘foreign acquiring firm’ and impacting a designated list of national security interests. This provision is however not yet in force and the scope of such application, requirements, processes and mechanisms under this provision have not yet been outlined. In addition, the executive committee tasked with reviewing such transactions is yet to be established. Whilst it is anticipated that this provision will shortly be implemented, there is no confirmation from authorities as to when this may take place.

Although there is no overarching piece of legislation which limits foreign ownership, there are a number of strategic sectors in which regulations affecting foreign entry or ownership are commonly found. The sectors which are subject to such regulations are: agriculture and fisheries, broadcasting and print media, business services (e.g., accountancy, legal services), defence and aerospace, energy, financial services, natural resources, nuclear energy and materials, real estate, telecommunications and transport.

BROAD- BASED BLACK ECONOMIC EMPOWERMENT (B-BBEE)

The Broad-Based Black Economic Empowerment Act 53 of 2003 (B-BBEE Act) is the principal legislation through which broad-based black economic empowerment (B-BBEE) is measured.

The general Codes of Good Practice (Codes) were published by the Minister of Trade & Industry (Minister) in 2007 and set out the details of the scoring process for B-BBEE.

The revised Codes of Good Practice were published by the Minister on 11 October 2013 and replaced the 2007 Codes.

Sector-specific codes detail the manner in which B-BBEE must be measured for businesses operating in particular sectors (e.g., sector codes have been published for the tourism, forestry, information communication and technology, chartered accountancy, property, defence, finance, construction, transport, and agriculture sectors).

Other General legislation

In addition to the B-BBEE Act and various Codes, other legislation such as the Employment Equity Act, which is anticipated to come into operation in September 2023, empowers the Minister to identify national economic sectors and to set numerical targets for any identified national economic sector for the purpose of ensuring the equitable representation of suitably qualified people from designated groups at all occupational levels in the workforce. require that the interests of various interested parties are taken into consideration.

Impact of regulatory regime on business

Government’s B-BBEE policy seeks to redress the inequalities created by apartheid in South Africa and to increase levels of participation in economic activities by black people. For this purpose, the Minister of Trade and Industry (the Minister), who is tasked with implementing the B-BBEE Act, has published various Codes of Good Practice (Codes) under the B-BBEE Act which must be taken into account by Government entities when dealing with the private sector (e.g. awarding licences, granting concessions, selling state-owned assets, and entering into public-private partnerships).

The Codes include a B-BBEE Scorecard stipulating various measurement indicators on which companies’ B-BBEE performance is measured (i.e. ownership, management control, skills development, supplier and enterprise development and corporate social investment).

The overall number of points that an investor achieves across all these categories translates into a B-BBEE level (e.g. Level 1 (100+ points), Level 2 (between 95 and 100 points), with Level 1 being the highest and Level 8 being the lowest). An investor’s overall B-BBEE score is then taken into account by Government entities when engaging with the private sector (e.g. deciding which suppliers to procure goods and services from). Investors with high B-BBEE scores relative to their competitors are preferred in any Government procurement process.

Other than in certain State licensing, permitting and authorisation processes (e.g. in the gambling sector), there is no ‘hard law’ requiring that any private entity in South Africa must meet specific B-BBEE targets, implement a B-BBEE policy or achieve certain levels of ownership by black people. However, while there are no absolute requirements in relation to B-BBEE, any company wishing to do business in the South African environment must consider and develop its B-BBEE position. An entity that does not have a good B-BBEE rating, or does not strive to improve its B-BBEE rating, may be hampered in the conduct of its day-to-day business with Government, organs of State and private sector customers. 

Scope

B-BBEE is a central part of the South African government’s economic transformation strategy, and the multi-faceted approach to B-BBEE has been adopted with a number of components which aim to increase the numbers of black people (being South African citizens who have been racially classified as African, Indian or Coloured) that manage, own and control the country’s economy, and to decrease racially based income inequalities. 

Industry specific legislation

In addition to the B-BBEE Act and various Codes, several sectors have specific legislation, including for instance the Mining industry which has specific BEE provisions in the Mineral Petroleum and Resources Development Act. It is important to have reference to any sector specific Acts and Regulations.

Capital Gains Tax

A percentage of a taxpayer’s net capital gain for the year of assessment is included in the taxpayer’s taxable income for the year, which constitutes the taxpayer’s taxable capital gain.

