When is a loop not a loop?
Update on South Africa’s exchange control laws relating to loop structures

Inexplicably, South Africa (SA) is still burdened with foreign exchange controls – an arcane and antiquated set of rules that regulate the flow of funds into and out of the country as well as its neighbours Lesotho, Namibia and Eswatini (which together form the Common Monetary Area or CMA). Administered by the South African Reserve Bank (SARB) through its department with the rather sinister name, The Financial Surveillance Department and assisted by Authorised Dealers (i.e. a similarly unfortunate appellation referring to most major banks in SA), the regime has not only survived the Apartheid era when it was birthed but it has lumbered on well into the 21st century.

This regulatory dinosaur appears now, however, to be on its last legs. Over time, the strictures the regime originally introduced have been relaxed considerably. Currently, SA resident individuals are entitled to transfer a maximum of R1 million a year outside the CMA with almost no scrutiny from SARB. Throw in a tax clearance certificate and they can invest a further R10 million per annum without too much more in the way of administrative hassle. The permissible allowance is even larger for corporates.   The one rider to these freedoms though is that the transmitted funds cannot create what is known as a “loop structure”.

But what is a loop structure, you may ask? Technically and quoting from the latest exchange control manual released by the SARB in August 2020 it refers to an “offshore structure” (such as a trust or company) formed “by (or at the instance of a SA resident) that through a re-investment of funds into the CMA acquires shares or some other interest in a CMA asset”. It could, for example, take the guise of a foreign company that invests funds given to it by its SA founders in SA shares or a non-resident trust that loans its SA settlor’s capital to its SA beneficiaries.

What is often misunderstood is the concept of “reinvestment”.  A loop is not created simply by the offshore structure moving funds into SA –  these funds must have originated in the CMA as well. In other words, the monies must have been circulated or “looped” hence its name.

The exchange control authorities fear these formations will somehow be used to smuggle out capital from the CMA through dividends or interest or such-like slippery mechanism without passing before their regulatory eyes. Obviously, their worries must have diminished considerably in recent years as we have seen a gradual easing in the restrictions on loops as well.

In 2018, SARB allowed companies and then, as from 31 October 2019, resident individuals as well (but still not trusts, unfortunately) to buy up to 40% of equity or voting rights in foreign companies that invest into the CMA. More than 40% may also be allowed if SARB expressly permits.

Then it became okay to set up a loop by accident. SA residents can now place funds with foreign asset managers or global investment funds that may directly or indirectly reinvest these monies into the CMA, provided the SA residents retain no control over the CMA assets. This means there is no longer an exchange control problem with SA residents putting money into foreign unit trusts that may or may not have SA assets.

Where to from here? Perhaps very soon nothing will be restricted. In February this year, the SA Government announced a huge modernisation of the exchange control regime.  The current system whereby foreign currency transactions, except for a specific list of allowable transactions, are prohibited by default will be replaced. Instead, all foreign currency transactions will be permitted except for a specific list of exceptions – the benefit of the change will only be reflected if this list is short.

Regulations detailing these changes have yet to be released but they are sure to involve loop structures. Whatever happens with the new developments though, we will, if you pardon the expression, keep you in the “in the loop”.

Contact us to discuss if loop structures could be relevant for your business.

When is a loop not a loop? Update on South Africa’s exchange control laws relating to loop structures

How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.