Exchange control in South Africa
All money transferred in and out of South Africa is controlled and regulated by the South African Reserve Bank (SARB) who is responsible for the day-to-day administration of exchange control.
How does exchange control in South Africa affect me?
The South African exchange control regulations dictate how much, and under what circumstances money can be transferred offshore. It’s important to remember that the exchange control regulations apply to South African residents, meaning any person (i.e. a natural person or legal entity) who has taken up permanent residence, is domiciled or registered in South Africa. Therefore, if you as an individual or an entity like a corporate is considered a resident for exchange control purposes, the rules are applicable.
If you have not recorded a financial emigration with the South African Reserve Bank and you live overseas, you will still be regarded as a South African resident for exchange control purposes.
South African residents living abroad can make use of various allowances, even if they have not completed financial emigration. They may use the R1 million single discretionary allowance and the R10 million foreign capital allowance per calendar year without returning to South Africa. These annual limits may not be exceeded.
South African residents leaving South Africa may also export household and personal effects, motor vehicles, caravans, trailers, motorcycles, stamps and coins (excluding coins that are legal tender in South Africa) to the value of R1 million (insurance value) under the prescribed South African Revenue Service Customs Declaration.
In addition to the above, if you receive any income from pensions and/or retirement annuities, excluding lump-sum payments, these may also be transferred abroad.
South Africans who have or are in the process of completing their financial emigration from South Africa, may avail of the following allowances:
Foreign Capital Allowance (cash)
South Africans who have already completed or are in the process of completing their financial emigration from South Africa, may transfer a foreign capital allowance of R10 million per single person per calendar year. Family units may transfer up to R20 million per calendar year.
Export of listed/ unlisted shares in lieu of cash
As a result, in changes in SARB policy, prospective emigrants now have the choice to transfer cash and/or export their listed/unlisted shares in lieu of cash:
Should some of the emigrant’s assets consist of listed and/or unlisted shares, the individual can also externalise shares without having to sell. The export of listed and/or unlisted shares may be taken in lieu of the foreign capital allowance.
The advantages of externalising shares:
- Listed shares – retain shares and sell when the share price is more favourable.
- Unlisted shares – retaining shares gives more time to source a buyer at a market-related price, i.e. no forced sales.
- Minimise exposure to currency fluctuations during periods of currency volatility.
To externalise shares at financial emigration from South Africa, the shares will need to be endorsed ‘non-resident’ by an Authorised Dealer (i.e. a local commercial bank). This means that the shares would not be under the control of the Authorised Dealer, which is what normally happens when other assets are held by an emigrant.
The export of unlisted shares will be granted subject to the condition that the company is not re-domiciled and shall remain a South African tax resident.
Special Allowance (cash and/or listed/ unlisted shares in lieu of cash)
To transfer money out of South Africa in excess of the limits, a special application will have to be made to SARB which application must be supported by a tax clearance certificate from the South African Revenue Service.
Capital and/or income transfers from an inter vivos trust
If you are a South African resident living or planning to live overseas (recording a financial emigration) and a capital and/or income beneficiary of a trust, a special application will have to be made to the South African Reserve Bank (SARB) to establish the transferability of any income or capital distributions therefrom. This application can coincide with the submission of your emigration application. Consideration must be given as to whether the trust will be classified by SARB as either an own asset trust or a third-party trust. Depending on the classification of the trust, it will then be decided whether capital and/or income distributions will be eligible for transfer abroad.
For example, if a trust was funded by an emigrant by way of a donation of his/her own assets to the trust, the trust will be classified as an own asset trust by SARB. Capital distributions will be eligible for transfer abroad as part of the emigrant’s annual foreign capital allowance. A special application will have to be made in cases where the capital distribution is in excess of the annual foreign capital allowance of R10 million. Income distributions will be freely transferable.
