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My completely unscientific review of the flags on the CIA web site suggests that the Cayman Islands wins that distinction:
(And here's the list: https://www.cia.gov/library/publications/the-world-factbook/docs/flagsoftheworld.html)

South Africa's
1) It depends if we just count the main colors on the flags or also the colors on a coat of arms which is eventually included in the flag.
2) I think this applies only to the main colors:
- "The national flag with the most colors is South Africa’s, with 6."
http://en.wikipedia.org/wiki/User:Reywas92/Trivia
" Table 3 shows where the numbers of colours on flags are located in the world in 1999. It is interesting to note that the only countries using a single-coloured flag (Libya) - the least number of colours currently used on a national flag - and a six-coloured flag (South Africa) - the most colours on a national flag - are both located in Africa."
Source and further information:
http://flagspot.net/flags/xf-colx.html
However, the table indicates *two* countries in Africa with a six color flag.
3) Those statements probably consider also the coat of arms on the flag.
"Pictured here are the flags of the Netherlands, the USA, and the flag with the most colors, Saint Pierre and Miquelon."
Source and further information:
http://presurfer.blogspot.com/2007_05_01_archive.html
Note, however, that Saint Pierre and Miquelon is not a sovereign state.
http://en.wikipedia.org/wiki/Flag_of_Saint_Pierre_and_Miquelon
"- Which flag in world showcase has the most colors?
- Mexico
- Correct! :)"
Source and further information:
http://forums.wdwmagic.com/archive/index.php?t-3496-p-7.html
http://en.wikipedia.org/wiki/Flag_of_Mexico
Some interesting flags are also those of Paraguay, Moldova and (in a less extent - bicolor) Saudi Arabia, because obverse and reverse differ.
http://en.wikipedia.org/wiki/Flag_of_Paraguay
http://en.wikipedia.org/wiki/Flag_of_Moldova
"The flag of Turkmenistan (Turkmen: Türkmenistanyň baýdagy) was adopted on January 24, 2001. It is often described as the most detailed national flag in the world."
Source and further information:
http://en.wikipedia.org/wiki/Flag_of_Turkmenistan
(only 4 colors)
Some other flags with a multicolored coat of arms:
- Belize:
http://en.wikipedia.org/wiki/Flag_of_Belize
- Croatia:
http://en.wikipedia.org/wiki/Flag_of_Croatia
- Ecuador:
http://en.wikipedia.org/wiki/Flag_of_Ecuador
- El Salvador:
http://en.wikipedia.org/wiki/El_Salvador
- Equatorial Guinea:
http://en.wikipedia.org/wiki/Equatorial_Guinea
- Fiji:
http://en.wikipedia.org/wiki/Flag_of_Fiji
- Guatemala:
http://en.wikipedia.org/wiki/Flag_of_Guatemala
- San Marino:
http://en.wikipedia.org/wiki/Flag_of_San_Marino
- Serbia (war flag):
http://en.wikipedia.org/wiki/Flag_of_Serbia
Vatican City:
http://en.wikipedia.org/wiki/Flag_of_Vatican_City
Venezuela:
http://en.wikipedia.org/wiki/Flag_of_Venezuela
I would say Comoros in Africa which has 6.
South Africa has quite many.
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You're reading Whic countries flag has the most colors?
- which can also be phrased in the following ways:
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