What on earth does South African exchange control residency mean now?

Generally, there are two main types of residence, where you have a right to live, based on citizenship, work permits, visas, etc, and where you are considered tax resident. However, for countries who still cling on to the archaic concept of exchange control – i.e., governmental restrictions on the outward flow of funds – there is a third type of residence, exchange control residency.

Most African countries, surprise, still have rigid and bureaucratic exchange controls, generally run by the major in-country banks.

South Africa’s exchange control regime has relaxed considerably over the last few years, but the most recent amendments have created widespread confusion around the critical definition of exchange control residency. In particular, when is a person exchange control resident in SA, how does she become or cease to be an exchange control resident, and what does all this mean anyway?

This confusion has arisen ever since the South African Reserve Bank (SARB) controlled process of exchange control emigration (also referred to as financial emigration) fell away from 1 March 2021. Financial emigration was previously a separate process to tax emigration, and one could be SA exchange control resident but not SA tax resident, and vice versa. The financial emigration process has now been replaced by a South African Revenue Service (SARS) controlled process which tests residency in terms of South African tax rules and the application for an Emigration Tax Clearance Certificate (with supporting documents). Therefore, SARB now essentially looks to SARS before it will allow the repatriation of any funds from South Africa as a result of emigration.

One view is that, since these changes took effect, SARB treats you as a resident for exchange control purposes if you are treated as a resident by SARS (i.e., by applying the tax rules of ordinarily resident and/or the physical presence test). Accordingly, if you are no longer ordinarily resident in South Africa and assuming you remain outside South Africa for the required number of days under the tax rules, SARB will treat you as a non-resident for exchange control purposes. Essentially, the issue of residency from an exchange control perspective is now dictated by tax rules.

However, the latest version of the Exchange Control Manual for Authorised Dealers on 27 May 2021 arguably contradicts this and seemingly creates some rather surprising results. Firstly, the terms “resident” and “non-resident” are defined as follows:

• Non-resident means a person (i.e. a natural person or legal entity) whose normal place of residence, domicile or registration is outside the Common Monetary Area
• Resident means any person (i.e. a natural person or legal entity) who has taken up permanent residence, is domiciled or registered in South Africa.

Notably, section B2 (B) of the Manual states that: “Authorised Dealers are advised that a valid green bar-coded South African identity document or a Smart identity document card is the only acceptable document proving residency in South Africa”. This implies that any person who possesses a green bar-coded ID document or smart ID card is, therefore, a South African exchange control resident. Presumably, therefore, a non-resident is a person who is the exact opposite of an exchange control resident – i.e., a person who does not possess a South African ID book/card.

No mention is made here of tax residency in these definitions. Rather, a new category of persons known as “private individuals who cease to be residents for tax purposes” is now created in terms of which the Manual provides for specific rules around the transfer of assets/funds of such persons from South Africa (e.g. rules limiting the withdrawal of retirement benefits from South Africa). Nothing in the Manual suggests that these specific rules have any bearing on the meaning of “resident” or “non-resident” for exchange control purposes.

Therefore, it seems that it is still possible under the Manual for an individual to be:

• South African exchange control resident whilst no longer being South African tax resident (e.g., a South African citizen who holds a green bar-coded ID card/book but who is, based on the criteria set out in the tax rules, no longer tax resident in South Africa); or
• Non-resident from an exchange control perspective whilst still being South African tax resident (e.g., a foreign national who is not a holder of a South African green bar-coded ID book/card but tax resident in South Africa as a result of being present in South Africa for the required number of days).

Furthermore, the Manual makes no mention of the consequences of exchange control residency for individuals who financially emigrated prior to the above changes being affected. Therefore, arguably all persons who previously completed the financial emigration process from South Africa are now once again South African exchange control resident by virtue of being holders of South African green bar-coded ID cards. This is quite scary, as most people who do financially emigrate from SA do not give up their citizenship or their ID books, so now by a stroke of the pen their financial emigration could be technically undone, and they could subject once again to exchange control restrictions.

It is doubtful that SARB intended this, but the interpretation is always left up to the relevant bank who must rely on the SARB Manual, and thus there are currently widely differing interpretations from the banks as to who and who is not exchange control resident.

So, clear as mud at the moment, contact us to discuss further if this could impact you.

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