The Exchange Control Regulations of 1961 (“Regulations”) were promulgated in terms of the Currencies and Exchanges Act, 9 of 1933. This is to regulate the flow of funds into South Africa from external or foreign sources. As well as the outflow of funds from South African residents in South Africa to non-South African residents. In terms of the Regulations, natural and juristic persons acquiring ownership of shares in South African companies must obtain a ‘non-resident’ endorsement on their share certificates.
Submission for non-resident endorsement
The Regulations provide that within 30 days of a natural or juristic person purchasing or subscribing for shares in a South African company. Their share certificates must be submitted to an authorised dealer, along with the following information:
the name and country of residence of the foreign acquirer, together with a declaration of non-residency;
the name of the South African company in which the shares are being acquired;
the total number of shares being acquired; and
the name and residential address of the person in possession of the shares.
Once the authorised dealer has satisfied itself with its assessment of the submission, it will affix a ‘non-resident’ stamp to the relevant share certificate.
Consequences of non-compliance
The ‘non-resident’ endorsement is more of a formality than an ‘application’. However, failure to obtain this endorsement will mean that the non-resident shareholder will not be entitled to repatriate any sale proceeds or dividends (or other distributions) is in respect of the South African company until it has successfully been granted condonation from the South African Reserve Bank.
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For years, many of our South African clients raising capital have struggled to attract investment from offshore. It is a familiar story. Investors are willing to bet on South African companies. However, they would prefer to do it via an offshore holding company. This would typically be in an investment friendly jurisdiction with which they are familiar. Importantly, the jurisdiction of choice typically has a more favorable regulatory and tax regime than South Africa. For example, R&D tax credits. However, these structures have not been allowed thanks to the South African Reserve Bank’s infamous loop structure prohibition.
What is a Loop Structure?
A loop structure can be summarized as a structure where a South African has an interest in a foreign structure, and that foreign structure in turn (directly or indirectly) owns assets in South Africa.
Since 2018, South African exchange control has only permitted South Africans to hold no more than 40 per cent equity in a foreign structure which in turn has investments in South Africa. Previously, the permitted equity percentage threshold was even lower.
There is an exception to the loop structure restrictions. Unlisted South African technology, media, telecommunications, exploration and other R&D companies are allowed to establish an offshore company to raise foreign funding. Crucially, however, the established offshore company still has to be a tax resident of South Africa. The tax implications meant that this exception had little to no effect practically speaking. Our clients continue to implement complex, clunky (and expensive) alternative structures in order to establish an offshore presence, without falling foul of the Exchange Control Regulations.
Removal of Loop Structures
However, in October 2020, there was good news. The October medium term budget speech announced the “removal” of loop structure restrictions.
National Treasury stated that:
“the full ‘loop structure’ restriction has been lifted to encourage inward investments into South Africa, subject to reporting to Financial Surveillance Department of the South African Reserve Bank (FinSurv) as and when the transaction is finalized. This reform will be effective from 1 January 2021, provided that the entity is a tax resident in South Africa.”
Tax residency is accordingly still a requirement for any company wishing to set up a loop structure. Once again, we cannot realistically see any of our clients embracing this new exemption with any gusto.
No circulars have yet been issued amending our Exchange Control Manuals to make this “removal” of loop structure prohibitions effective. As at the date of writing, the loop structure restrictions are alive and well in the existing manuals. Hopefully publication of these amendments is imminent.
However, with the tax residency disclaimer in place, this “liberalization” may turn out to be a damp squib.
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https://www.brevitylaw.co.za/wp-content/uploads/2020/12/Loop-structures-01-1.png4271068Brevity Lawhttps://www.brevitylaw.co.za/wp-content/uploads/2017/08/brevity-logo-1-300x138.pngBrevity Law2020-12-02 10:21:532020-12-02 10:26:53Are Loop Structures “Still A Thing”?
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