Where a trust was not funded by the emigrant (e.g. father/grandfather), the trust will be classified as a third-party trust. If the father/grandfather is still alive, capital distributions may not be remitted abroad. Income distributions will not be transferable if the trust was established within a period of three years prior to the emigration of the beneficiary. If the funder is deceased, income and capital distributions will be transferable to the emigrant abroad.
Beneficiaries who want to emigrate from South Africa and who would like to continue to benefit from trust distributions made to them by the South African family trust should carefully consider the exchange control policy that would be applicable in their situation to ensure compliance with all exchange control requirements. It is highly recommended that specialist advice be obtained in this regard since a contravention of the exchange control regulations is a criminal offence in South Africa.
Artwork owned by an emigrant may be exported as part of his/her household and personal effects up to an insured value of R2 million. The value of the artwork must be declared on the Form MP336(b) and included in the IT21(a) request when applying for a tax clearance certificate from the South African Revenue Service (SARS).
The export of artwork in excess of the R2 million limit would require a special application to be submitted to the South African Reserve Bank (SARB). A valuation of the artwork, whether within or above the limit, will have to accompany the emigration request. Details of when and how the artwork was acquired must also be provided.
Should the artwork be older than 50 years, approval from the South African Heritage Resources Agency (SAHRA) must be obtained prior to the export of the artwork. SAHRA is a statutory organisation established under the National Heritage Resources Act (25 of 1999), as the national administrative body responsible for the protection of South Africa’s cultural heritage.
Artwork is treated as a personal-use asset for tax purposes in terms of the Income Tax Act (58 of 1962) and is therefore exempt from capital gains tax (CGT) if the same is owned by an individual (not an art dealer). However, if the artwork was distributed to an emigrant from an inter vivos trust, the same will be subject to CGT, despite the fact that it is exempt from CTG in the hands of the individual. Similarly, if the artwork is owned by a company, the artwork will not be exempt from CGT.
South Africans who want to study overseas, may use their single discretionary allowance of R1 million. Similarly, a spouse accompanying the student overseas may also be accorded a single discretionary allowance of R1 million per calendar year.
In addition to the above, tuition and academic fees may be transferred abroad.
Students under the age of 18 years qualify only for a study allowance to pay for costs associated with their studies abroad, as well as a travel allowance of R200 000 per calendar year.
A non-resident is a person (i.e. a natural person or legal entity) whose normal place of residence, domicile or registration is outside the Common Monetary Area (i.e Lesotho, Swaziland, Namibia and South Africa).
Exchange controls over non-residents have been abolished and non-residents can invest in South Africa without restriction. The sale proceeds of non-resident acquired investments/assets are also freely transferable abroad provided the investment/asset was acquired at an arm’s length basis and at a fair and market-related price.
Income due to non-residents is normally also freely transferable.
Although no exchange controls exist over non-residents, there are still certain requirements that must be adhered to when a non-resident wishes to repatriate the sale proceeds of an investment/asset or when they want to transfer income earned on their South African assets abroad.
It is always good practice to obtain advice prior to entering into transactions to ensure adherence to the exchange control rules and regulations.
Corporates may transfer funds abroad in respect of any number of payments to non-residents as specifically mentioned in the Currency and Exchanges Manual for Authorised Dealers (CEM)– as long as the necessary documentary evidence is provided, confirming the amount and nature of the payment.
In addition, various other payments may be made by corporates to non-residents up to an amount of R100 000 in respect of payments not specifically mentioned in the CEM, provided suitable documentary evidence are provided substantiating the amount and nature of the liability.
We can assist with travel facilities of up to R20 million per calendar year to corporates for allocation to employees who make regular trips overseas.
Corporates who have various employees travelling on their behalf for business purposes may apply to avail of an omnibus travel allowance of up to R20 million per calendar year. An omnibus allowance is a company travel allowance to be utilised by nominated employees for foreign travel purposes. The omnibus business travel allowance would enable corporates to plan ahead for their foreign business travel requirements for a specific calendar year.
