There’s a fine line between South African entrepreneurs emigrating to start a new life with the aim of expanding their businesses internationally; and those who end up taking an expensive holiday, warns Richard Neal, director at Sovereign Trust SA.
When opportunity knocks, local entrepreneurs are ever keen to offer their goods or services internationally and we have therefore seen the “great migration” of South Africans who are going overseas to expand or set up their businesses, he said.
“Whatever you do, don’t go it alone.” Emigrants working for multinationals can rely on established surroundings when they arrive overseas. They enjoy the benefit of a fully operational office, assistance with visas, a support base and a salary.
“It’s a much easier transition than the challenges faced by South African entrepreneurs who need to make their own way,” said Neal.
“Preparation prior to departure can make or break the success of overseas business expansion.”
Despite the current “great migration” of South Africans exhausted by political, social and economic instability, South Africans have never shied away from going it alone and heading out to find new frontiers. When opportunity knocks, local entrepreneurs are ever keen to offer their goods or services internationally.
The entrepreneurial nature of South Africans may come out of necessity – being so far removed from the large economies of Europe, America and Asia. Or it could simply be an instinctive “can-do attitude”.
Entrepreneurs moving overseas to take advantage of a new market will almost certainly be required to establish a corporate entity overseas, either in the country they are moving to or in a jurisdiction within the common market. “Care must be taken in hastily establishing an overseas company – there are pitfalls as well as opportunities in this arena,” said Neal.
Things to consider prior to establishment include determining who the director of the newly formed overseas company will be. Most entrepreneurs would want to be the listed director, however while they retain their South African tax residency, this move could bring the overseas company into the South African tax net (via the Place of Effective Management rules).
“It is far better to enlist the services of a corporate services provider to establish and manage the company until the entrepreneur has lost their South African tax residency, at which point they can become the director,” Neal said.
Some jurisdictions require local residents to be the director or require two resident directors. Local management or even local shareholding requirements can pose a massive threat if the local provider turns out to be untrustworthy. Rather than using local individuals, professional organisations like Sovereign are set-up to provide the management and shareholding requirements.
“More importantly, it gives the entrepreneur peace of mind that the management or ownership will not be usurped,” added Neal.
He said that before entrepreneurs assume that financial emigration is the only option to escape taxation on their foreign earnings, they need to brief a tax advisor on the entire situation and consider less drastic and expensive options.
Shareholding an overseas company can be a great tax planning opportunity. Most jurisdictions allow the shares of local companies to be held in foreign entities such as trusts. “Entrepreneurs are so focused on the operation of their business, they don’t realise that the new venture is an opportunity to accomplish dynastic planning,” said Neal.
“The new company would start with little or no value, a perfect opportunity to assign the shares to a Trust in a stable and low tax jurisdiction.
The benefits to this sort of planning are plentiful, including; protection from creditor attack; ability for the dividends declared to be invested tax efficiently; the Trust to establish a second overseas operation from funds amassed; looking after the interests of the family; and separation of ownership should the entrepreneur return to South Africa.
Saving for retirement is also solely at the discretion of the entrepreneur. Just because the entrepreneur leaves SA doesn’t mean they should stop making provisions. Entrepreneurs can consider establishing an overseas retirement plan in a favourable jurisdiction. Guernsey for example has legislation which makes it a very attractive locale to establish a private retirement savings plan.