Guide on Business Investment in South Africa

There are many reasons to invest in business. In South Africa, business investment contributes to the growth of small businesses and the overall economy. Business investment is more than just making money, it creates innovation and provides a good foundation for research and development.

Business investment is defined as the act of providing capital, making capital contribution or investing. The investing is done through contracts and investment projects by the investor. Investing is done as a method of growing a business and also to create extra income for the investor.

For small businesses, business investment presents an opportunity to gain funding for the business. Typically, business investors will also provide expert advice on how the business can grow and collect profits quickly.

In this guide, we look at business investment in South Africa and the effects it has on small businesses.

Foreign direct investment happens when an individual, company or government invests in a business or assets in another country. This is to establish a stake in the business or country’s operations.

Impact of FDI on South Africa’s Economy

The impact of FDI is significant in the positive growth of South Africa’s economy. Through FDI, positive effects occur such as:

Job Creation – FDI typically creates jobs. As foreign investors establish or expand their operations in the country, they require a workforce to staff their facilities.

Knowledge and Skills Transfer – The arrival of FDI facilitates the transfer of skills, expertise and business practices. This is done through training programmes which leads to improved workforce productivity.

Better Capital Inflows – The capital that is brought into the country through FDI can help finance investment projects, expand production capacity, and activate economic activity.

Better Infrastructure – FDI contributes towards infrastructure development in South Africa. Better infrastructure can facilitate trade and support economic growth.

Key Sectors for FDI in South Africa

South Africa is a valuable destination for foreign direct investment. Foreign investors expand their investments within various sectors such as manufacturing, automotive and energy. The most recent investment was from the European Union to stimulate investments in green hydrogen infrastructure.

According to the government, FDI inflows amounted to R 96,5 billion. This is equivalent to 1,4% of South Africa’s gross domestic product (GDP).

A recent PwC report states that South Africa has exciting fundamentals for foreign investors. These include world-class financial services and communications industries, capital markets, a broad range of natural resources and a transparent legal system. Additionally, South Africa, presents a great geographical location for entry into the rest of sub-Saharan Africa.

Trends in Global FDI and South Africa’s Position

To the average South African, FDI might seem to have lowered but that is not the case. South Africa continues to receive foreign investment. The PwC report states the most prominent trends in FDI are:

• There has been a positive net FDI flow yearly in South Africa since the global financial crisis.
• FDI inflows in South Africa averaged R 58 billion per annum.
• The manufacturing industry is the largest receiver of FDI.
• Mining and quarrying is the second largest receiver of FDI. This is due to South Africa being the largest exporter of platinum group metals.
• The financial services sector is the third biggest receiver of FDI. FDI in financial services is driven by the large banks and insurance firms on the continent that call South Africa home.

The South African government has a range of programmes aimed at increasing investment. These programmes consist of a network of sector-specific and cross-cutting incentives.

Agro-Processing Support Scheme

This programme aims to drive investment by the South African agro-processing enterprises/beneficiation agri-business. The incentive offers 20-30% cost-sharing grant to a maximum of R 20 million. This is given over a two-year investment period.

To qualify for the programme, you need to meet the following criteria:

• Have a minimum investment of R 1 million.
• Have a B-BBEE level of 1-4.
• Showcase that at least 50% of raw materials will be sourced from South African suppliers. 30% of suppliers must be black South African suppliers.
• Be able to start the project or activities applied for within 90 calendar days after application approval.
• Retain and create additional job opportunities.
• Offer employees minimum wage.

Aquaculture Development and Enhancement Programme

The aquaculture development and enhancement programme seeks to support entities engaged in primary, secondary and ancillary aquaculture. This is for both marine and freshwater as classified under the Standard Industry Classification. The programme offers a 30%-45% reimbursable grant of up to R 20 million towards qualifying costs.

To qualify for the programme, you need to meet the following criteria:

• You must have a B-BBEE level 1-4.
• You must have a turnover of above R 10 million. If your turnover is less than R10 million, you must submit an affidavit.

Additional qualifying criteria include:

Primary aquaculture operations

• Hatchery, Nursery and Grow-out facilities and operations.

Secondary aquaculture operations

• Primary processing for aquaculture: post-harvesting, handling, gutting and packaging.
• Secondary processing for aquaculture: fileting, portioning and packaging.
• Tertiary processing for aquaculture: value-adding such as curing, brining, and smoking.
• Waste stream handling aquaculture.

Ancillary aquaculture operations

• Aquaculture feed manufacturing operations.

Global Business Services Incentive

The primary objective of this initiative is to attract investment and create employment in South Africa. This is done through offshoring activities. Additionally, the programme seeks to create employment opportunities for the youth (aged 18-35) and to contribute to the bettering of the country’s export revenue through offshoring services.

To qualify for the programme, providers of outsourced business services to clients in South Africa must be:

• A South African legal entity.
• Have a minimum three-year fixed-term contract for offshore activities.
• Pay a minimum wage of R 5 000 per month.
• Submit an application prior to appointing staff to qualifying jobs.
• Must be B-BBEE compliant.
• If your project is performing mostly non-complex jobs:
  – It must create a minimum of 50 new offshore jobs within three years of the start of operation.
  – It must employ at least 80% youth.
• For projects performing mostly complex and high-complex jobs:
  – It must create a minimum of 30 new jobs within three years from the start of the project.
  – It must employ 60% youth.