Staff members of entities availing of an omnibus travel facility also qualify in their personal capacity for a travel allowance within the single discretionary allowance limit of R1 million per calendar year. The omnibus facility thus used by an employee will not affect his/her annual travel allowance allocation of R1 million.
The omnibus travel facility may only be used for business travel purposes and may not be deposited into any foreign bank account or be used to acquire goods and/or services abroad.
If you are a registered private, public and listed business entity in South Africa, you are allowed to transfer capital from South Africa for foreign investment purposes. Sole proprietorships, partnerships, close corporations and trusts are excluded from the dispensation.
There is no limit on the amount that can be transferred offshore but requests for foreign investments not exceeding R1 billion per corporate per calendar year will have to be assessed by an Authorised Dealer i.e. a local commercial bank to ensure compliance with the conditions outlined by the South African Reserve Bank (SARB). If the amount to be transferred offshore exceeds the limit of R1 billion, a special application must be submitted via an Authorised Dealer i.e. a local commercial bank to SARB, who will adjudicate the request. Even if no funds are being transferred from South Africa, the proposed foreign investment must still be approved by an Authorised Dealer and comply with all the regulatory requirements.
There are a number of qualifying criteria and conditions that a corporate must adhere to prior to approval being granted. Certain documents and information also have to be provided to the Authorised Dealer. There are also different criteria and conditions applicable to foreign investments in excess of R1 billion.
At least 10% of the foreign target entity’s voting rights must be obtained and passive real-estate investments focussed on long-term appreciation of asset values with the limited day-to-day management of the asset are excluded from the dispensation. If more than 40% equity and/or voting rights are acquired, the foreign target entity may not hold any investments and/or make loans into any CMA country (i.e. Lesotho, Namibia, South Africa and Swaziland).
In respect of foreign investments above and below R1 billion, the following information must be provided to the Authorised Dealer:
- The shareholding structure of the local business entity i.e. the names, domicile and percentage interest of all the shareholders therein (in respect of public and listed companies, the information will not be required)
- Latest available financial statements of the local entity. It would be important to note that the nature of the local entity’s business will also be verified from the financial statements. Similarly, details of the type of business that the foreign entity will be involved in must also be provided.
- Details of the funding required for the acquisition of the foreign entity, the amounts to be transferred abroad and how the investment will be reflected in the financial statements e.g. share capital or shareholder’s loan. If capital goods will be exported from South Africa or if there will be any guarantees issued, the Authorised Dealer also has to be provided with this information.
- The structure through which the foreign entity will hold i.e. will the shareholding be held directly from South Africa or through a holding company.
Once the investment has been approved, details thereof will also be provided to SARB.
In respect of foreign investments above R1 billion, the following additional information must also be provided in support of the request:
- Business plan of the local entity
- Details of the longer-term benefits that will be derived by South Africa as a result of the investment (excluding dividend flows) as well as cash flow forecasts confirming the same
- Pro forma balance sheet of the foreign entity immediately prior to and after the investment from South Africa
- The manner in which the funds to be transferred from South Africa will be employed
- An estimate of the annual running costs of the foreign entity.
To manage any impact on the foreign exchange market, SARB may request the staggering of the capital outflows in respect of very large amounts to be transferred abroad.
Corporates who wish to invest above R1 million may also, with SARB approval, fund the foreign investment by way of a corporate asset or share swap transaction. Similarly, such investments can also be funded by means of share placements and bond issues offshore.
For small and medium-sized business entities wishing to invest less than R1 billion offshore, the application process has been simplified in that no SARB approval is required for such investments and that Authorised Dealers are able to adjudicate and approve the applications if the criteria outlined above, are met. Notwithstanding the simplification of the approval process, business entities will still have to submit the financial statements of the foreign entity to SARB on an annual basis and if there are any changes to the nature of the foreign entity’s business, the same must also be reported to SARB.
FinGlobal can assist corporates (excluding Close Corporations, Trusts, Partnerships and Sole Proprietors) that regularly import goods from overseas to apply to SARB to avail of the imports undertaking dispensation. The dispensation allows corporates to effect payments for imports without having to submit all the required import documentation to their bank.
