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Outward Foreign Direct Investment (FDI)

Do You Wish to Develop Your Business Offshore? – Outward Foreign Direct Investment

The concept of Outward Foreign Direct Investment, otherwise referred to as ‘FDI’ throughout this presentation, is applicable to South African companies and in these circumstances, the likes of Trusts or CC’s may not take advantage of these arrangements

By way of definition, an FDI, which is an Internationally accepted term, represents a controlling or lasting ownership in a business in one country by an entity based in another country. The lasting interest implies the existence of a long-term relationship between the investor and the offshore enterprise. Furthermore, from an international perspective it needs to be understood that acquiring a minimum of 10% of the offshore ‘target entity’s’ voting rights is the ‘global norm’ and must be secured for the transaction to be deemed an FDI.

Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but to some, this is seen as a grey area since a smaller block of shares can give control in widely held companies.

Standard definitions of control use the internationally agreed 10 percent threshold of voting shares, but to some, this is seen as a grey area since a smaller block of shares can give control in widely held companies. Moreover, control of technology, management, even crucial inputs can also suggest control. However, from a South African Reserve Bank Financial Surveillance point of view, FDI represents an arrangement where a holding of 10% or more of the voting rights is achieved.

At this stage, it is useful to make a differentiation between Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI). The latter is effectively a more passive type of investment, where less than 10% of the voting rights in a foreign company is acquired and can include investment in offshore equities as well as debt instruments. Typically, a non-controlling stake, is acquired with limited day to day management of the underlying asset and no real strategic intent lies behind undertaking the investment.

I will not focus on FPI in this presentation, but for your information the Financial Surveillance (Exchange Control) criteria for approval of such requests, is largely the same for both FDI and FPI.

A local company might achieve an FDI via the following mechanisms:

  • By establishing a new offshore subsidiary company, branch, or office outside of the Common Monetary Area (CMA) which consists of Lesotho, Namibia, South Africa and eSwatini.

  • By acquiring or merging with an unrelated offshore company

  • By participating in a joint venture (JV) with an offshore entity

NB! The business of the foreign target entity does not have to be the same as the local company’s current line of business in South Africa.

The South African Reserve Bank, Financial Surveillance Department (SARB) allows local Authorised Dealers (Banks) to adjudicate on requests for new investments, and/or expansions of existing investments, within a maximum value of R5Billion per applicant company per calendar year, but subject to the presentation of suitable supporting documentation and motivating background information. Where the Bank cannot obtain sufficient background information or documents, or they feel they cannot approve the request as submitted, they are required to present a formal application to SARB to obtain approval for the new investment. I may add that all investments and/or expansions with a value exceeding R5Billion per applicant company, per calendar year, are subject to upfront SARB approval, in every instance and require to be supported by enhanced supporting documents and motivation.

To enable a local Bank to consider a request for FDI (under R5Billion), they will need to be in possession of the following documents or information.

  • The name and registration number of the local company

  • The names, domicile and percentage equity interest of all shareholders in the local company, where the applying company is a (Pty) Ltd company

  • The local company’s latest Financial Statements, which will verify the nature of the company’s business

  • Details of how the investment will be funded and value of such funding, eg cash for share capital, cash for loan capital, guarantees to be issued and perhaps any capital goods to be exported from South Africa

  • Clarify whether the investment will be into a new company or into an existing foreign company. Full details to be provided

  • The percentage of equity interest and voting rights to be acquired

  • The proposed structure through which the foreign target entity will be held, eg directly from South Africa or via a holding company

  • The name of the offshore ‘target’ company and type of business to be involved in

  • It is also important to note that even if the investment can be undertaken without the transfer of any funds from South Africa, it must still be formally approved, by a Bank or SARB, whichever relevant. I might mention that in their simplest form, Exchange Control principles state that no South African entity may hold offshore assets or transfer capital offshore, except as provided for in the Exchange Control Regulations and the Currency and Exchanges Manual. Hence the reason why approval processes remain in place.

In addition to what I have said above, it is always a good idea to give the Bank, considering your request some history on the company itself, including line of business, developments, financial achievements and successes to date, what its aims and objectives might be and an explanation as to why expanding offshore is an important element insofar as the ongoing development and growth of the business, is concerned.

Should your Banker then be in a position to approve your request, they will provide you with a clear list of requirements and conditions applicable to their consent. A few of these conditions are however worth highlighting.

  • Financial Statements of foreign entities and holding companies need to be submitted to SARB annually. Excess profits earned by an approved foreign company have to be declared as a dividend, but these funds can be retained offshore and used for any purpose. Alternatively, they can be repatriated to South Africa and retransferred offshore at any time. All such arrangements are subject to reporting to SARB on an annual basis.