The inclusion rate for natural persons or special trusts is 40%, while the inclusion rate for companies and normal trusts is 80%.

Taxable capital gains of individuals and companies are thus subject to the following effective rates:

• 22.4% for companies and close corporations;
• 18% (maximum rate) for individuals and special trusts; and
• 36% for normal trusts.

Corporation tax

Income tax is imposed in terms of the Income Tax Act 58 of 1962 (ITA). South Africa’s income tax system is a residence-based system. South African residents are taxed on their worldwide income, while non-residents are taxed on income from a South African source.

The corporate income tax rate of resident and non-resident companies (including close corporations) has been reduced from 28% to 27% for years of assessment ending on 31 March 2023 or later.

A company will be tax-resident if it is incorporated in South Africa or has its place of effective management in South Africa, subject to the provisions of a double tax agreement (DTA) if applicable.

The taxable base is determined by calculating the taxable income of a person, which consists of gross income (see below), less exempt income = Income

Less all permissible deductions or allowances, plus all amounts to be included or deemed to be included in the taxable income of a person (see below) in terms of the ITA (such as taxable capital gains) = Taxable income.

‘Gross Income’ includes, in the case of a resident:

• the total amount;
• in cash or otherwise;
• received by or accrued to or in favour of such resident;
• during the year or period of assessment;
• excluding receipts and accruals of a capital nature; and
• including certain specified amounts, irrespective of whether they are of a capital or revenue nature.

For a non-resident, ‘Gross Income’ is similar to that applicable to a resident, but subject thereto that it only includes amounts from a South African source.

‘Income’ is calculated by deducting from gross income any ‘exempt income’ as defined. Amounts which are not taxable in South Africa by virtue of the application of a DTA are not ‘exempt income’ as defined.

Taxable income’ means the aggregate of:

• income less all permissible deductions or allowances;
• plus all amounts to be included or deemed to be included in the taxable income of a person in terms of the ITA, such as taxable capital gains.

Exchange control

South African residents are subject to exchange controls in terms of the Exchange Control Regulations, issued under the Currency and Exchanges Act, 1933.

The Financial Surveillance Department (FinSurv) (previously known as the Exchange Control Department) of the South African Reserve Bank (SARB) is responsible for the day-to-day administration of exchange control.  FinSurv from time -to -time issues Rulings and Circulars to provide further guidelines regarding the implementation of exchange controls.  The Exchange Control Regulations, Rulings and Circulars are collectively referred to as “Excon Rules” for purposes hereof.

Certain South African banks have also been appointed to act as authorised dealers in foreign exchange (Authorised Dealers).  Authorised Dealers may buy and sell foreign exchange, subject to conditions and within limits prescribed by FinSurv.

The purpose of exchange controls is, inter alia, to regulate inflows and outflows of capital from South Africa.  South African residents are not permitted to export capital from South Africa except as provided for in the Excon Rules.

No South African resident is thus entitled to enter into any transaction in terms of which capital (whether in the form of funds or otherwise) or any right to capital is directly or indirectly exported from South Africa without the approval of either FinSurv or, in certain cases, by an Authorised Dealer.

Exchange controls do not apply to non-residents, but non-residents may be impacted indirectly as acquisitions of South African assets and transactions with a resident may require exchange control approval.

Contravention of the Exchange Control Regulations (the Regulations) is a criminal offence and general offences are subject to a fine, imprisonment for a period not exceeding five years, or both.  Transactions concluded in contravention of the Regulations could be void ab initio or could be voidable.  Other possible penalties include the attachment of any money or goods in respect of which a contravention of the Regulations, whether by omission or commission has been committed and the forfeiture and disposal of such money or goods to the State.

National Treasury wishes to move away from a restrictive approach that disallows any unapproved capital flows to a progressive, pro-investment allowance of all capital flows, save for a limited list of risk-based capital flow measures.

To date, only certain reforms have been introduced, such as the abolishment of the ‘loop structure’ rules, although there have been difficulties with the implementation of certain loop structures subsequent to the abolishment.

Interest

Prior to 1 January 2015, a specific exemption applied to interest paid to a non-resident.  However, with effect from 1 January 2015, interest withholding tax at a rate of 15% applies in respect of interest received by or accrued to a non-resident that is not a controlled foreign company (CFC).

