South African (“SA”) exchange control regulations and loop structures are slowly but surely changing for the better. However – that always comes with stricter compliance at the end of the day.
Changes to the dividend and capital gain exemptions due to relaxed exchange control regulations
Under the old exchange control restrictions, individuals and SA resident companies could hold up to 40% of the equity or voting rights in a foreign target company. The foreign target company was permitted to hold investments (including loans) in any country within the Common Monetary Area (SA, Namibia, Lesotho, and eSwatini) resulting in a loop structure. If an individual or SA resident company wanted to hold more than 40% of the shareholding, approval was required from the South African Reserve Bank (“SARB”). Foreign trusts with SA beneficiaries holding directly or indirectly (via an offshore entity) into a country within the Common Monetary Area also constitute loop structures.
Government reviewed the current exchange control rules and aims to move toward a new capital flow market framework. The new framework is aimed at promoting investment, reducing the administrative burden of obtaining SARB approval, and providing a transparent and risk-based approval framework for cross-border flow.
As a result, individuals and SA resident companies no longer need to obtain SARB approval should their shareholding in a foreign entity exceed 40%. With the relaxation of the exchange control restrictions tax planning opportunities may arise such as making use of the participation exemption.
In the efforts to curb the tax planning opportunities, changes were made to certain sections of the South African Income Tax Act. These amendments came into effect on 1 January 2021. The changes mostly relate to the legislation around controlled foreign companies (“CFCs”). CFCs are entities where SA individuals, companies or trusts hold more than 50% of the shareholding in a foreign entity.
The changes will affect the dividend exemption enjoyed by CFCs as well as the disposal of shares in a CFC to a non-resident third party.
Planning to financially emigrate from SA?
Firstly, it should be noted that tax emigration is different to financial emigration and renouncing citizenship. Each of these three types of emigration are separate and independent of each other and each can be done without impacting the others. Specifically, exchange control residence provides a country with rights to control the flow of funds of that person in and out of the country. SA has recently amended the rules for financial immigration, which came into effect 1 March 2021.
What has changed?
The following is falling away from the financial emigration process:
- SARB MP336(b) form and application – used for declaring your remaining SA assets and liabilities
- Requirement for an authorised dealer to verify the application
- SARB approval needs to be granted before conclusion of the application
- Restrictions on bank accounts
The new financial emigration process will include:
- A focus from SARS specifically on tax residency
- The application for an Emigration Tax Clearance Certificate, with supporting documents to prove non-resident status
- An “exit tax” calculated on worldwide assets
- A stringent audit by the SARS auditors and potentially by the dedicated SARS Foreign Employment team
- Approval by SARS before any funds may be expatriated by an authorised dealer
What this will do, however is cause the treatment of tax emigration to be a more rigorous process, potentially making it more onerous to overcome the burden of proving non-resident status. Our newsletter detailing the change in tax residency can be found, here.
These are complex areas in SA legislation, and we recommend that you reach out to us should you need guidance and advice on how the changes will affect your business.
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.