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Thread: Advice on type of company to set up when contracting to an international company

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    Advice on type of company to set up when contracting to an international company

    I'm moving back to SA in September, and the Irish company I've been working for wants to keep me on as a daily-rate contractor.

    Their policies require me to set up a company that invoices them monthly.

    I now need to make a decision as to the type of company to set up: Will a sole-proprietor or a Pty be most beneficial (tax-wise) for this scenario?

    I'll be working as a software engineer, working from home, so my running costs should be low (I hope!):
    - broadband
    - rent(?) (extra room required for an office)
    - basic office supplies

    • Am I right in saying that if trading as a sole-proprietor, then my entire invoice amount will be taxed at the normal personal income tax rate?
    • Are there any other taxes to consider as a sole trader?
    • Will I be able to claim back the above expenses if acting as a sole-trader?
    • If I start up a Pty, I understand I can either draw a salary OR pay myself dividends? Is this correct? Does the compay income determine which of these is best?


    Any advice would be greatly appreciated -- my tax knowledge is (obviously) VERY limited and I'm struggling to get any concise info from the web!

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    With little expense it might be worth to regsiter a micro company for a turnover tax where you only have to keep records for sales.

    1 Yes
    2 sole trader and you are the same person
    3 yes
    4 yes, when you know what the turnover and expenses will be you can structure it to be most tax efficient
    ---There is no traffic at the extra mile---

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    Quote Originally Posted by Nickolai Naydenov View Post
    With little expense it might be worth to regsiter a micro company for a turnover tax where you only have to keep records for sales.
    Thanks for the feedback, Nickolai.

    Do I first need to register a Pty in order to register a micro-company? I understand there is some application process for a micro-company -- how likely is it that I'm turned down?

    I see from the SARS website that this criteria must be met:
    • Do you declare that income from ‘professional services’ is not expected to exceed 20% of the total income of the business for the year of assessment?

    I can't seem to find a definition of what this is...but would a software engineer (being 100% of my income) not be considered a "professional service"?

    Thanks!

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    ---There is no traffic at the extra mile---

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    Yup, was on there, and the rates looks extremely attractive, however I don't think I comply with the "not more that 20% professional services" stipulation, as I now see laid out in the FAQ document:

    k. For close corporations, companies and cooperatives, the business’s investment income (annuities, dividends, interest, rental derived in respect of immovable property, royalties and any proceeds derived from the disposal of financial instruments) and income from professional services must not exceed 20% of the total receipts (income) of the business. The following are regarded as “professional services”: accounting; actuarial science; architecture; auctioneering; auditing; broadcasting; consulting; draftsmanship; education; engineering; financial service broking; health; information technology; journalism; law; management; real estate broking; research; sport; surveying; translation; valuation; or veterinary science. For natural persons (sole proprietors and partnerships the 20% restriction is limited to professional services only.

    I guess that's that then

    Looks like sole trader is the best way...I don't like the sound of double taxation associated with a Pty, I haven't seen any way around this...?

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    OK, I've found a similar thread here, which indeed says that the turnover tax isn't viable for me.

    However, it does reccommend trading as a Pty, and paying 28% tax. I need to do a bit more research on how I can withdraw money from the Pty? (i.e. salary / dividends), and what tax I would pay on those options.

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    Micro-company and similar names are income tax issues. In other legal respects there is practically no difference from one profit company to the next.

    Your biggest concern should be whether or not SARS would regard your company as a personal service company or not. The tax rate on a personal service company is 34%.

    One of the criteria is: do you derive at least 40% of your income from a single entity? It would seem your answer would be "yes".

    On that basis it would most likely make sense to trade as a sole proprietor, provided your principal is happy with this.

    You would still be able to deduct all expenses incurred in the production of income, from your income, to determine net income from trade.

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