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12 May 2023

Considerations for Establishing a Local Non-Profit Entity in South Africa

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International non-profit entities are increasingly establishing local offices in South Africa to expand their reach and impact. These offices serve as a bridge between the parent organization and the local market and community, allowing them to better understand the local environment and tailor their programs and services accordingly. Setting up a local office also helps non-profits to build stronger partnerships with local organizations and stakeholders, which can lead to more effective and sustainable interventions.

However, establishing a local entity in South Africa can also present challenges such as navigating the applicable legal and regulatory frameworks, cultural differences, and language barriers. Below we will discuss a few considerations international non-profits must keep in mind when setting up operations here in South Africa.

What type of entity to register

The Companies Act (“the Act”) provides two options for a foreign entity that seeks to conduct business in South Africa:

  • the foreign company may be registered as an external company under the Act where the foreign company will have a branch office based in South Africa; or
  • the foreign company may incorporate a new South African entity which will be a wholly-owned subsidiary of the foreign company.

Non-profit companies (“NPCs”) cannot function as wholly owned subsidiaries since they lack shareholders. NPCs can however have members and may therefore have their “parent” entity as the sole member (as opposed to shareholder).

The choice between an external company or a South African company will depend on various factors such as tax considerations, liabilities of the entity and what kind of presence the entity wants here in South Africa.

An external company registered in South Africa is not considered a new entity, instead, the company remains one and the same legal entity which is registered in two countries. The operations in South Africa are merely that of a branch office of the external company and not a separate entity. Conversely, registering a new non-profit entity in South Africa will create a separate legal entity from the foreign one. The new entity will have its own founding documents and structure and be liable in its own name.

What are the Employment obligations?

When establishing a local office, foreign entities must familiarize themselves with South Africa’s extensive employment and labour laws. Whether the foreign entity establishes a branch office or a South African entity, they must comply with our employment and labour laws.

South African employment and labour laws such as the Labour Relations Act and the Basic Conditions of Employment Act (amongst many others), regulate the way employers manage their employees. Foreign entities cannot claim that as they are not based here, they do not need to abide by our employment and labour laws. If you are employing South Africans to perform work in South Africa, you must ensure such employment is managed lawfully.

Liability of employees and directors

In the case of a branch office, an external company will be liable for the conduct carried out by the branch through its employees, agents and directors in South Africa which creates liability in South Africa for the foreign entity. In the case of a South African entity, this entity is an independent entity. The parent company will therefore not be liable for the conduct of the South African entity’s employees and agents in South Africa.

In South Africa, directors of a company have legal responsibilities known as fiduciary duties. These duties include that they always acting in the best interest of the company and protecting the company’s interest at all times. The directors of a foreign company assume the legal responsibilities of directors under South African law (which may be more onerous than their own law).

Do I get a Tax exemption status

Non-profit entities in South Africa do not automatically receive tax exemption as a default. Instead, they must directly apply for tax exemption with the South African Revenue Services (“SARS”). SARS only grants tax exemption to entities that engage in one or more public benefit activities listed in the Income Tax Act.

Registration as a non-profit organisation

In South Africa, we have the Non-profit Organisations Act (“NPO Act”). The aim of the NPO Act is to regulate and promote the registration of charitable entities as non-profit organisations (“NPO”). Any entity type can register as an NPO. This means that whether an entity is a non-profit company, a trust, or a voluntary association, it can register as an NPO. The Department of Social Development handles NPO registration. When an entity registers as an NPO, the Department of Social Development will register it on the list of NPOs and it will be eligible for other benefits, such as consideration for government grants and funding.

Establishing a local office in South Africa comes with many benefits for international non-profit entities. However, international entities should always do their due diligence into the regulatory and compliance laws that will be applicable to their operations locally before setting up locally.

– Lauren van der Byl