South Africa: Abolition of the ban on “loop structures”


In line with the South African Reserve Bank’s (SARB) commitment to implement a new capital flow management system, changes began to occur in early 2021. In the first circular of the year, issued on January 4, 2021 (Circular), the SARB announced that with effect from January 1, 2021, the complete “loop structure” restriction for individuals and businesses that are tax residents in South Africa has been lifted in order to encourage foreign investment in South Africa.

The deletion comes with caveats, however, as these structures are subject to the normal criteria that apply to inbound investments in South Africa and must be reported to the Financial Supervision Department (Finsurv).

A little history

Pursuant to Article 10 (1) (c), no one may, except under the conditions imposed, enter into a transaction whereby capital or any right to capital is directly or indirectly exported from South Africa. Thus, residents cannot (use funds or any other authorized foreign asset to) enter into any transaction or series of transactions, the purpose and / or effect of which is to export capital directly or indirectly from Africa to Africa. South (i.e. to, directly or indirectly, through any structure or scheme of arrangement, acquire shares or any other asset / interest in a Common Monetary Area (CMA) country (Transactions) .

These transactions –

  1. invariably result in the formation by (or at the request of) a resident of an offshore structure who – through reinvestment in the CMA – acquires shares or other interest in a CMA company or CMA asset
  2. contravene the Regulations, including Regulation 10 (1) (c), as they result in and / or may result in the direct or indirect export of capital abroad

“Loop structures” are usually created by an individual, trust or company resident in South Africa transferring authorized or unauthorized funds from South Africa to, for example, create a foreign trust or a foreign company. The trust or foreign company would then invest directly or indirectly (through another offshore entity) the authorized or unauthorized funds in South Africa, thus creating a “loop structure”. The investment could take the form of South African stocks, loans or other assets. Income accruing to the foreign company or trust on South African investments could take the form of dividends, interest or other amounts, resulting in the accumulation of profits from the investments of the trust or offshore company in South Africa.

Over the years, Finsurv has relaxed the restrictions around “loop structures”, initially with the relaxation of its policy on “loop structures” in the CMA by companies (Circular of exchange control no. ° 5/2018) and, more recently, the relaxation of its policy towards individuals. Finsurv published the exchange control circular n ° 18/2019, which applies to “loop structures” formed after October 30, 2019, and provides that individuals can individually or collectively acquire up to 40% of the capital and / or voting rights, whichever is greater, in a foreign target entity, which entity may, in turn, hold investments and / or grant loans to any country in the CMA. Existing “loop structures” (ie created by individuals before October 30, 2019) and / or “loop structures” where the 40% stake is exceeded, must be regularized with Finsurv. Failure to do so may result in a fine or imprisonment or both. As an exception, and only with regard to “loop structures” formed after October 30, 2019, private, public and listed South African companies may, upon request from their authorized broker, acquire up to 40% of the capital. and / or voting rights, whichever is greater, in a foreign target entity, which entity may, in turn, hold investments and / or grant loans to any country in the CMA. This exemption does not apply to foreign direct investment where the South African company alone, or where several South African companies collectively, hold an ownership interest and / or voting rights in the foreign entity exceeding 40 percent in total.

Then, in his February 2020 budget speech, the Minister of Finance announced his intention to introduce a new system for managing capital flows over the next twelve months, with all foreign currency transactions allowed without hindrance, at the same time. exception of a risk-based list of measures. , including among others relaxation of exchange control requirements relating to “loop structures”. These changes would only be introduced after the amendment and introduction of the relevant income tax provisions aimed at protecting the South African tax base.


The Circular notes that as of January 1, 2021, the Currency and Exchange Handbook for Authorized Brokers (Handbook) is amended by removing restrictions on investment in “loop structures” by individuals and resident companies. (including private equity funds) provided that the investment is reported to an authorized reseller and the authorized reseller submits an annual progress report to Finsurv. Written confirmation from an independent auditor or appropriate supporting documents, attesting that the transaction is concluded at arm’s length, at a fair price and linked to the market, must be submitted to the Authorized Distributor.

Once a “loop” transaction is completed, an authorized reseller must provide FinSurv with a report including among others:

  1. the name (s) of the affiliated South African foreign investor (s)
  2. a description of the assets to be acquired (including incoming foreign loans, acquisition of shares and acquisition of property)
  3. the name of the target South African investment company, if applicable
  4. the date of acquisition
  5. the actual amount in foreign currency entered, including a transaction reference number

The circular also provides that existing unauthorized “loop structures” created before January 1, 2021 must still be regularized with FinSurv, including those where the 40% threshold has been exceeded.

The other consequential changes are as follows:

  • All incoming loans from foreign investors affiliated with South Africa must comply with the guidelines issued in section I.3 (B) of the Handbook.
  • Residents, who have acquired the right to a foreign inheritance from a resident’s estate and who are required to report such inherited foreign assets through an authorized reseller to Finsurv are now allowed, upon request, to keep the assets in the foreigner and invest in a “structure loop”; the only restriction currently applicable is that the property cannot be made available to other residents.
  • With respect to loans received from foreign lenders, these will no longer be subject to the restrictions that the loan funds may not represent or originate from the authorized foreign assets of a South African resident or that there may not be no direct / indirect South African interest in the foreign lender.

Tax considerations

As noted above, the removal of the ban on “loop structures” was premised on the commitment that there would be adequate tax provisions in place to protect the South African tax base. In line with this commitment, changes to the Income Tax Act 1961 have been proposed and will come into effect on January 1, 2021, being primarily:

  • Dividends received by a controlled foreign company (i.e. a company in which more than 50% of its shares, for example, are owned directly or indirectly by South African residents) from a South African company will be now taxed in a ratio of the number 20 to the number 28 and taking into account any dividend tax paid.
  • The transfer of shares in a controlled foreign company will not qualify for the equity exemption as the value of the assets of the controlled foreign company is derived from South African assets. In other words, a resident will only pay capital gains tax on that part of the sale price that represents the value of South African assets.


While the removal of the ban on “loop structures” is a welcome change and a step in the right direction, it comes with the caveat that it is not an absolute removal of ban, especially if we keep in mind that the structures that contravened the restrictions on January 1, 2021 still need to be regularized. It would also appear that the restrictions would still apply to South African trusts seeking to set up “loop structures”. Then there is the fiscal caveat, which requires that the tax considerations of any “loop structure”, or any structure for that matter, be carefully considered before being implemented.


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