The Loop is dead! Or is it?
Probably the brightest news to emerge from South Africa’s otherwise gloomy and doom-laden Medium Term Budget Policy Statement last month was the apparent abolition of the ban on so-called “loop structures” by South Africa’s National Treasury. For decades, this particular exchange control restriction has been a thorn in the side of South Africans who wished to invest offshore.
However, before one rushes one’s hard-earned cash out of the country to take advantage of the new dispensation, a word of caution must be sounded. New tax measures are to be introduced which may have a similar effect to the loop prohibition, i.e. to some extent there has simply been a change in guard from the SA exchange control to the SA revenue service, with de facto the same actions being prohibited or made very unattractive. Is this a case of – the loop is dead, long live the loop?
To start off with, however, you may be wondering what a “loop structure” involves. Technically and quoting from the latest exchange control manual released by the SARB 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 Common Monetary Area or CMA (comprising South Africa, Lesotho, Namibia and Eswatini/ Swaziland)… acquires shares or some other interest in a CMA asset”.
What is often misunderstood is the concept of “reinvestment”. A loop is not created simply by the offshore structure moving funds into SA but these funds must have originated in the CMA as well. In other words, the monies are circulated or “looped” hence its name.
Over the years, the outright prohibition on South Africans setting up such “loops” has gradually loosened and following the announcement in February this year of the general relaxation of exchange controls coming in March 2021, it was widely expected to fall away altogether.
As a result of the changes, there is no longer an exchange control prohibition on South Africans advancing funds to a foreign trust which makes loans to their South African beneficiaries.
Similarly, South Africans can now hold local investments through foreign companies which may have potential fiscal advantages when these companies are not controlled.
But just because the loop prohibition has been removed, it does not mean that National Treasury intends allowing greater freedoms resulting in a reduction in tax revenue. New tax legislation currently before the South African Parliament aims to remove any tax benefits arising from the now permitted loop structures.
For example, it has been proposed that South Africans holding more than 50% of the shares in a foreign company (i.e. a so-called “controlled foreign company” or CFC) will be taxed on dividends from South African investments that such foreign companies hold. This income was previously exempt.
Furthermore, the new tax laws stop South Africans from using the “participation exemption” which previously allowed them to receive proceeds from the sale of their CFC tax-free, to the extent that the CFC holds South African assets.
These are complex anti-avoidance which should be monitored carefully, but notwithstanding these, there is certainly now more freedom for South Africans to structure foreign transactions involving their South African assets.
So the loop is indeed dead, but tread carefully!
For these and other opportunities that National Treasury’s recent announcement on loop structures opens up, you are welcome to contact us.
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.