Have you managed to stay in the loop?
Long-standing restrictions on “loop” structures have been lifted following the release of Exchange Control Circular No. 1/2021 by the South African Reserve Bank (“SARB”). This regulatory change took effect on 1 January 2021.
A loop structure comes into being when a South African tax resident (an individual or company) creates or invests in an offshore entity such as a foreign company or trust, which in turn reinvests in South Africa (or any other country in the Common Monetary Area (“CMA”) – Eswatini, Namibia or Lesotho). In other words, these structures can enable South African residents to hold South African assets through a foreign entity.
Prior to the regulatory change, loop structures were subject to restrictive rules due to their ability to create channels for the direct or indirect export of capital from South Africa. Under the former rules loop structures were only permitted in instances where South African residents held less than 40% of the voting and/or equity rights in a foreign entity with interests in the CMA.
The rationale behind the decision to lift the former restrictions is to encourage inward investment into South Africa. This forms part of a broader governmental project that aims to promote South Africa as an investment and financial hub in Africa.
It is worth noting that although loop structures will no longer require upfront approval from the SARB, residents remain obliged to report all finalised transactions to the Financial Surveillance Department of the SARB for review. Furthermore, various amendments to tax legislation are being introduced to prevent any tax leakage resulting from the lifting of these restrictions.
One of the amendments proposed is the imposition of capital gains tax on the disposal of foreign shares where a portion of the gain is derived from South African assets. South African residents should, therefore, be awake to the real possibility that negative tax consequences could flow from investments in loop structures once these amendments are promulgated.
The regulatory change is welcomed as it will do away with the need to create complex shareholding structures where South African residents choose to invest in foreign companies with interests in the CMA. However, it remains to be seen whether potentially onerous reporting standards and tax pitfalls will stand in the way of achieving the desired increase in investments into South Africa.
For now, keep a watchful eye!
This article is a general information sheet and should not be used or relied on as legal or other 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 legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).