Historically loop structures were not permitted in terms of the South African exchange control regulations. In terms of Exchange Control Regulation 10(1)(c), such transactions (or series of transactions) in which capital or the right to capital was directly or indirectly exported from South Africa, were not permitted. Essentially, South African individuals and companies were prohibited from forming any loop structures, as these enabled the export of capital and dividends from the country for the ultimate benefit of a South African resident.
In an effort to modernise South Africa’s exchange control system, the South African Reserve Bank (SARB) has relaxed its policy on loop structures, issuing Exchange Control Circular No. 1/2021 to lift the prohibition on loop structures, while implementing a set of rules to control loop structures to ensure their legitimate use.
What are loop structures in South Africa?
In South Africa, loop structures refer to cross-border investment structures in which a South African resident (individual or company) engages in a transaction or a sequence of transactions, which entails the establishment of an offshore structure that reinvests in South Africa. This reinvestment can take the form of acquiring an interest in a South African company or asset or providing loan funds to a South African entity.
Loop structures have been used as a workaround option that offers investment flexibility, granting access to foreign investment opportunities while still investing in South Africa. Loop structures can also be used for estate planning purposes.
What are the rules on loop structures in South Africa?
Exchange Control Circular No. 1/2021 was issued in order to relax the prohibition on loop structures, while implementing a set of rules to guide their legitimate use. Furthermore, the Income Tax Act was amended to prevent any tax leakages potentially arising from this exchange control relaxation of loop structures, with amendments directed specifically at controlled foreign companies (CFC) investing back into South Africa.
The lowdown on loop structures created after 1 January 2021:
Following the relaxation of exchange control regulations concerning loop structures, residents of South Africa, both individuals and entities, are now able to reinvest their authorised foreign assets in any manner within South Africa. Any South African assets acquired through an offshore loop structure must be promptly reported to an Authorised Dealer (i.e., a local commercial bank)upon the finalisation of the transaction(s).
The lowdown on loop structures created before 1 January 2021:
Previously unauthorised loop structures, those established by individuals or entities before 1 January 2021, and those exceeding the 40% shareholding threshold, must still undergo regularisation with the Financial Surveillance Department (FSD) of the South African Reserve Bank in order to be legitimised.
To recap: residents with authorised foreign assets may now invest in South Africa, provided that:
- Where South African assets are acquired using a loop structure, this investment is reported to an Authorised Dealer, and an annual progress report must be submitted to the FSD.
- a) This report must include: the names of the South African affiliated foreign investors, a description of the assets acquired, the name of the South African target company, the acquisition date, as well as the foreign currency amount introduced, including a transaction number.
- Written confirmation/documentary evidence is obtained from an independent auditor, verifying that the conclusion of such transaction(s) was at an arm’s length basis and for a fair, market-related price.
Prior exchange control approval is necessary for the introduction of all inward loans from SA-affiliated foreign investors, and must comply with the directives issued in terms of Section I.3 of the Currency and Exchanges Manual for Authorised Dealers.,
Which authorised foreign assets that can be used to invest in South Africa?
- Foreign assets acquired by using the Foreign Capital Allowance/Single Discretionary Allowance.
- Income earned and retained abroad after 1 July 1997.
- Foreign inheritances or legacies received after 17 March 1998.
- Exemptions granted in terms of Exchange Control Circular No. D 405.
- Amnesty funds approved, after payment of a 10% levy to retain assets abroad.
- Regularised foreign assets.
FinGlobal: cross-border financial specialists for South Africans
When you need a trusted partner to handle your cross-border transactions, report or regularise your loop structures, FinGlobal is ready to assist. We are authorised by the South African Reserve Bank to act as a Treasury Outsourcing Company , and a licensed Financial Services Provider (#42872) with the South African Financial Sector Conduct Authority (FSCA).
Exchange Control services offered by FinGlobal
- Regularisation and reporting of loop structures
- Non-resident endorsement of share certificates held by non-residents
- Approval for acceptance of foreign loans
- Regularisation of foreign loans
- Regularisation of any other prior exchange control contraventions
- Payment of consultancy fees, salary, royalties between related parties
- Approval for the export of Krugerrand coins
- Review of transactions/cross border structures to ensure compliance with the exchange control regulations
To find out more about FinGlobal’s convenient, hassle-free services, please leave your contact details in the form below and we’ll be in touch.