1. Openness To, and Restrictions Upon, Foreign Investment
The GoSA is generally open to foreign investment to drive economic growth, improve international competitiveness, and access foreign markets. The Department of Trade and Industry and Competition’s (DTIC) Trade and Investment South Africa (TISA) division assists foreign investors. It actively courts manufacturing in sectors where it believes South Africa has a competitive advantage. It favors sectors that are labor intensive and with the potential for local supply chain development. DTIC publishes the “Investor’s Handbook” on its website: HYPERLINKError! Hyperlink reference not valid. and TISA provides investment support through One Stop Shops in Pretoria, Johannesburg, Cape Town, Durban, and online at http://www.investsa.gov.za/one-stop-shop/ (see Business Facilitation). The 2018 Competition Amendment Bill introduced a government review mechanism for FDI in certain sectors on national security grounds, including energy, mining, banking, insurance, and defense (see section on Laws and Regulations on Foreign Direct Investment). The private sector has expressed concern about the politicization of mergers and acquisitions.
Currently, there are few limitations on foreign private ownership and South Africa has established several incentive programs to attract foreign investment. Under the Companies Act, which governs the registration and operation of companies in South Africa, foreign investors may establish domestic entities as well as register foreign-owned entities. However, the Act requires that external companies submit their annual returns to the Companies and Intellectual Property Commission Office (CIPC) for review. Although generally there are no rules that would prohibit foreign companies from purchasing South African assets or engaging in takeovers, the Act does contain national security interest criteria for certain industries, including energy, mining, banking, insurance, and defense (see section on Laws and Regulations on Foreign Direct Investment), that could potentially subject transactions covered to additional scrutiny. Reviews will be conducted by a committee comprised of 28 ministers and officials chosen by President Ramaphosa. The law also states that the president must identify and publish in the Gazette, the South African equivalent of the U.S. Federal Register, a list of national security interests including the markets, industries, goods or services, sectors or regions for mergers involving a foreign acquiring firm.
In addition to the Companies Act national security review provisions, there are a small number of industries that are subject to additional requirements through separate acts. On September 28, 2021, President Ramaphosa signed the Private Security Industry Regulation Amendment Act, which limits foreign ownership of private security companies to 49 percent based on national security concerns. The Banks Act of 1990 permits a foreign bank to apply to the Prudential Authority (operating within the administration of the South African Reserve Bank) to establish a representative office or a local branch in South Africa. The Insurance Act of 2017 prohibits persons from conducting insurance business in South Africa without being appropriately licensed by the Prudential Authority. The Insurance Act permits a foreign reinsurer to conduct insurance business in South Africa, subject to that foreign reinsurer being granted a license and establishing both a trust (for the purposes of holding the prescribed security) and a representative office in South Africa. The Electronic Communications Act of 2005 imposes limitations on foreign control of commercial broadcasting services. The Act Provides that a foreign investor may not, directly or indirectly, (1) exercise control over a commercial broadcasting licensee; or (2) have a financial interest or an interest in voting shares or paid-up capital in a commercial broadcasting licensee exceeding 20 percent. The Act caps the percentage of foreigners serving as directors of a commercial broadcasting licensee at 20 per cent. Lastly, foreign purchasers of South African securities are obliged to notify an authorized dealer (generally commercial banks) of the purchase and have the securities endorsed “non-resident.”
