South Africa’s exchange control framework plays an important role in regulating capital movements. It focuses on key areas such as loop structures and Controlled Foreign Companies (CFCs). These elements create opportunities for cross-border investments but also pose regulatory challenges that require careful attention.

In the past, transactions involving loop structures were restricted under Exchange Control Regulation 10(1)(c). These structures were permitted only under exceptional circumstances and subject to specific conditions.

What Is a Loop Structure?

A loop structure is a cross-border mechanism enabling a South African resident to hold a South African asset indirectly through an offshore entity or structure. Such structures are established when a South African resident, whether an individual or corporate entity, uses authorised funds to create a foreign entity or structure which then invests back into South Africa.

This investment back into South Africa can involve acquiring South African shares, assets, or loan accounts.

Authorised funds include:

1. Foreign Investment Allowance
2. Single Discretionary Allowance
3. Retained income earned abroad after 1 July 1997, including income from approved foreign assets or services rendered to non-residents while abroad.
4. Foreign inheritances or legacies from non-resident estates received after 17 March 1998.
5. Gifts or donations from non-residents received on or after 23 February 2022.
6. Foreign inheritances or legacies from South African estates with foreign assets received after 23 February 2022.
7. Exemptions under Exchange Control Circular No. D405 dated 30 September 2003.
8. Amnesty funds with a 10% levy, approved for retention abroad under the exchange control amnesty framework.
9. Regularised foreign assets, referring to previously undeclared foreign assets disclosed and formalised.

What is a Controlled Foreign Company (CFC)

A Controlled Foreign Company refers to a non-resident company where South African residents collectively hold more than 50% of the participation rights or voting control. CFCs are commonly used in international tax planning but are subject to stringent regulations designed to prevent base erosion and profit shifting (BEPS).

Intersection of Loop Structures and CFCs

Loop structures and CFCs intersect when South African residents establish offshore entities classified as CFCs, which subsequently invest in South African assets. Although the relaxation of loop structure restrictions supports such investments, associated CFC regulations ensure that profits from the offshore entity are taxed in South Africa.

Developments in Loop Structures

Exchange Control Circular No. 1/2021, issued by the Financial Surveillance Department of the South African Reserve Bank (FinSurv), removed restrictions on loop structures. This policy was introduced to position South Africa as a leading investment and financial hub for Africa while promoting inward investment.

Under the revised regulations:

1. Ownership Rights for Tax Residents: Individuals and corporates may now hold 100% ownership of an offshore entity or structure that reinvests in South Africa.
2. Reporting Requirements: Loop structures must be reported to an Authorised Dealer (a local commercial bank) upon finalisation of the transaction.
3. Compliance for Inward Foreign Loans: All loans from foreign investors requires prior exchange control approval.
4. Endorsement of share certificates: A foreign entity acquiring an interest in a local company under the loop structure regime must ensure that the share certificates are endorsed as “non-resident.”
5. Regularisation of Unauthorised Loop Structures: Unauthorised loop structures must be reported to and regularised with FinSurv.

These amendments provide greater flexibility for cross-border investments while maintaining necessary oversight.

Practical Considerations

Businesses and individuals seeking to utilise loop structures or establish CFCs should consider the following:

1. Regulatory Compliance: Adhere to SARB’s exchange control and SARS’ tax regulations to avoid penalties.
2. Tax Efficiency: Consult professional advisors to structure investments that minimise tax liabilities while remaining compliant.
3. Transparency: Ensure accurate and complete disclosure of all cross-border transactions and offshore holdings.
4. Strategic Planning: Assess the long-term implications of loop structures and CFCs, particularly in light of global tax initiatives such as BEPS and the OECD’s Pillar II framework.

Conclusion

The relaxation of loop structure restrictions and the robust CFC regime highlight South Africa’s commitment to balancing investment flexibility with regulatory oversight. These changes create new opportunities for cross-border investments but demand a comprehensive understanding of the exchange control and tax implications.

By working with exchange control and tax specialists, businesses and individuals can navigate these complexities effectively, unlocking growth opportunities in a compliant and strategic manner.

For assistance with the exchange control reporting and regularisation of loop structures, contact the Exchange Control Advisory Hub at marina@xconhub.com or complete the form below.