Are you an investor looking to establish a business in Botswana? In a series of newsflashes, we will cover pertinent points aimed at assisting investors when considering establishing a business in Botswana. In this first series we will deal with ways in which a foreign investor can establish a business in Botswana, the advantages and disadvantages of the establishment options, localisation requirements, fees payable and the tax implications of each option.
What are the ways in which a foreign company may set up business in Botswana?
There are 2 main ways in which a foreign company can set up a place of business in Botswana:
- incorporate a company in terms of the Companies Act [Cap 42:01] (the Companies Act); or
- register as an external company (also referred to as a branch).
Option 1 – Incorporate A Company
In terms of the Companies Act, a company shall be a company limited by shares, a close company or a company limited by guarantee. A company may either be private or public. A private company is a company that cannot have more than twenty-five (25) shareholders and cannot make an offer to the public to subscribe for its shares. A public company is a company that has no limit on the number of shareholders and can make an offer to the public to subscribe for its shares. The most common type of company in Botswana is the private company.
Foreign companies may incorporate a private company that is a subsidiary of its holding company. In terms of the Companies Act, a company is a “subsidiary” of another company if that other company, inter alia:
- “controls the composition of the board of directors of the company;
- is in a position to exercise, or control the exercise of, more than one-half the maximum number of votes that can be exercised at a meeting of the company;
- holds more than one-half of the issued shares of the company, other than shares that carry no right to participate beyond a specified amount in a distribution of either profits or capital; or
- if the company is a subsidiary of a company that is a subsidiary of another company.”
Advantages and Disadvantages
The primary advantage of a private company is that it is a corporate entity that exists separately, thereby shielding the holding company from its liabilities.
A primary disadvantage of a private company, as against an external company, is that the compliance requirements are more onerous than those of an external company. Administratively, if one decides to incorporate a subsidiary, another corporate limb is added to a group of companies, requiring its own board, company secretary and public officer.
Localisation Requirements
There is no requirement for the shareholders to be citizens of Botswana. Where an investor decides to register a Botswana subsidiary, the holding company can hold 100% of the issued share capital. However at least 1 (one) director must be ordinarily resident in Botswana and the company secretary must be resident in Botswana.
Registration fees and timelines
Incorporation as a subsidiary, subject to receipt by the Companies and Intellectual Property Authority (CIPA) of all required documents, takes approximately 2-3 business days and attracts statutory fees of BWP380.00.
Option 2 – External Company
What is an external company?
The Companies Act defines an “external company” as a “body corporate… which is registered or incorporated outside Botswana and that is required to be registered under [the Companies Act]”.
Section 345(1) of the Companies Act provides that “every external company shall, within 1 month after it establishes a place of business or commences to carry on business in Botswana” make an application to be registered as an external company.
In terms of section 344(2)(a) a reference to an external company carrying on business in Botswana includes a reference to the external company, inter alia, “administering, managing, or dealing with property in Botswana as an agent, or personal representative, or trustee, and whether through its employees or an agent or in any other manner.”
An external company does not carry-on business in Botswana merely because in Botswana it, inter alia:
- maintains a bank account;
- effects a sale of property through an independent contractor;
- solicits or procures an order for delivery in Botswana or elsewhere that becomes a binding contract only if the order is accepted outside Botswana;
- creates evidence of a debt or creates a charge on property; or
- conducts an isolated transaction that is completed within a period of 31 (thirty-one) days, not being one of a similar number of transactions repeated from time to time.
Advantages and Disadvantages
The advantage of an external company is the ease with which it can be registered. It is also administratively leaner, as it does not add to the corporate structure of a group of companies.
On the other hand, registration as an external company does not create an entity that exists separately from the foreign company. An external company is recognised under the Companies Act as a corporate entity registered under the laws of another jurisdiction that is active within Botswana. The liabilities of the external company are therefore the liabilities of the foreign company.
Localisation requirements
In terms of the Companies Act, an external company is required to appoint an “authorised agent” that is ordinarily resident in Botswana to:
- have responsibility for the management of the business of the external company in Botswana;
- accept on the external company’s behalf service of process and any notices required to be served on the external company; and
- be answerable for all such acts, matters and things that are required to be done by the company under the Companies Act by an authorised agent.
Registration fees and timelines
Registration as an external company, subject to receipt by CIPA of all required documents, takes approximately 2-3 business days and attracts statutory fees of BWP4,620.00.
Tax Implications For The Subsidiary And External Company
For purposes of the Income Tax Act [Cap 52:01] (the Income Tax Act), a company is resident in Botswana when it’s registered office or place of incorporation is in Botswana, or if the company is managed and controlled from Botswana. In the premises, both the Subsidiary and the External company will be liable for tax under the Income Tax Act.
Any revenue generated in Botswana by the External company or Subsidiary, howsoever arising, would be subject to tax under the Income Tax Act. The Botswana Subsidiary would be taxed at a rate of 22% whereas the External company would be taxed at a rate of 30%. On the foregoing, the Subsidiary would be more tax efficient than the External company.
The Subsidiary and External company will generally be liable for Value Added Tax (VAT) at a rate of 14% on imports and sale of goods and services in Botswana. A company that has an annual turnover or taxable supplies of P1 000 000 (One Million Pula) is required by law to register for VAT.
We are available to assist foreign companies establish their corporate presence in Botswana. Our services include:
- drafting a constitution for the company;
- assisting with gathering documents required for registration;
- submitting registration documents to CIPA;
- drafting of shareholder’s agreements;
- assist with proceedings of the board of directors;
- drafting of resolutions for corporate approvals; and
- assist with regulatory approvals.
For more information on the establishment options please contact Partner Imaan Kader at imaan@bookbinder.co.bw and Associate Winnie Gotsilemotho Phuduhudu at gotsilemotho@bookbinderlaw.co.bw or 3912397.