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The ‘loop structure’ exchange control regulations made offshore structuring for SA tax residents challenging – this has now been lifted!
South Africa has lifted the prohibition on loop structures relating to individuals, companies, and private equity funds that are tax resident in South Africa. This reform is effective from 01 January 2021 and has been adopted to encourage investment into South Africa and establish South Africa as an investment and financial hub within Africa.
A loop structure arises when a South African resident form an offshore structure to re-invest, acquire shares or assets including loan claims or some other interest in the Common Monetary Area, which includes South Africa. Loop structures were previously barred as the government believed that they facilitate the direct or indirect export of capital from South Africa.
The new changes brought forward are summarised as follows:
- South African tax resident individuals, companies and private equity funds with authorised foreign assets can now invest in South Africa provided that they adhere to the following:
- The investment must be reported to an Authorised Dealer (Domestic bank) and an annual progress report must be submitted to the Financial Surveillance Department via an Authorised Dealer;
- The Authorised Dealer must view an independent auditor’s report verifying that the transaction is concluded on an arm’s length basis and at a fair and market-related price;
- Upon completion of the transaction, the Authorised Dealer must report to the Financial Surveillance Department on the names of the parties involved, what assets were acquired, date of acquisition, and the foreign currency amount introduced;
- Inward loans from South African affiliated foreign investors must still comply with the current exchange control rules applying to inward foreign loans; and
- Existing unauthorised loop structures (i.e. created before 01 January 2021) must still be regularised with the Financial Surveillance Department of the South African Reserve Bank.
- If a resident has inherited foreign assets held by the deceased offshore in compliance with exchange control regulations, he may apply to the Financial Surveillance Department to retain the assets offshore. The approval of the Financial Surveillance Department to retain such foreign assets abroad will be granted subject to the condition that the foreign assets may not be placed at the disposal of other residents.
Please click here to see the circular from the South African Reserve Bank.
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This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)