Back in the days of South Africa’s stringent exchange control regime, loop structures were prohibited. The whole idea was to prevent capital from flowing out of the country, but it inadvertently made foreign investment much harder at the same time. As part of the modernisation of the South African exchange control system, the South African Reserve Bank (SARB) redefined their position on loop structures in 2021, lifting the prohibition while putting in place a number of rules to regulate the use of loop structures to ensure they are used for the correct purpose.

What is a loop structure and what is it used for?

A loop structure is created when a South African resident holds a South African asset through an offshore entity. Exchange Control Regulation 10(1)c prevents any South African entity, whether an individual or a company, from engaging in transactions with the purpose to directly or indirectly export capital or any right to capital from South Africa.

Here’s what you need to know about the exchange control rules and using loop structures:

1. Loop structures are no longer prohibited, but they are still highly regulated on the exchange control front.

In 2021 SARB issued Exchange Control Circular No. 1/2021 to ease restrictions on loop structures for South African resident individuals and companies. South African businesses and individuals can now use loop structures to conduct international fund transfers through investments in foreign entities, which then channel the funds back into South Africa. However, it’s important to emphasise that participation in this type of investment loop isn’t automatic and it must be explicitly authorised. Loop structure transactions must meet a number of exchange control criteria which come with continuous reporting commitments to the Financial Surveillance Department (FinSurv) of the South African Reserve Bank.

2. All loop structure transactions must be reported to FinSurv and must meet specific requirements.

The lifting of the prohibition on loop structures did not open a free-for-all. All loop structures created after 1 January 2021 must comply with the exchange control regulations and must be reported to FinSurv.

The requirements to utilise loop structures include:

1. The inward investment must be made using an Authorised Dealer (i.e., a local commercial bank), who must then report the transaction to FinSurv. The report to FinSurv must contain the following information:
   • • a. The names of the affiliated investors
     • b. A full description of the assets acquired
     • c. The nature of the transaction (e.g., inward foreign loan, share acquisition, property acquisition)
     • d. The name of the target company in South Africa
     • e. The date of the transaction
     • f. The currency and transaction reference numbers
2. The applicant wishing to use a loop structure must be able to prove to the Authorised Dealer that the transaction has been conducted on an arm’s length basis, at a fair market value or consideration.
3. This must be supported by an auditor’s report or similar evidence to clarify that the transaction complies with the arm’s length and fair market value requirements.
4. Once authorised, the applicant must provide annual progress reports to FinSurv.

3. Additional exchange control requirements may apply to loop structure transactions.

All other relevant exchange control requirements must be met, depending on the type of transaction or parties involved. For example, where the loop structure is used to facilitate an inward loan, Section I.3 of the SARB Currency And Exchanges Manual for Authorised Dealers must be adhered to.

4. Loop structures that existed before 2021 were not legitimised as a result of Exchange Control Circular No. 1/2021.

Any pre-existing unauthorised loop structure must be regularised with FinSurv to comply, and failure to bring it in line with exchange control regulations could lead to potential penalties. This is because the main risk that South Africa faces relates to the movement of assets to foreign jurisdictions, which could potentially lead to tax advantages or profit manipulation, ultimately diminishing the tax base within South Africa.

5. Loop structures are not workarounds to be used as high tax exemption measures.

Anyone considering using loop structures to reduce their taxes should be aware that:

1. SARS has well-developed anti-avoidance and controlled foreign company legislation that can have a significant impact on the tax treatment of loop structures.
2. South Africa has an extensive case law history to reference on the application and interpretation of its tax laws, which tends to favour the revenue authority.

In other words, while loop structures can be used to reduce taxes, they cannot be used to escape tax and there are a number of risks and considerations that must be taken into account. As such, it is necessary to consult with a tax advisor to ascertain whether or not a loop structure is right for you. This is particularly important in light of the fact that SARS is cracking down on tax avoidance schemes, and loop structures are no exception. If you are caught using a loop structure to avoid paying taxes, you could face penalties, including fines and interest. It is important to make sure that any loop structure you use is legitimate and complies with all relevant tax and exchange control laws.

FinGlobal: trusted financial specialists for South Africans abroad

Navigating cross-border and financial transitions can quickly become a complex affair. However, with FinGlobal by your side, your compliance with South African exchange control regulations and tax laws is assured. We have already assisted thousands of clients across 105 countries with diverse financial portfolios, and this expertise and experience makes us the perfect partner to guide you through the process of having your funds moved abroad. Let us help you seamlessly move your money to its intended destination, without unnecessary delays or complications.

All you need to do is fill out the form below with your contact details, and we’ll reach out to discuss your specific requirements. Alternatively, you can also send us an email to info@finglobal.com to take the first step towards financial peace of mind today!