Until recently, South African investors contemplating foreign investments were required to take note of the South African exchange control regulations in order to avoid a potential pitfall, namely creating a loop structure. Loop structures come into existence when a South African individual or company transfers authorised funds from South Africa to a foreign country and/or uses authorised funds already abroad to set up a foreign company or structure, which would then either directly or indirectly reinvest the authorised funds back into South Africa (“Loop Structure”).

The creation of a Loop Structure was considered to be a serious contravention of South Africa’s exchange control regulations and could result in severe penalties for the South African investor. In this article we consider Loop Structures against the backdrop of South African exchange control legislation to determine whether Loop Structures are still prohibited.

Prohibition of Loop Structures

The prohibition of Loop Structures can be traced to Regulation 10(1)(c) of the Exchange Control Regulations, 1961.  Regulation 10(1)(c) states that no person may enter into a transaction whereby capital, or any right to capital, is directly or indirectly exported from South Africa, except with permission from national treasury and in accordance with any conditions which national treasury may impose.

In light of this, the exchange control rules only permitted Loop Structures in very limited circumstances, such as where South African investors did not own more than 40% of the shares in the foreign company.

Lifting of the prohibition

The position regarding Loop Structures however changed in January 2021 when the South African Reserve Bank (“SARB”) released the Exchange Control Circular 1/2021 (“Circular”), which was aimed at supporting South Africa’s growth as an investment and financial hub for Africa. In the Circular the SARB announced the lifting of the Loop Structure restriction in order to encourage inward investments into South Africa. Pursuant to the Circular, the Currency and Exchanges Manual for Authorised Dealers (“Manual”) was amended as follows:

  • South African individuals or companies with authorised foreign assets may invest in South Africa, provided that where South African assets are acquired through a Loop Structure, the investment is reported to an authorised dealer (such as a bank) (“Authorised Dealer”), as and when the transaction(s) is finalised. An annual progress report must also be submitted to the SARB’s Financial Surveillance Department (“FinSurv”) via an Authorised Dealer. The aforementioned party also has to view an independent auditor’s written confirmation or suitable documentary evidence verifying that such transaction(s) is concluded on an arm’s length basis, for a fair and market-related price.
  • Upon completion of the abovementioned transaction, the Authorised Dealer must submit a report to FinSurv which should include, amongst other things:
    • the name(s) of the South African affiliated foreign investor(s);
    • a description of the assets to be acquired (including inward foreign loans, the acquisition of shares and the acquisition of property);
    • the name of the South African target investment company, if applicable; and
    • the date of the acquisition as well as the actual foreign currency amount introduced including a transaction reference number.
  • All inward loans from South African affiliated foreign investors must comply with the directives issued in section I.3(B) of the Manual.
  • Existing unauthorised Loop Structures and/or unauthorised Loop Structures where the 40% shareholding threshold has been exceeded, created prior to 1 January 2021, must still be regularised with FinSurv.

Concluding remarks:

The removal of the prohibition on Loop Structures is a step in the right direction and will certainly contribute to the SARB’s aim of supporting South Africa’s growth as an investment and financial hub for Africa. South African investors are however still advised to take caution as the removal of the prohibition is not an absolute removal and certain regulatory procedures, as mentioned above, must still be followed.

VDMA’s team of experts are available to assist you and your business with any investment into a foreign company or structure with a Loop Structure element, including providing expert advice in respect of Companies Act No. 71 of 2008.

Published 29 August 2022