Big news from the South African Reserve Bank (SARB)! The exchange control rules for related-party transactions with non-residents have been given a major revamp. This article explores the updated rules, their implications, and the obligations for affected parties. Here’s a summary:

What’s a Related Party?

According to SARB’s Currency and Exchanges Manual for Authorised Dealers, a “related party” refers to a party involved in a transaction that holds a direct or indirect interest in the other party and has the ability to control or exert significant influence over the other party in making financial and operational decisions.

Alternatively, both parties may be under common control. This includes transactions between entities within the same corporate group, such as a parent company, subsidiary, fellow subsidiary, or associate company.

What’s New?

Under the new framework, South African residents no longer need prior approval from the Financial Surveillance Department of the South African Reserve Bank (FinSurv) to remit royalties and fees to related foreign parties. This development marks a shift towards reducing administrative burdens and facilitating cross-border transactions while maintaining strict compliance with transfer pricing regulations and reporting requirements.

Key Highlights

• Approval Removal for a SARB application – South African residents no longer need FinSurv’s prior approval to remit royalties and fees to related non-resident parties.
• Arm’s Length Principle – transfer pricing – transactions must adhere to the arm’s length principle, ensuring fair and market-related pricing.
• Documentation Requirements – before processing payments, the Authorised Dealer (i.e. a local commercial bank) must review the relevant agreement.

An invoice from the non-resident party must verify the purpose and amount of the payment.

Permissible Payments

• Payments for services rendered, including associated costs.
• Minimum, advance, and down payments are allowed, provided they are recoverable against future obligations.
• Percentage-based fees are permitted if customary in the relevant trade.

Transfer Pricing Compliance

• For related-party transactions, senior management of the applicant company must confirm that transfer pricing documentation is maintained as per the South African Revenue Service (SARS) and the OECD Transfer Pricing Guidelines.
• Refer to the SARS and OECD guidelines for the nitty-gritty:
  • SARS Public Notices
  • OECD Guidelines

Specific Reporting and Confirmation

• Disclose of related party  transactions: Payments to related non-resident parties must be reported by the Authorised Dealer as a “Related party payment” in the subject field on the FinSurv Reporting System and the SARBAuthReferenceNumber field must contain the reference “Circular 13/2024.”
• A quarterly return must be submitted by each Authorised Dealer listing all related party agreements approved by them.
• Annual confirmation from an independent auditor is required for recurring royalty payments detailing the amount or percentage transferred.

Ad-Hoc Transactions

Written confirmation from senior management is needed to affirm that ad-hoc related party transactions were concluded at fair and market-related prices.

Other Good-to-Know Bits

• Invoices older than 12 months can be paid, provided no interest is charged.
• Authorised Dealers may approve extensions of agreements provided the original agreement entered into indicates that the agreement may be extended, or an addendum to the agreement is provided to confirm the extension thereof.

The updated exchange control requirements underscore the importance of adhering to compliance requirements when transferring royalties and fees to related non-resident parties. To ensure a smooth process, obtaining the necessary approval from an Authorised Dealer is a critical step. The Exchange Control Advisory Hub is equipped to assist clients with the preparation of the exchange control submission to an Authorised Dealer, obtaining the required documentation, meeting regulatory standards, and navigating the approval process with ease.

Contact us today for expert advice and personalised support to ensure your transactions are handled efficiently and comply fully with the latest regulations.