A number of exemptions apply, such as interest in respect of government debt instruments and interest in respect of listed debt instruments paid to foreign persons, etc. There are also anti-avoidance provisions regarding back-to-back arrangements designed to circumvent the interest withholding tax. In addition to the domestic exemptions, relief may also be available under a DTA.  An exemption or reduced rate declaration is required to qualify for an exemption from and reduced rates of interest withholding tax. Since 1 July 2020, these declarations and undertakings are only valid 5-year period.

Special economic zones

The Industrial Development Zone (IDZ) programme that was introduced in 2000 has been incorporated into the Special Economic Zone (SEZ) programme. The main focus of the IDZ programme was to encourage foreign direct investment and the export of value-added commodities.

There were five IDZs in South Africa, all along the coast. These were converted to SEZs in terms of the transitional SEZ provisions. There are currently 11 approved SEZs and an application for a twelfth SEZ is currently pending.

The SEZ programme is intended to improve on the IDZ programme.

The SEZ incentives include a 15% corporate tax, a building tax allowance, an employment tax incentive, accelerated depreciation allowances and Customs Controlled Areas, the latter providing Value Added Tax and customs relief in respect of imports and exports.

Dividends

Dividends tax is imposed at a rate of 20% on dividends paid by a South African resident company, or by a non-resident company in relation to shares listed on the JSE. 

A DTA may apply to reduce the rate of withholding tax, typically to 5% or 10%.

There are a number of instances where the payment of dividends will be exempt from dividends tax, for example where the beneficial owner of the dividend is inter alia a South African resident company, a tax exempt public benefit organisation, a benefit fund or a retirement fund. 

South Africa does not currently impose a branch profits remittance tax.

Payroll tax and social security

Remuneration from employment is subject to an employees’ tax withholding system, known as Pay As You Earn (PAYE). A resident employer is required to deduct employees’ tax at source, and to pay the amount so deducted directly to the South African Reserve Service (SARS).    A non-resident employer will only be obliged to withhold employees’ tax if it has a “payroll agent” in South Africa who is authorised to pay remuneration on behalf of the non-resident employer.

It is important to note that not only individuals, but also companies or trusts could be regarded as employees for employees’ tax purposes, which could oblige the “employer” making payment to them, to withhold employees’ tax from their remuneration.

Employers and employees are required to contribute to the Unemployment Insurance Fund (UIF) monthly. Employees pay 1% of their salary and employers contribute another 1%, subject to a current monetary ceiling of R177.12 in respect of each of the employer and employee contributions.

The Skills and Development Levy (SDL) is a levy imposed to promote learning and development in South Africa.  The amount is 1% of the total amount paid in salaries to employees (including overtime payments, leave pay, bonuses, commissions and lump sum payments).

Personal income tax

Personal Income tax is, similar to corporate tax, imposed in respect of the taxable income of a taxpayer. Taxable income  is calculated by deducting form gross income any “exempt income” as defined, as well as all permissible deductions or allowances, and adding all amounts to be included or deemed to be included in the taxable income of a person in terms of the ITA, such as net capital gains.

However, individuals are subject to progressive income tax rates, with tax brackets based on the taxable income of the individual. A maximum marginal rate of 45% applies to income in excess of ZAR 1,731,601 (in the 2023 tax year).

Real property tax

Transfer duty is levied on a purchaser for the transfer of fixed property in South Africa, subject to specific exemptions.

Transfer duty is payable on a sliding scale, ranging from 0% in respect of fixed property with a market value of not more than ZAR 1 million to 13% on property with a market value exceeding ZAR11 million.

Where a non-resident disposes of South African immovable property or shares in an immovable property company, the purchaser (or his agent) may be required to withhold tax from the payment and pay such tax to SARS. The withholding tax rate in respect of a non-resident is 7.5%, in respect of a non-resident company is 10% and in respect of the foreign trust is 15%. This is not a final tax and the non-resident may also, in a number of instances, apply for a directive that no tax, or tax at a reduced rate, should be withheld from the purchase price.

Royalties

The payment of royalties to a non-resident is currently subject to withholding tax at the rate of 15% unless a DTA reduces this rate.

Stamp duty

Securities Transfer Tax (STT) is levied on every transfer of a security and was introduced with effect from 1 July 2008 to replace stamp duty and uncertificated securities tax on the transfer of listed and unlisted securities respectively.

STT is payable on the transfer or redemption of any security at a rate of 0.25% on the greater of the market value or consideration payable. 

There is no business licence tax.