Foreign Film, Television Production and Post-Production Incentive

This incentive is aimed at large-budget films and post-production work which will contribute towards employment creation and enhancement of South Africa’s international profile. Additionally, it aims to increase the country’s creative and technical skills base.
To qualify for the programme, applicants must meet the following criteria:

• The foreign film studio or production company must use a South African service company with a B-BBEE level of 1-3.

For production-only projects, the Qualifying South African Production Expenditure (QSAPE) must be:

• No less than R15 million for shooting in South Africa when using a service company that is B-BBEE level 2-3.
• No less than R 12 million for shooting in South Africa when using a service company with a B-BBEE level of 1.

For production and post-production projects:

In addition to the above requirement on production projects, the e Qualifying South African Post-Production Expenditure (QSAPPE) should be at least R 10 million.

For post-production only projects:

The QSAPPE should be at least R 1,5 million for conducting post-production activities in South Africa.

These programmes are just a few examples of the government incentives put in place for investment. These programmes are designed to stimulate investment into sectors that can elevate the economy of South Africa.

A tax incentive is an aspect of a government’s taxation policy. It is designed to encourage a particular economic activity by reducing tax payments. In South Africa, there are a number of tax incentives, namely research and development (R&D), foreign tax credit, headquarters company regime and industrial policy projects amongst others.

Research and Development (R&D) Tax Incentive

This incentive allows for a 150% deduction on qualifying R&D expenditures subject to pre-approval by a government-appointed approval committee. Machinery and other capital assets acquired for R&D use may be depreciated by 50% in the first year of use, 30% in the second and 20% in the third year. Any building used in the process of R&D may be written off over a 20-year period.

Foreign Tax Credit Incentive

The South African Income Tax Act makes provision for a rebate against corporate income tax in respect of foreign taxes paid on foreign-sourced income. It also seeks to deduct against income of foreign taxes paid on SA-sourced income. In both instances, the taxpayer must be a South African resident, the income must be included in taxable income, and the income must have been subject to a foreign tax that is not recoverable.

Headquarter Company Regime Incentive

This incentive encourages the use of South Africa as a location for intermediate holding companies. The main benefits of the incentive include:

• Exemption from South Africa’s controlled foreign corporation rules.
• Exemptions from dividend withholding tax (WHT) on the headquarter company’s dividend distributions.
• Exemption from the WHT on interest in certain circumstances.
• Exemption from South Africa’s transfer pricing rules on consecutive loans, outbound loans, consecutive intellectual property (IP) licensing agreements and outbound IP licensing arrangements.

Industrial Policy Projects

The incentive is available for industrial projects participating in the manufacturing sector. These projects are not alcohol or alcohol-related products, tobacco or tobacco-related products, arms and ammunition and biofuels which have a negative impact on food security.
The R 20 billion incentive package for investors in energy-efficient projects. The projects must either be a ‘brownfield project’ (expansion or upgrade of an existing industrial project) or a ‘greenfield project’ (a new industrial project which uses new and unused manufacturing assets).

Approved projects may be given a tax allowance known as an additional investment allowance equal to 55%. The tax allowance can be 100% if the project is located in an industrial development zone.

Special economic zones (SEZs) are geographically designated areas in South Africa which have been set aside for specifically targeted economic activities. These activities are supported through special arrangements and systems that are often different from those that apply in the rest of the country.

Under the Special Economic Zones Act, these locations are defined as:

• Industrial development zone.
• Free ports.
• Free trade zones.
• Sector development zone.

The SEZ investment incentives are:

• Preferential 15% corporate Tax.
• Businesses in SEZs are eligible for tax relief.
• Building allowance allows businesses in SEZs to be eligible for tax relief.
• 12I tax allowance is designed to support greenfield investments and brownfield investments.

Existing SEZs in South Africa

There are currently a number of SEZs in South Africa namely:

Atlantis SEZ

This location is part of the City of Cape Town’s initiative to establish a Greentech manufacturing hub in Atlantis. The area is situated on the West Coast of South Africa, 40 km from Cape Town.

Nkomazi SEZ

The Nkomazi is strategically placed between northern Eswatini and the southwest of Mozambique. Its main advantage is that the area is linked to Swaziland by two national roads, the R 570 and R 571 and Mozambique by a railway line and the N4. These roads together form the Maputo Corridor.

Coega IDZ

The Coega SZE is the biggest in Southern Africa. In 2001 it became South Africa’s first Industrial Development Zone (IDZ) and was chosen because of its strategic placement on the east-west trade route. This route services both world and African markets.

These are just three of the SEZs in South Africa. These zones are chosen to attract foreign investment in South Africa.

Challenges in the South African Business Environment

When it comes to some of the challenges that are experienced by small businesses in South Africa, the main ones are:

• Access to funding.
• Competition from large corporations.
• Limited reach in markets.
• Very high operating costs.
• Lack of skilled employees.
• Various regulatory compliance.
• Threats in cybersecurity.
• Management of cash flow.
• Limited access to technology.
• Environmental sustainability.

These challenges outline how investment can help small businesses in South Africa thrive in their own environment and grow to eventually become competitive in the larger market.

Opportunities in the South African Business Environment

When it comes to business investment, the opportunities are endless in South Africa. According to the International Trade Administration, some of the benefits of FDI in South Africa include:

• South Africa’s sophisticated finance, legal, and business services sectors.
• South Africa presents a clear entryway to other countries and markets in Sub-Saharan Africa.
• The strong reputation of US-branded goods and services.
• Presence of strong and capable South African companies that can serve as good partners for trade and investment.

Other opportunities include the vast availability of small businesses with innovative ideas that simply need investment to take them to market.