Tuesday 22 May, 2018
The official Financial Markets Journal of SAIFM
Home Instruments & Investments Exchange control – relaxation of prohibition to loop structures

Exchange control – relaxation of prohibition to loop structures

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Emil Brincker

Generally South African residents are prohibited in investing in a foreign company, which in turn invests back into South Africa. This is called a so-called loop structure.

Previously, the Financial Surveillance Department of the South African Reserve Bank allowed South African companies to apply from 10% to 20% equity and/or voting rights, whichever is the higher, in a foreign target company, which could in turn hold investments into the common monetary area. This dispensation did not apply to foreign direct investments where the South African company held interests in the foreign entity exceeding 20%.

It was also indicated that state owned enterprises may not use low tax jurisdictions as a conduit for outward foreign direct investments outside in the world. In other words, the state owned enterprises could not make use of so-called double tax treaty to reduce withholding taxes.

It has now been announced that a relaxation will be introduced pertaining to loop structures. The loop structure provision will be increased from 20% to a maximum of 40% for bona fide investment purposes. Currently, the South African company also had to hold at least a 10% interest in the foreign company. This requirement will equally be abolished. It should be appreciated that these requirements applied to all companies, including private equity funds.

It has also been indicated that loop structures that exceed the 40% threshold will require Reserve Bank approval with due consideration to transparency, tax, equivalent audit standards and governance.

At the same time, it was indicated that the limit that applied to South African companies investing offshore will be increased. Holding companies can now transfer R3 billion in the case of listed companies and R2 billion for unlisted companies, subject to Reserve Bank reporting requirements.