However, it is important that taxpayers also consider South Africa’s exchange control rules and ensure that where an offshore investment is made, they comply with these rules. One of the biggest pitfalls to avoid, is creating a loop structure, which is considered to be a serious contravention of South Africa’s exchange control rules.
A good description of a loop structure is set out in a policy document that was released by the South African Reserve Bank’s Financial Surveillance Department (FinSurv) on 17 November 2016 entitled: Exchange Control Special Voluntary Disclosure Programme policy dealing with ‘loop structures’ (including 74/26 structures). This document sets out FinSurv’s policy regarding the regularisation of loop structures in terms of the exchange control special voluntary disclosure programme that was in place between 1 October 2016 and 31 August 2017.
According to the policy document, loop structures entail the formation by a South African resident of an offshore structure which, by reinvestment into the republic, acquires shares, loan accounts or some other interest in a South African resident company or a South African asset. The document adds that transactions creating loop structures contravene, amongst other provisions, Regulation 10(1)(c) of the Exchange Control Regulations, 1961 (Regulations). Regulation 10(1)(c) states that no person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose, enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the republic.
The Policy Document sets out how a loop structure can be created and its potential consequences, as follows:
From the above example, one can also see that a loop structure has the effect of reducing South Africa’s tax base and could reduce any taxes that the offshore structure would have to pay in South Africa.
South African residents must keep in mind that although the regulations and policy document only refer to the republic, the prohibition against creating loop structures applies to the reinvestment into all countries forming part of the Common Monetary Area (CMA). The CMA consists of South Africa, Swaziland, Lesotho and Namibia. This is stated in the Currency and Exchanges Manual for Authorised Dealers, which must be read with the regulations.
As stated above, Regulation 10(1)(c) states that transactions which result in the export of capital from the republic may only be entered into with the permission of the Treasury and on such conditions as the Treasury may impose. According to the manual, the word “Treasury” refers to the minister of finance or National Treasury, including the persons to which the minister has delegated this authority, including the governor and deputy-governor of the South African Reserve Bank. Loop structures may therefore only be created where Treasury has given its permission for this to take place.
In terms of the manual, some of the circumstances under which a loop structure may be created, are the following:
When considering investing abroad or setting-up offshore structures through which to invest or do business, South African residents must ensure that they comply with not only South Africa’s tax laws, but also with South Africa’s exchange control laws. FinSurv has broad powers in terms of the Regulations and at worst, could even declare that foreign assets held in contravention of the regulations, such as through an unlawful loop structure, must be forfeited to the state. It is therefore important that before investing abroad, South African residents ensure that they receive correct and accurate advice, especially where large sums of money are involved.