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As background, in 2020 the Minister of Finance’s announced in the 2020 Medium Term Budget Policy Statement that the prohibition on “loop” structures for exchange control purposes would be relaxed. As a result, the South African Reserve Bank has advised that from 1 January 2021 the full “loop” structure restriction has been lifted to encourage inward investments into South Africa; subject to the normal criteria applying to inward investments and reporting to the Financial Surveillance Department (FinSurv).
The changes to the South African exchange control rules have lifted the “loop” structure restrictions as it relates to individuals, companies and private equity funds, however, South African trusts will continue to be prohibited from establishing “loop” structures.
Interestingly, the amendments to the exchange control rules provide that individuals, companies and private equity funds with authorised foreign assets may invest in South Africa through offshore structures, subject to reporting of the transactions through an Authorised Dealer to FinSurv. It would seem, based on the wording of the Circular that the restrictions in terms of “loop” structures have therefore only been lifted to the extent that the relevant exchange control residents already have authorised foreign assets. A South African resident would not be able to create a “loop” structure without prior exchange control approval where it does not have authorised foreign assets.
From a tax perspective, various amendments have been proposed to existing tax legislation (in some instances punitive) to curb any tax leakage arising due to the relaxation of the rules to “loop” structures. It is important to consider these changes once promulgated as it may have negative tax consequences on South African tax residents holding into existing “loop” structures or who consider implementing “loop” structures. In future, the difficulties arising in regard to “loop” structure may primarily be the potential tax pitfalls rather than the exchange control rules which have been prohibitive in the past.
Changes to the South African Exchange Control Rules
The South African Reserve Bank has released Exchange Control Circular No. 1/2021 which provides for the long-awaited relaxation of the South African exchange control rules relating to “loop” structures and investments. In this update, Cor Kraamwinkel, Keith Veitch and Sean Franken set out what you will need to know about these changes
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