South Africa’s exchange control regulations are designed to manage the flow of capital in and out of the country, preserving the value of the South African Rand (ZAR) and ensuring economic stability. However, these regulations provide several avenues for individuals and corporates to externalise funds in a compliant manner. This article outlines the key mechanisms through which South African resident individuals, corporates and trusts, can legally transfer money abroad while adhering to the exchange control rules set by the South African Reserve Bank (SARB).
What you need to know about Exchange Control to transfer funds from South Africa
1. Externalisation of funds by resident individuals
For individuals, South Africa has established structured allowances that permit resident individuals to externalise funds. These include the Single Discretionary Allowance and the Foreign Investment Allowance (also referred to as the Foreign Capital Allowance).
- Single Discretionary Allowance (SDA): South African residents (over the age of 18) are allowed to transfer up to R1 million per calendar year abroad without needing a tax clearance certificate. This allowance can be used for various purposes, such as investment, travel expenses, and maintenance of family members abroad. It’s worth noting that minors (those under 18) have a separate allowance of R200,000 annually.
- Foreign Investment Allowance (FIA): Besides the SDA, resident individuals may utilise the FIA, which allows them to transfer up to R10 million per calendar year. However, unlike the SDA, this allowance requires the individual to obtain a tax clearance certificate from the South African Revenue Service (SARS).
Resident individuals will be allowed to externalise funds above R10 million per calendar year, subject to a tax clearance certificate obtained from SARS. An exchange control application must also be submitted via an Authorised Dealer in foreign exchange (i.e., a local commercial bank) to the Financial Surveillance Department of the South African Reserve Bank (SARB FinSurv).
It’s essential for individuals seeking to externalise funds using these allowances to ensure that all transactions are appropriately documented and reported to an Authorised Dealer in foreign exchange, as they are responsible for monitoring compliance with exchange control regulations.
2. Externalisation of funds through corporate entities
For corporates, the exchange control regulations are somewhat different. South African companies can externalise funds through a foreign direct investment (FDI) or loan facilities. Still, they must adhere to specific guidelines and sometimes obtain SARB approval.
- Foreign Direct Investment (FDI): Authorised Dealers in foreign exchange may approve requests from mandated state-owned companies as well as from private companies seeking to make legitimate new outward foreign direct investments in entities, branches, or offices outside the Common Monetary Area (which consists of Lesotho, Namibia, South Africa and Eswatini). This includes requests that may extend beyond their current line of business, provided the total cost of such investments does not exceed R5 billion per company per calendar year.
- Intra-Group Loans: Companies can also provide foreign subsidiaries or sister companies loans. Interest rates and repayment terms must be market-related, and any exchange control regulations regarding interest payments back to South Africa must be adhered to.
- Repatriation of Dividends: South African companies with foreign shareholders can remit dividends to their offshore investors, provided they comply with exchange control regulations. Dividends are generally repatriated free of charge, but withholding tax on dividends may apply depending on the tax agreements between South Africa and the foreign jurisdiction.
- Use of Offshore Investment Structures
Both individuals and companies may use offshore structures such as trusts or special purpose vehicles (SPVs) to hold foreign investments. These entities are legal and commonly used for tax planning and investment diversification. However, they must be adequately disclosed to SARS and SARB FinSurv to ensure compliance with the exchange control regulations.
3. Externalisation of funds through South African inter vivos trusts
South African inter vivos trusts may distribute funds (income and capital) to non-resident trusts provided a Manual Letter of Compliance is obtained from SARS. Trusts seeking approval must adhere to the following steps:
- Application Submission: Trusts must apply for a Manual Letter of Compliance. This application should include all relevant details about the trust, the distribution, and the non-resident beneficiary.
- Verification Process: SARS will perform rigorous verification upon receiving the application.
- Compliance with Trust Instrument: The non-resident trust must be a bona fide beneficiary of the resident trust. The distribution must adhere to the terms and conditions stipulated in the trust instrument of the resident trust.
- Tax Liabilities: SARS will approve the distribution only if the resident trust demonstrates that all tax liabilities related to the distribution have been or will be settled.
4. Reporting and Documentation
Compliance with exchange control regulations in South Africa requires complete transparency in reporting and documentation. Individuals, corporates and trusts must ensure that they retain all records of their foreign transactions, including:
- Proof of tax clearance certificates.
- Transaction records through Authorised Dealers in foreign exchange.
- Annual tax filings that disclose offshore income and assets (for individuals).
6. Penalties for Non-Compliance
Non-compliance with the exchange control regulations can result in significant penalties, including fines, forfeiture of funds, and, in severe cases, imprisonment. Additionally, SARS may impose penalties for tax evasion if offshore income or assets are not adequately disclosed. The SARB regularly audits transactions, particularly where large amounts of capital are being externalised, making it essential for individuals, corporates and trusts to ensure strict compliance.
Conclusion
While South Africa’s exchange control regulations may seem restrictive, they offer several avenues for individuals, corporates and trusts to externalise funds in a compliant manner. Understanding the rules governing discretionary and foreign investment allowances, foreign direct investment, and offshore structures makes it possible to transfer capital abroad legally and efficiently.
Navigating the complexities of exchange control can be challenging, and professional advice is essential to avoid pitfalls. Contact FinGlobal to help you navigate this maze.
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