The long-awaited relaxation of South African exchange control rules relating to “loop” structures and investments (By Chido Pamela Mafongoya)


The long-awaited relaxation of South Africa’s foreign exchange control rules relating to structures and ‘loop’ investments was released on 4e of January 2021 by the South African Reserve Bank under Exchange Control Circular No. 1/2021. The “loop” structure and investment restriction were lifted to promote inbound investment in South Africa, subject to normal criteria for inbound investment reporting to the Department of Financial Supervision (FinSurv).

  • What is a “loop” structure?

Simply put, a ‘loop’ structure is usually created by an individual, trust or company resident in South Africa transferring authorized or unauthorized funds from South Africa to, for example, set up a foreign trust or company. 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”. An exception to this rule applied, however, in that South African residents were allowed to acquire individually or collectively up to 40% of the shares and / or voting rights, whichever is greater, in a target entity. foreign, which in turn can hold investments and / or make loans in any common currency area (CMA) which includes South Africa, Eswatini, Lesotho, Namibia and South Africa.

  • What was the position before the exchange control circular?

Prior to January 1, 2021, South African individuals, companies, trusts and private equity funds were prohibited from using funds or any other authorized foreign asset to enter into any transaction or series of transactions, directly or indirectly through a transaction. structure or scheme of arrangement. , acquire shares or any other asset or interest in the CMA.

  • What changes has the exchange control circular introduced?

The changes described in the circular apply from January 1, 2021 and are summarized below.

  • Individuals, companies and private equity funds.

The changes to the foreign exchange control rules provide that individuals, companies and private equity funds with authorized foreign assets may invest in South Africa through offshore structures, subject to the reporting of transactions by the ‘intermediary of an authorized FinSurv dealer. The wording of this seems to suggest that the restrictions in terms of “loop” structures have only been lifted to the extent that the affected residents of the exchange control already have authorized foreign assets. A South African resident would not be able to create a “loop” structure without prior approval from exchange controls when he does not have authorized foreign assets. Individuals, businesses and private equity funds may use authorized foreign assets to invest in South African assets through a loop structure, subject to the following requirements:

  1. The investment should be reported to an authorized reseller, such as a local bank, as the transaction (s) is finalized. An annual progress report must be submitted to the Financial Supervision Department of the South African Reserve Bank (Finsurv) through an authorized dealer;
  2. An authorized reseller should consult the report of an independent auditor verifying that the transaction (s) are concluded at arm’s length and at a fair price in accordance with the market;
  3. Upon completion of the transaction, the authorized reseller must submit a report to Finsurv which must, among other things, include the name (s) of the South African affiliated foreign investor (s), a description of the assets to be acquired, the name the South African target investment company (if applicable), the acquisition date and the foreign currency amount entered;

All incoming loans from foreign investors affiliated with South Africa must always comply with the applicable exchange control rules that apply to incoming foreign loans and existing unauthorized loop structures (i.e. created before January 1, 2021), must always be regularized with Finsurv. These changes apply to South African trusts, trusts will continue to be prohibited from establishing “loop” structures.

In the event that a resident has inherited foreign assets held by the deceased abroad in accordance with exchange control regulations, the resident may apply to Finsurv for approval to keep the assets abroad. Until recently, such approval was subject to the condition that the assets could not be used to invest in a loop structure. The ban on investing in loop structures is now lifted.

Foreign loans received from foreign lenders will no longer be subject to the following restriction:

  1. Loan funds cannot represent or originate from authorized foreign assets of a South African resident; and
  2. There can be no direct / indirect South African interest in the foreign lender.

Thus, all clients who are currently invested in loop structures or who have not been able to make investments due to loop structure restrictions should carefully consider the impact of the proposed relaxations on their current investments or future.

  • Currency and exchange manual

Changes to the exchange control rules do not affect sections B.2 (F) (ii) and B.2 (F) (iii) of the Currency and Exchange Handbook for licensed brokers who have not been deleted or modified. These changes are also not industry specific, as is the case with B.2 (F) (ii) of the Currency and Exchange Handbook for Authorized Resellers, which provides that technology, media, Unlisted South African telecommunications, exploration and research and development activities companies can set up an offshore company to raise foreign funds for their operations, under certain conditions. Companies established under this exemption have been permitted to hold investments and / or make loans in South Africa in accordance with terms B.2 (F) (iii) of the Currency and Exchange Handbook for Authorized Resellers.

It is important to note that existing unauthorized “loop” structures created before January 1, 2021 and unauthorized “loop” structures whose 40% participation threshold has been exceeded will not be automatically regularized due to the changes. made to the exchange control rules. These structures still need to be regularized with FinSurv. Additionally, when assets are contributed by a South African company to an offshore structure, FinSurv approval will still be required as this would continue to constitute an outsourcing of South African assets. This is particularly relevant to the private equity industry, where “double structures” have become the industry standard for complying with historical prohibitions on “loop” structures.

It is particularly important for investors to seek professional legal advice regarding the impact of the proposed tax changes on existing loop structures. Indeed, the proposed modifications aim to remedy the potential tax leaks resulting from the relaxation of the loop structures. Several amendments have been proposed to existing tax legislation (in some punitive cases) to limit any tax evasion resulting from the relaxation of the rules to “loop” structures. It is important to consider these changes once enacted as they may have negative tax consequences for South African tax residents who own existing “loop” structures or who are considering setting up “loop” structures. Potential tax challenges could arise in the future with respect to “loop” structures which could be primarily potential tax traps rather than exchange control rules which were prohibitive in the past.

While the removal of the ban on “loop structures” is a gradual and welcome development and a step in the right direction, the relaxation of the bans on “loop” structures may be below what was intended. . This is because the changes are limited to South African foreign exchange control residents who already have authorized foreign assets and thus continue to subject residents without authorized foreign assets to exchange control approval when they intend to ‘establish a “loop” structure.

Those who intend to invest in an offshore company or structure with a loop structure component are recommended to seek professional legal advice beforehand in order to understand the tax and exchange control considerations that will apply. to their investment.

CREDIT: Chido Pamela Mafongoya, trainee lawyer at Centurion Law Group

Distributed by APO Group on behalf of Centurion Law Group.

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The long-awaited relaxation of South African exchange control rules relating to “loop” structures and investments (By Chido Pamela Mafongoya)
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