DTIC’s TISA division assists foreign investors, actively courting manufacturers in sectors where it believes South Africa has a competitive advantage. DTIC publishes the “Investor’s Handbook” on its website: www.the DTIC.gov.za and TISA provides investment support through One Stop Shops in Pretoria, Johannesburg, Cape Town, Durban, and online at http://www.investsa.gov.za/one-stop-shop/ (see Business Facilitation). Foreign companies may be eligible for incentives in South Africa under several ad hoc initiatives as well as the Special Economic Zones (SEZs) Act of 2014, which promotes regional industrial development by providing incentives for foreign (and local) investors that elect to operate within the country’s SEZs. More information regarding incentive programs may be found at: http://www.thedtic.go/v.za/financial-and-non-financial-support/incentives/ and below in Incentives. The 2018 Competition Amendment Bill introduced a government review mechanism for FDI in certain sectors on national security grounds,
Although South Africa welcomes foreign investment, there are policies that potentially disadvantage foreign companies, including the Broad-Based Black Economic Empowerment Act of 2013 (B-BBEE). B-BBEE represents one avenue that South Africa has taken to re-integrate historically disadvantaged individuals (HDIs) into the economy by requiring companies meet certain thresholds of black ownership and management control to participate in government tenders and contracts. While companies support the Act’s intent, it can be difficult to meet the B-BBEE requirements, which are tallied on B-BBEE scorecards and are periodically re-defined. The higher the score on the scorecard, the greater preferential access a company must bid on government tenders and contracts.
In recognition of the challenge the scorecards place on foreign business, the Department of Trade, Industry and Competition created an alternative Equity Equivalence Investment Program (EEIP) program for multinational or foreign owned companies to allow them to show alternative paths to meeting B-BBEE ownership and management requirements under the law. Many companies still view the terms as onerous and restrictive. Multinationals, primarily in the technology sector such as Microsoft and Amazon Web Services, participate in the EE program. J.P. Morgan was the first international investment bank in South Africa to launch a DTIC-approved equity equivalent investment program in August 2021. The company will deploy R340 million (approximately USD 22 million) of financing into the South African economy and create more than 1000 permanent jobs.
The B-BBEE program has come under sharp criticism in the past several years on the grounds that the Act has not gone far enough to shift ownership and management control in the commercial space to HDIs. In response, the GoSA has increasingly taken measures to strengthen B-BBEE through more restrictive application, increasing investigations into the improper use of B-BBEE scorecards, and is considering additional legislation to support B-BBEE’s policies. For instance, the GoSA is considering a new Equity Employment Bill that will set a numerical threshold, purportedly at the discretion of each Ministry, for employment based on race, gender, and disability, over and above other B-BBEE criteria. The bill is currently with the National Council of Provinces and if it passes, it will move to President Ramaphosa for signature.
South Africa has not undergone any third-party investment policy reviews through organizations such as the Organization for Economic Co-operation and Development (OECD), World Trade Organization (WTO), United Nations Conference on Trade and Development (UNCTAD), or UN Working Group on Business and Human Rights.
In November 2021, civil society organizations launched a constitutional lawsuit against the GoSA, demanding that it cancel plans to build 1,500 Mega Watts (MW) of coal-fired power because this would worsen air and water pollution along with health hazards and global warming. They filed the case in the North Gauteng High Court on the grounds that the new power would pose “significant unjustifiable threats to constitutional rights” and to the climate by pushing up greenhouse gas emissions. South Africa is the 12th worst greenhouse gas (GHG) emitter in the world. The Center for Environmental Rights provided a review at: https://cer.org.za/news/new-coal-power-will-cost-south-africans-much-more-report-shows .
In November 2021, environmental activists gathered at the oil and gas giant Sasol’s annual general meeting demanding commitment to move away from fossil fuels. Activists also want Sasol and its shareholders to accelerate the country’s just transition, which commits to significantly reducing carbon dioxide emissions, and moving towards greener energy alternatives. A domestic shareholder activism organization called JustShare released a report on Sasol and climate change claiming that Sasol is not planning to decarbonize, despite climate science.
DTIC has established One Stop Shops (OSS) to simplify administrative procedures and guidelines for foreign companies wishing to invest in South Africa in Cape Town, Durban, and Johannesburg. In theory, OSS should be staffed by officials from government entities that handle regulation, permits and licensing, infrastructure, finance, and incentives, with a view to reducing lengthy bureaucratic procedures, reducing bottlenecks, and providing post-investment services. However, some users of the OSS complain that some of the inter-governmental offices are not staffed, so finding a representative for certain transactions may be difficult. The virtual OSS web site is: http://www.investsa.gov.za/one-stop-shop/ .
