Many will be aware of the South African Reserve Bank’s announcement in January of this year that it is lifting the prohibition against “loop” structures. Previously, the Reserve Bank disallowed South African individuals investing in South African assets via an offshore entity, creating a “looped” investment structure. As part of the large-scale relaxation of the exchange control regime announced by Minister Mboweni in the 2020 Budget, the lifting of the “loop” structure prohibition marks the beginning of what is bound to be a significant overhaul of the exchange control regime as existed until now.
In terms of exchange controls, South Africans may not enter into cross border transactions without first obtaining permission from an Authorised Dealer (generally commercial banks and who mandated by the Reserve Bank to approve certain transactions) or from the Reserve Bank itself.
In terms of the new policy being developed by the Reserve Bank, South Africa will however, come March of this year, move away from a system in terms whereof permission needs to be obtained prior to cross border transactions being entered into, to a new capital flow management system in terms whereof all cross-border transactions will be automatically permissible, other than for a number of to be identified transactions which will still require upfront approval.
This presents a significant development for South Africans wishing to invest abroad as well as for South African companies looking to attract foreign direct investment from offshore more easily.
The departure of the “loop” structure regime should be seen in the broader context in terms of which the Reserve Bank, as part of its overhaul, is looking to do away with the concept of “residence” for exchange control purposes. Tax laws have already been amended to provide for the concept of an “exchange control resident” to be abolished and one is left wondering what this may hold for the future.
To date, exchange control residence for individuals involved a limitation on two fronts. First, the ability to invest in South African assets via an offshore structure (the “loop” structure prohibition) and secondly a ceiling being placed on the amount that individuals may invest offshore annually.
In looking to do away with the concept of exchange control residence, it is possible that South Africans wishing to invest abroad in own name may be in for a pleasant surprise when the South African Budget is tabled in Parliament on 24 February 2021.
If the concept of residence as applies to exchange control is truly to be done away with, it would mean that individuals would be subjected to the same exchange control regime as would exist for companies in the future and that limitations on annual foreign investment spend may as a result be significantly relaxed.
This would mark a significant departure from the existing regime in terms whereof many South Africans are frustrated when wanting to invest abroad due to red tape and limitations hampering those abilities.
Dr Albertus Marais is director at AJM Tax