  • Financial accounts of approved foreign branch operations and income and expenditure statements of approved foreign offices need to be submitted to SARB annually. It should be noted that with effect from 23 February 2022 foreign earned income of a branch or foreign office can also be retained offshore, subject to the requisite annual report being made to SARB

  • Should the foreign investment, in the future, be sold to third party South African residents, such an arrangement will require prior SARB approval

  • If the foreign company is sold to a Non-Resident, at some point in the future then the sale proceeds need to be repatriated to South Africa, under advice to SARB. The retention of any portion of the sale proceeds offshore would therefore need to be the subject of a formal application to SARB.

Loop Structures

No Presentation on FDI would be complete without a short reference to ‘Loop Structures.

In its simplistic form a ‘Loop Structure’, in the context of FDI, occurs when a South African business enterprise uses authorised funds, or authorised funds already offshore, to establish an offshore company of structure, which in turn re-invests such funds back into another South African entity.

From a technical perspective, creating loop structures contravenes certain regulatory provisions, including Regulation 10(1)(c) of the Exchange Control Regulations, 1961, which states that: ‘no one may enter any transaction whereby capital or any right to capital is directly or indirectly exported from South Africa, except with permission from Treasury and in accordance with any conditions Treasury may impose’, As a result, ‘loop structures’ were historically ‘frowned upon’ and only approved previously, in very exceptional circumstances.

There has however been a softening of the Regulators approach to such structures in recent years, to the extent that, provided they are in alignment with stipulated conditions, they are now recognised as acceptable arrangements, in terms of current Rules and principles.

A reinvestment into South Africa could be in the form of acquiring local shares, assets, or loan accounts and in some instances, the South African resident may also choose to export returns on these investments, eg. the payment of dividends, profits, interest on loans back to the foreign structure

It follows therefore, that in terms of the Currency and Exchanges Manual issued by SARB, corporates with authorised foreign assets may re-invest back into South Africa, provided that where South African assets are acquired through an offshore structure (loop structure), the investment is reported to an Authorised Dealer as and when the transaction(s) is finalised, at which time an Auditor’s confirmation or similar document verifying that the transaction has been concluded at arm’s length, for a fair and market related price, needs to be provided, to the company’s banker. When the transaction is completed, the Bank will need to submit a detailed report of the arrangements to SARB. Thereafter an annual progress report will also need to be made to SARB via the company’s Bank

Apart from my comments above, which are typical of many FDI arrangements there are other avenues to achieve similar objectives.

Domestic Treasury Management Companies (DTMC)

The SARB also now allow South African companies who have gone through the formal approval and registration process with Financial Surveillance Department, to expand into the rest of Africa and abroad, via the establishment of a DTMC. This process if approved, allows, for listed and unlisted companies to establish one subsidiary within the group as a DTMC, not only to hold offshore operations for foreign direct investment purposes but to facilitate domestic treasury management operations, without being negatively impacted by SARB’s Financial Surveillance (Exchange Control) requirements. The DTMC regime was originally introduced primarily to promote the expansion of investments into other African countries

A local group of companies is therefore able to utilise a South African entity within the group, to fund their offshore operations, allowing them to gain increased access to the open market abroad. An Authorised Dealer may authorise transfers from the parent company to the DTMC up to R5Million per calendar year for a listed company and R3 billion per calendar year, for an unlisted company, in respect of funding new offshore investments, expansions, as well as other transactions of a capital nature

Specific Financial Surveillance and legal requirements must be complied with for a company to be Registered as a DTMC. Amongst other things, the proposed company must be a South African tax resident and a wholly owned subsidiary of a South African parent company, although for Financial Surveillance reporting and monitoring purposes the DTMC is deemed to be ‘Non-Resident’.

The use of a DTMC is most certainly not for everyone, but does nonetheless provide for certain tax benefits specifically when considering currency translations. General benefits, inclusive of tax benefits, in respect of the establishment of a DTMC should in all instances be explored with your ‘Accounting and Tax professionals’, before considering this ‘investment route’.

Technology, media, telecommunications, exploration and other research and development companies

For information purposes, unlisted technology, media, telecommunications, exploration and other research and development companies can make formal application to the Financial Surveillance Department of SARB for approval to primary list offshore, to raise foreign loans and capital for their operations, provided specific information is provided and conditions can be complied with.

South African private equity funds

Private equity funds that are members of the South African Venture Capital Association and are mandated to invest outside the CMA, may make formal application to the Financial Surveillance Department of SARB for approval to invest offshore, provided specific information is provided and conditions can be complied with.


Foreign Direct Investment applications, from a Financial Surveillance (Exchange Control) perspective are often seen to be overly complex and perhaps a little confusing. In the circumstances, please contact us at BeztForex and we will help to ‘de-mystify’ the complexities, guide you through the process and assist with all your related foreign currency transactions, once all approvals are in place.


Keith White


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