Google has announced the completion of its acquisition of wearable company Fitbit. The announcement was made by Google Senior Vice President, Devices & Services…
There are several stories of SA and African companies successfully taking their products and services to the global market.
However, African entrepreneurs have to overcome various financial, legal and regulatory challenges in order to take advantage of these potentially lucrative overseas markets.
Most high-growth businesses being built today consist of people, technology and intellectual property (IP) that can in theory be easily exported to other markets where their products and services are needed.
However, several countries, including South Africa, have exchange controls and restrictions limiting the movement of assets to other jurisdictions. Assets cover not just physical items, but intangible assets that could include patents, trademarks, software code, licences and rights to an income stream.
HAVAÍC ‘s investment thesis is centred around investing in African tech startups with the potential to scale internationally
In South Africa, the exchange control regulations are in place to monitor and control the flows of capital and assets into and more importantly, out of the country.
The regulations require SA companies to apply for approval to externalise or expand their businesses into other markets and to pay any arising fees or taxes.
In the technology sector, companies that have developed a software or hardware product which has global application, would at some point wish to consider externalising their IP for the following reasons:
- Patents and trademarks should be registered in the countries where the products or services are being offered in order to provide the necessary legal protections against copycats and competitors.
- It is easier to raise further rounds of funding from the same markets where the product or service is being successfully sold or from a capital market that has funding for that industry.
- There is far less friction with a future sale or initial public offering (IPO or listing) of the business if it is domiciled in an investor-friendly jurisdiction or is in the same country as the potential acquirer or stock exchange
It is important to note that a SA company should only apply for approval to move its IP offshore if most or all of its clients are offshore (outside SA and the common monetary area).
Without a valid business reason such as this, the SA authorities could view this as a mere attempt to avoid the country’s tax and regulatory system.
While it can be seen as a long and complicated process, HAVAÍC has successfully assisted a few portfolio companies with the offshoring process and the good news is that it is not as daunting or as expensive as you might think.
What is important is that the right advisors are engaged early on and the myriad of factors are considered before commencing.
One of these factors and a crucial point to consider is that by moving the IP offshore, effective management of the business must also be moved, thus bringing with it higher ongoing operating costs.
However, with good planning, the right advice and the correct composition of the company’s management, advisory and executive (board of directors) teams, the higher associated costs could be minimised.
HAVAÍC ‘s investment thesis is centred around investing in local technology businesses with the potential to scale internationally, and our investor returns will be realised either through future international funding rounds or an international sale, the locations of the IP and effective management are major investment considerations – even for early stage businesses.
Thus, we have set up a structure in an offshore jurisdiction that is tax efficient for our investors, recognised and trusted by international investors and is business friendly. In addition, we have built a panel of international advisors who represent us on the boards of our portfolio companies, which adds significant experience.
To conclude, it is important for both founders and investors alike to remember that while tax is often a primary consideration, the rationale for moving and where to domicile IP should be driven by business strategy and future value creation.
Therefore, whether a local or international structure is appropriate should be based on sound commercial principles.
Read more: What startups should know about tax, when setting up an overseas company
Read more: How to structure functions and operations across your international group
Read more: Here’s how SA startups can legally create an offshore company
Read more: The ins and outs of taking your startup offshore
Grant Rock is a founding partner of HAVAÍC, a Cape Town based venture capital company.