After many years of this being the ultimate no-no in terms of South African exchange control rules, the prohibition on “loop” structures is finally to be relaxed.
Please note, however, that such an investment does not come without supervision as well as changes to the tax rules to prevent tax leakage.
The changes follow on the Minister of Finances budget speech in February 2020 where the relaxation was announce. A loop structure is regarded as one where a SA resident has an interest in an offshore structure and that structure owns an interest in a SA asset or one within the Common Monetary Area.
These structures were allowed in very circumspect circumstances, in parular the shareholding was limited to 40% in the offshore entity.
However, In terms of Exchange Control Circular No. 1/2021, the restrictions on loop structures pertaining to individuals, companies and private equity funds that are tax resident in South Africa have been relaxed. A notable exemption is one relating to Trusts, and it can only be surmised that trusts will stop not be allowed to invest in loop structures..
The changes are as follows:
Individuals, companies and private equity funds
In order for these entities to invest in a loop the following must be adhered to:
- The investment must be reported to an Authorised Dealer and an annual report must be submitted to the SARB via an Authorised Dealer;
- An independent audit report must be submitted confirming that the transaction was concluded on an arm’s length bases at a market related price;
- The Authorised Dealer must report to the SARB on the names of the parties involved as well as what assets were acquired and the sum of money involved;
- All inward loans from SA affiliated foreign structures must comply with excon rules.
- Any existing structures must be regularised.
Loans into SA
An interesting point is that any loans from an offshore structure will no longer be subject to a restriction that there is no SA interest in the foreign lender.
Please note that whilst these changes are to be welcomed, care should be taken that any changes to the domestic tax rules as a consequence of this are taken into account.