Companies who have been granted the dispensation have a huge advantage – they are not being required to submit supporting documentation to the bank for every foreign exchange transaction related to an import which can result in huge savings in terms of cost and time.
Corporates who adhere to the following criteria will be allowed to apply for the dispensation:
- A minimum of 120 import transactions must be concluded per annum
- Import turnover must be in excess of R20 million per annum
- The company needs to have already been active in the import industry for a minimum period of 3 years.
Individuals and corporates may avail of foreign loans from non-resident parties, subject to approval being obtained from an Authorised Dealer in South Africa (i.e. a local commercial bank).
The following criteria must be adhered to in respect of the loans:
- The loan must be at least for a period of 1 month;
- The interest rate in respect of a third party foreign-denominated loan may not exceed the base lending rate plus 3% or, in the case of shareholder’s loan, the base lending rate as determined by commercial banks in the country of denomination;
- The interest rate in respect of a Rand denominated loan may not exceed the base rate (the prime rate) plus 5% on a third-party loan or the base rate, in the case of shareholder’s loan;
- The loan funds to be introduced may not represent or be sourced from a South African resident’s foreign capital allowance, legitimate foreign assets, legitimate foreign earnings retained abroad, funds for which amnesty had been granted in terms of the Exchange Control Amnesty and Amendment of Taxation Laws Act (12 of 2003) and/or foreign inheritances;
- There may not be any direct/indirect South African interest whatsoever in the foreign lender;
- The loan funds may not be invested into foreign sinking funds;
- No upfront payment of commitment fees, raising fees and/or any other administration fees are payable by the borrower; and
- The above fees may only be paid from South Africa once the loan funds have been received and converted into Rand locally provided that such fees do not exceed 5% of the principal sum.
Loop structures are created when South African residents enter into a transaction or series of transactions, where the purpose is to export capital, directly or indirectly from South Africa. These transactions, which contravene the Exchange Control Regulations in South Africa (including Regulation 10(1)(c)), includes the resident forming an offshore structure, which – by re-investment into South Africa – acquires shares or some other interest, either in a South African resident company or a South African asset.
South African resident individuals may not use their authorised foreign assets to re-invest in any form, into the Common Monetary Area (CMA) (i.e. Lesotho, Swaziland, Namibia and South Africa).
Authorised foreign assets include:
- Foreign Capital Allowance
- Retained income earned abroad subsequent to 1997-07-01
- Foreign inheritances/legacies subsequent to 1998-03-17
- Exemptions granted in terms of Exchange Control Circular No. D405 dated 2003-09-30
- Amnesty funds approved whereby a levy of 10% was paid to retain the assets abroad
- Regularised foreign assets (post amnesty)
Permissible/unintended “loop structures”
South African corporates – A South African company may acquire up to 40% equity and/or voting rights in a foreign target entity, which may, in turn, hold investments and/or make loans back into any CMA country.
South African private equity funds – Unintended loops are allowed in instances where South African private equity funds invest in Africa where the African entity has a portion of their business in South Africa.
Foreign parent company share incentive/option schemes – South African resident individuals can participate in offshore incentive schemes – on the condition their participation is financed using their foreign capital allowance and/or from the proceeds of authorised foreign assets.
Portfolio investments – Foreign shares acquired by a South African resident individual as part of a portfolio investment, where the resident gains a minority interest in the offshore company which holds an investment back into the CMA.
New immigrants – A new immigrant that held a direct/indirect interest in assets in the CMA via an offshore structure prior to immigration may keep such a structure in place.
Foreign inheritance – Loop structures that arise from assets inherited by South African resident individuals from foreign estates (post 1998-03-17), provided the investments into the CMA were in existence before the date of the inheritance.
Any unauthorised loop structures will have to be regularised with the South African Reserve Bank. A breach of the regulations can result in financial penalties being imposed by the Reserve Bank.
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