The CIPC issues business registrations and publishes a step-by-step guide for online registration at ( http://www.cipc.co.za/index.php/register-your-business/companies/ ), which can be done through a self-service terminal, or through a collaborating private bank. New businesses must also request through the South African Revenue Service (SARS) an income tax reference number for turnover tax (small companies), corporate tax, employer contributions for PAYE (income tax), and skills development levy (applicable to most companies). The smallest informal companies may not be required to register with CIPC but must register with the tax authorities. Companies must also register with the Department of Labour (DoL) – www.labour.gov.za – to contribute to the Unemployment Insurance Fund (UIF) and a compensation fund for occupational injuries. DoL registration may take up to 30 days but may be done concurrently with other registrations.
South Africa does not incentivize outward investments. South Africa’s stock foreign direct investments in the United States in 2019 totaled USD 4.1 billion (latest figures available), a 5.1 percent increase from 2018. The largest outward direct investment of a South African company was a gas liquefaction plant in the State of Louisiana by Johannesburg Stock Exchange (JSE) and NASDAQ dual-listed petrochemical company SASOL. There are some restrictions on outward investment, such as a R1 billion (USD 83 million) limit per year on outward flows per company. Larger investments must be approved by the South African Reserve Bank and at least 10 percent of the foreign target entities’ voting rights must be obtained through the investment. https://www.resbank.co.za/RegulationAndSupervision/FinancialSurveillanceAndExchangeControl/FAQs/Pages/Corporates.aspx
4. Industrial Policies
South Africa also offers various investment incentives targeted at specific sectors or types of business activities, including tax allowances to support in the automotive sector and rebates for film and television production. The GoSA favors sectors that are labor intensive and with the potential for local supply chain development More information regarding incentive programs may be found at: http://www.thedtic.gov.za/financial-and-non-financial-support/incentives/ .
The Public Investment Corporation SOC Limited (PIC) is an asset management firm wholly owned by the GoSA and is governed by the Public Investment Corporation Act, 2004 . PIC’s clients are mostly public sector entities, including the Government Employees Pension Fund (GEPF) and UIF, among others. The PIC runs a diversified investment portfolio including listed equities, real estate, capital market, private equity, and impact investing. The PIC has been known to jointly finance foreign direct investment if the project will create social returns, primarily in the form of new employment opportunities for South Africans.
To encourage and support businesses looking to green their operations, there are incentives built in into the income tax. Section 12L of the Income Tax Act was passed in 2013 allowing for deductions for energy efficiency measures. Businesses can claim deductions of 95 cents per kilowatt hour, or kilowatt hour equivalent, of energy efficiency savings made within a year against a verified 12-month baseline. The baseline measurement and verification of savings must be done by a SANAS accredited Measurement and Verification (M&V) body. The incentive allows for tax deductions for all energy carriers, not just electricity, except for renewable energy sources which have separate provisions. An amendment in 2015 allowed businesses to claim savings from electricity co-generation, combining heat and power, if there is an energy conversion efficiency of more than 35 percent. All energy efficiency schemes that businesses want to claim the deductions against need to be registered with the South African National Energy Development Institute (SANEDI). https://www.sanedi.org.za/12L.html
Section 12B of the Income Tax Act includes a provision for a capital allowance for movable assets used in the production of renewable energy. The incentive allows for 100 percent asset accelerated depreciation in first financial year that the asset is brought online. This could equate to a 28 percent deduction on the business’ income tax. Currently, company tax in South-Africa is 28 percent (it has since been reduced to 27 percent as from April 1, the beginning of the 2022/2023 fiscal year). With this incentive, a company could deduct the value of a new solar power system as a depreciation expense decreasing the company’s income tax liability by the same value as the value of the installed solar system. The reduction can also be carried over to the next financial year as a deferred tax asset.
