Running your own business can be an expensive endeavour, which is why it’s important to minimise costs like your corporate income tax.
We find out how starting your business in a country with a lower corporate income tax rate can generate more profit, and we consider whether you should register your start-up abroad.
Tip: Looking for funding? Consider a personal loan to get you started.
Finding a lower corporate income tax rate
Megan Landers, manager of international tax at AJM Tax, says that continuous advancements in technology have made it easier to start a business from anywhere in the world. She explains that, as a result, countries with favourable corporate income tax rates are attracting start-ups.
Similar to personal income tax, which is the percentage of your income that you need to pay to your country’s revenue authority, corporate income tax is the percentage of profit that a company has to pay to its country’s revenue authority.
For example, if your business is registered in France, it will have to pay corporate income tax to the French government, and not the South African government.
The higher the corporate income tax is, the less take-home profit your business will make. For example, if your business makes R1,000 and it’s based in a country with a corporate income tax rate of 20%, then you will have to pay R200 in corporate income tax and your profit will be only R800.
Certain countries have relatively low corporate income tax rates and they’re considered ideal spots to start your own business. Examples include the United Kingdom (19% corporate income tax), the Isle of Man (0%), Ireland (12.5%), Singapore (17%), the Cayman Islands (0%), and Cyprus (12.5%), among others.
The highest corporate income tax rate is currently held by the United Arab Emirates, which stands at 55%. If we consider the previous example and apply this tax rate, rather than making a profit of R800 after taxes, you will make only R450, which is nearly half.
KPMG has compiled an interactive table where you can see a list of all countries’ income tax rates.
South Africa’s corporate income tax rate currently stands at 28%. However, Landers says it was announced that this will decrease to 27% in April 2022. This puts South Africa’s rate somewhere around the middle.
Should you stick with South Africa?
“Opting for a foreign country to start your business with a lower tax rate than South Africa may not always be feasible when considering the other costs of starting a business,” says Landers.
She points out that the following factors may add additional costs:
- Administration costs and paperwork for business incorporation
- Ease of getting access to credit
- Political and economic environment
- Legislative framework for protecting intellectual property
- Enforcing contracts in those countries
“Further tax considerations include the withholding tax rates on dividends, royalties, and interest. You may also have to maintain the place where you manage the corporate entity in the country of incorporation to ensure it is taxed in that country rather than in another,” says Landers.
Each business is unique and it may be profitable for you to start your company abroad. Make sure you do your research beforehand, and consider all the costs before making a final decision.
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