The South African Reserve Bank’s Financial Surveillance Department recently published a circular which effectively ends the exchange control prohibition against “loop structures”. (This on condition that the SA exchange control resident investing offshore, is tax resident in SA too.)
Clients may recall that a “loop structure” would have existed where SA exchange control residents held an interest in SA assets via an offshore structure, be it through an offshore company or trust. Previously, these regimes were the subject of strict regulation and “loop structures” would only be allowed in very limited instances. For instance, where SA residents held an interest in a foreign entity which held a less than 40% share back into an SA company.
In terms of a policy reconsideration, communicated by the Minister of Finance during last year’s budget (and repeated at several instances after that), the Government decided to no longer combat tax avoidance through exchange controls. It took the encouraging decision rather for tax avoidance to be addressed through tax avoidance legislation.
Legislative amendments have been introduced in the Income Tax Act over the past few years. These amendments address direct SA shareholding in offshore companies holding interests back in SA (contained in the CFC rules). The amendments also addressed the taxation of offshore trust distributions of income and gains to SA beneficiaries, which also cater for investments that such non-resident entities may hold in SA.
Per new Government policy, exchange controls should be employed primarily to protect the ZAR; tax legislation should be developed to tax “loop structures” more effectively.
Some uncertainty existed until recently whether the Government would proceed with this significant relaxation of exchange controls. Yet, the circular from the Reserve Bank confirms that that policy decision has been implemented.
The relaxation applies only to “loop structures” created from here on going forward and does not cater for unauthorised “loop structures” that were in existence before 1 January 2021. It is encouraging to see that investment into SA will be encouraged as a result of the amendment. As previously, we often saw legitimate non-tax related reasons why offshore investments were sought to be made into SA with distinct indirect SA interests holding shares in those offshore entities seeking to invest in this country. The policy decision of the Reserve Bank, even though somewhat overdue, is to be applauded.
De Wet de Villiers, AJM Tax
For more information or assistance with tax-related matters, please contact De Wet at [email protected]