Section 12N of the Income Tax Act provides for improvements to property not owned by taxpayers: if the improvements are associated with the Independent Power Producer Procurement Programme. Section 12U Income Tax Act provides for additional deduction in respect of supporting infrastructure in respect of renewable energy: such as roads and fences
South Africa designated its first Industrial Development Zone (IDZ) in 2001. IDZs offer duty-free import of production-related materials and zero VAT on materials sourced from South Africa, along with the right to sell in South Africa upon payment of normal import duties on finished goods. Expedited services and other logistical arrangements may be provided for small to medium-sized enterprises or for new foreign direct investment. Co-funding for infrastructure development is available from DTIC. There are no exemptions from other laws or regulations, such as environmental and labor laws. The Manufacturing Development Board licenses IDZ enterprises in collaboration with the SARS, which handles IDZ customs matters. IDZ operators may be public, private, or a combination of both. There are currently five IDZs in South Africa: Coega IDZ, Richards Bay IDZ, Dube Trade Port, East London IDZ, and Saldanha Bay IDZ. South Africa also has SEZs focused on industrial development. The SEZs encompass the IDZs but also provide scope for economic activity beyond export-driven industry to include innovation centers and regional development. There are six SEZs in South Africa: Atlantis SEZ, Nkomazi SEZ, Maliti-A-Phofung SEZ, Musina/Makhado SEZ, Tshwane SEZ, and O.R. Tambo SEZ. The broader SEZ incentives strategy allows for 15 percent Corporate Tax as opposed to the current 28 percent, Building Tax Allowance, Employment Tax Incentive, Customs Controlled Area (VAT exemption and duty free), and Accelerated 12i Tax Allowance. For more detailed information on SEZs, please see: http://www.theDTIC.gov.za/sectors-and-services-2/industrial-development/special-economic-zones/?hilite=%27SEZ%27
The GoSA does not impose forced localization. However, authorities incentivize the use of local content in goods and technology. In 2021, President Ramaphosa and DTIC Minister Ebrahim Patel announced that South Africa will expand existing localization measures to reboot the economy. DTIC released a policy statement on localization in May 2021. The localization plan’s cornerstone is the implementation of a scheme to substitute 20 percent of imports, or approximately R20 billion (USD 1.3 billion) across selected categories with local goods by 2025. For instance, the industrial master plan for textiles set a goal that 60 percent of all clothing sold in South Africa will be locally manufactured by 2030. Preferential procurement is applied uniformly to both domestic and foreign investors. The GoSA’s B-BBEE requirements, however, make it difficult for foreign investors to score well on the “ownership” element of the B-BBEE scorecard due to corporate rules that can prevent the transfer of discounted equity stakes to South African subsidiaries. Although the GoSA created the EEIP for international companies that cannot meet the ownership element of B-BBEE through the direct sale of equity to local investors, some companies claim that the reporting requirements and high level of required financial contributions make the EE program unviable.
A Draft National Data and Cloud Policy, released by the GoSA in April 2021, seeks to put the GoSA at the heart of data control, ownership, and distribution in South Africa. The draft policy proposed a series of government interventions, including the establishment of a new state-owned enterprise to manage government-owned and controlled networks. It aims to consolidate excess capacity of publicly funded data centers and deliver processing, data facilities and cloud computing capacity. The GoSA plans to develop ICT special economic zones, hubs and transformation centers. The draft policy seeks to impose data localization requirements and defines data localization as the “…requirements for the physical storage of data within a country’s national boundaries, although it is sometimes used more broadly to mean any restrictions on cross border data flows.” The draft policy provides inter alia that: data generated in South Africa shall be the property of South Africa, regardless of where the technology company is domiciled; ownership and control of personal information and data shall be in line with the Protection of Personal Information Act (POPIA); DTIC through the CIPC and the National Intellectual Property Management Office (NIPMO) shall develop a policy framework on data generated from intellectual activities including sharing and use of such data. The POPIA entered fully into force in July 2021 and regulates how personal information may be processed and under which conditions data may be transferred outside of South Africa. Currently, there is no requirement for foreign information technology providers to turn over source code or provide access to surveillance. However, compliance burdens may be significant. The Department of Communications and Digital Technologies is responsible for developing ICT policies and legislation. The Independent Communications Authority of South Africa is the regulatory body which regulates the telecommunications sector.