Exchange control risks when moving funds offshore

By Bianca Botes, Treasury Partner at Peregrine Treasury Solutions

Many South Africans are actively looking to move funds offshore, for reasons that range from travel and investing to importing or exporting new products and launching new businesses. But without observing the correct exchange control procedures, you or your business could quickly land in hot water with the South African Reserve Bank (SARB).

First introduced in 1961 in an effort to ensure currency stability and manage the country’s balance of payments, exchange controls are used to manage, measure and report South Africa’s total foreign exchange inflows and outflows. Consequently, all foreign exchange transactions must be reported by authorised dealers to SARB as the relevant regulatory authority by way of a Balance of Payments (BOP) form.

South Africa is currently one of just a few countries globally which still imposes exchange controls on individuals and entities (others include China and India), and failure to comply could mean a hefty fine, the freezing of your bank accounts, or even, in severe cases, the forfeiture of assets.

And despite some claims to the contrary, do not be hoodwinked into believing that you can bypass exchange control through the use of cryptocurrencies such as Bitcoin, as all transactions into or out of the country must be reported if you are to avoid wrangling with SARB in the future.

In terms of individuals, each South African has a single discretionary annual allowance of R1 million, and may additionally invest a further R10 million offshore subject to certain criteria such as acquiring a tax clearance certificate (TCC).

While this effectively means that the individual limits are only likely to be felt by the super wealthy, it is nonetheless essential to ensure that you do not exceed these amounts without SARB’s express approval.

Additionally, you need to be careful to ensure that your funds are utilised in accordance with the restrictions and limitations provided for by SARB. Other details such as assigning your transactions the correct category codes, reporting accurate amounts and supplying the necessary supporting documents are further key for compliance.

There are also specific exchange control procedures that entities such as businesses and trusts must comply with, such as the requirement that entities convert foreign dividend receipts into ZAR within specific time frames according to SARB requirements.

SARB has published separate exchange control manuals for individuals, companies and authorised dealers, and updates these regularly in order to assist individuals and entities to ensure their continued compliance.

To demonstrate some of the complexity of exchange control requirements, below are two examples of foreign transactions which, although by no means exhaustive, demonstrate some of the details and processes that must be considered for successfully externalising funds:

Exceeding the individual allowance

First, consider the example of an individual who has already exceeded their R1 million single annual discretionary allowance, as well as their R10 million investment allowance, and now wishes to invest an additional R100 million offshore.

If this individual were to partner with a treasury manager, their treasury partner would be able to assist with an application to the South African Revenue Service (SARS) for a tax clearance certificate (TCC) for the R100 million.

On receipt of the TCC, the individual would next need to apply to the SARB via an authorised dealer to expatriate the relevant funds, and supply the necessary documents such as:

  • The TCC;
  • ID and proof of residence;
  • A motivational letter detailing the reasons for externalising the funds;
  • A written statement outlining the individual’s intention for the funds, as offshore funds are typically not allowed to be placed in a trust or structure; and
  • A declaration confirming that the funds will not be transferred into the account of another South African resident upon externalisation.

Once the necessary approval has been received from SARB, the individual’s treasury partner would then be able to assist in transferring the funds offshore.

This individual would then need to report to SARB on these assets on an annual basis in order to prove that the funds remain in his or her name, and that the funds continue to be held in compliance with the conditions laid out in SARB’s approval. The individual’s treasury partner would then continue to serve as the communication facilitator between the client and the authorised dealer for reporting and renewal purposes.

Launching or purchasing an offshore business

Next, consider the example of a company that wishes to launch or purchase an offshore business, with a transaction size of less than R1 billion.

The company would first need to apply for approval from SARB to conduct this transaction via an authorised dealer, and supply details including but not limited to:

  • The name and registration number of the local entity or applicant – close corporations do not qualify;
  • An overview of the business being launched or acquired;
  • The proposed financial structure of the business, including details of whether shareholders or SA-issued guarantees or other such financial instruments will be utilised;
  • The type of foreign entity or business that will be established;
  • The percentage of voting rights that will be acquired; and
  • Financial statements demonstrating the financial ability or means of the applicant seeking to conduct the transaction.

Upon receiving the necessary approval, the company would be allowed to proceed with its transaction, but, as in the previous example, would also need to submit annual reporting on its foreign business operations. Again, the company’s treasury partner would act as the communication facilitator for reporting and renewal purposes.

These two examples demonstrate that the process of externalising or moving funds offshore is by no means as simple as it might first appear.

So, when in doubt, consult a professional treasury manager to guide you in successfully navigating the various applicable regulations necessary for smooth foreign transactions. Ultimately, adherence to exchange control procedures is crucial to successfully making offshore transactions, and it is wise to ensure that you remain well informed, even before you start the process.