There is no apprenticeship tax, but employers are obliged to pay a levy, known as SDL (see Payroll Tax and Social Security), which aims to fund education and training as envisaged in the Skills Development Act.

The collection and payment of levies are administered by the SARS. Every employer who pays or is liable to pay remuneration to employees, is required to pay the levy, subject to certain exemptions.

Technical service fees

A new withholding tax on service fees paid to a non-resident was proposed to come into effect from 1 January 2016, but the proposal was subsequently withdrawn.

Thin Cap regulations

The South African thin capitalisation rules (which form part of South African transfer pricing rules) must be considered where a South African company is funded by a non-resident connected person by way of capital and shareholders’ loans.  

Until April 2012, SARS applied a “safe harbour” 3:1 debt-to-equity guideline ratio to determine whether interest-bearing loans were disproportionate in relation to the capital of the South African entity.

However, the transfer pricing rules, including the thin capitalisation rules, have been amended with effect from 1 April 2012.  SARS issued a draft interpretation note in this regard in 2013 but this interpretation note was never finalised.

SARS recently, in January 2023, issued Interpretation Note 127 regarding the determination of the taxable income of certain persons from international transactions: intra-group loans (IN127).

The purpose of IN127 is to provide taxpayers with guidance on the application of the arm’s length principle, in the context of intra-group loans. IN127 applies to loans advanced in years of assessment commencing on or after 1 April 2012.
SARS states in PN127 that they will consider a taxpayer’s debt to be non-arm’s length if, amongst other factors, some or all of the following circumstances exist:

• The taxpayer is carrying a greater quantity of debt than it could sustain on its own (that is, it is thinly capitalised).
• The duration of the lending is greater than would be the case if negotiated at arm’s length.
• The repayment, interest rate or other terms are not what would have been entered into or agreed to at arm’s length.

The above are not safe harbour rules. Instead, SARS would use these measures to select taxpayers for audit.

With regard to a possible secondary adjustment (i.e. the adjusted amount being treated as a dividend in specie, in the case of a company), SARS expresses the view that a DTA would not apply to reduce the withholding tax on dividends, arguing that the recipient of a deemed dividend in specie is not the ’beneficial owner’ of the dividend and thus not entitled to DTA relief. However, one could also argue that the disallowed portion of an adjusted interest expense is treated as a deemed dividend and that the recipient of that amount is the beneficial owner thereof.

The thin capitalisation rules should be considered taking into account section 23M of the ITA, which limits interest deductions in respect of debts owed to persons not subject to tax under Chapter II of the ITA. It contains a formula that restricts the interest deduction to a percentage of ‘adjusted taxable income’ as defined in the section.

Transfer pricing

South Africa’s transfer pricing rules effectively require SARS to adjust prices on the transfer of goods and services between related resident and non-resident entities if the prices are found to be artificially high or low and result in South African tax benefits for either party. In order to prevent triggering these rules, transactions and agreements between a South African subsidiary and any non-resident related parties must be entered into on an arm’s length basis.

Parties applying for approval in respect of the licensing of IP to a non-resident are generally required to submit an opinion from an independent transfer pricing specialist that the proposed royalty is acceptable for South African transfer pricing purposes (i.e. that the royalty has been determined on an arm’s length basis).

Value Added Tax (VAT)

South Africa applies a VAT system in terms of which VAT is levied on the supply of all goods and services by a registered VAT vendor at each stage within the production and distribution chain. Vendors collect output tax from their customers and are able to claim credits for input tax paid by them, with the effect that the tax burden is on the final consumer. VAT is also payable on the importation of goods and certain services to South Africa.

In terms of the Value-Added Tax Act 89 of 1991 (VAT Act 89), VAT is payable on the supply of goods and/ or rendering of services by a registered VAT vendor, or on goods and certain services imported into South Africa.

Any person who carries on any enterprise in South Africa and has taxable supplies that exceed ZAR 1 million per annum is obliged to register as a VAT vendor. There are certain exemptions from VAT, and certain transactions are subject to VAT at 0% (referred to as ‘zero-rating’).

The definition of an enterprise has been expanded to include the supply of electronic services by a non-resident where at least two of the following three circumstances are present:

• the recipient of the services is a South African resident;
• payment to the service provider originates from a bank registered or authorised in terms of the Banks Act, 94 of 1990; and
• the recipient has a South African business, residential or postal address.