For decades, Exchange Control Regulations and related ‘policy’ have largely prohibited South African residents from directly owning assets in South Africa and the rest of the Common Monetary Area either directly or indirectly via an offshore entity or structure.
For decades, Exchange Control Regulations and related ‘policy’ have largely prohibited South African residents from directly owning assets in South Africa and the rest of the Common Monetary Area either directly or indirectly via an offshore entity or structure.
These arrangements were defined as ‘Loop Structures’. A few exceptional approvals exist, but only National Treasury could historically adjudicate such requests
However, these restrictions were partially relaxed recently, enabling South African individuals and Corporate entities to acquire up to 40% in total, of a foreign entity, which in turn could invest back into South Africa, by way of shares and/or loan accounts.
The Authorities have now taken the significant step, via the issue of Exchange Control Circular No.1/2021, to lift these ‘Loop Structure’ restrictions on South African tax resident individuals, companies, and private equity funds, thereby allowing such parties to conclude arrangements whereby South African assets may be acquired via an offshore entity, defined as a ‘South African Affiliated Foreign Investor’. It is important to note that only authorised foreign assets may be used for this purpose.
The rationale for removing these ‘Loop Structure’ restrictions is to encourage inward investment into South Africa and to promote South Africa as an investment and financial ‘hub’.
It is however evident from a review of the Circular that this relaxation does not give prospective investors ‘Carte Blanche’ authority to do as they wish and certain administrative formalities, will still need to be complied with, most significantly to report details of ‘loop structure’ type investments into South Africa to an Authorised Dealer (local Bank) as and when finalised, which report will then need to be on submitted to the SA Reserve Bank Financial Surveillance Department. The submission of annual progress reports to SA Reserve Bank, Financial Surveillance Department, via your local bank, will be a requirement. Some additional administrative requirements include.
An independent auditor’s written confirmation or suitable documentary evidence verifying that the transaction has been concluded on an arm’s length basis and for a fair market related price, to be viewed by your bank.
The normal criteria to support inward investments into South Africa needs to be complied with and submitted to your bank.
The name of the South African Affiliated Foreign Investor, a description of the local assets to be acquired and the name of the proposed South African ‘target company’ as well as the foreign amount introduced, must be provided to your bank.
Any inward loans from the South African Affiliated Investor need to be administered in terms of existing Exchange Control Rules and procedures and a Loan Reference Number issued.
Any previously unauthorised ‘Loop Structures’ must still be regularised.
In addition, Circular No 1 also allows for foreign assets inherited by a South African resident and held by the deceased in compliance with the Exchange Control Regulations to be retained offshore, subject to approval from SA Reserve Bank Financial Surveillance Department. These assets would thereafter be allowed to be used to fund a ‘Loop Structure’ type investment, if desired.
Where assets inherited were perhaps held by the deceased contrary to the provisions of the Exchange Control Regulations, it will be necessary for the South African beneficiary or beneficiaries to initially regularise the holding of such assets, via the submission of a formal application, through their bankers, to SA Reserve Bank Financial Surveillance Department.
Any approvals will be subject to the condition that these assets may not be placed at the disposal of any other South African residents.
When the intention to remove restrictions on ‘Loop Structure’ type investments was initially announced by the Minister of Finance in his 2020 Medium Term Budget Policy Statement, it was suggested that certain tax changes may need to be put in place. In the circumstances it would be wise to initially address any intended ‘Loop’ investments in terms of these Exchange Control relaxations, with your tax advisor, before proceeding.
BeztForex is well placed to assist companies and private individuals with all their global trade, foreign exchange and investment requirements.
- Keith White
HEAD – FINANCIAL SURVEILLANCE
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