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In brief

The South African Reserve Bank (SARB) has begun to implement a new capital flow management system in South Africa, with changes starting to come through in early 2021. In a circular issued on 4 January and effective from 1 January 2021, the SARB announced that the full “loop structure” restriction for private individuals and companies that are tax resident in South Africa had been lifted to encourage inward investments into the country.  Denny Da Silva, a Tax Specialist, at Baker McKenzie in Johannesburg, discusses these changes below.


In line with the South African Reserve Bank’s (SARB) undertaking to implement a new capital flow management system, changes began to come through in early 2021. In the first circular for the year, issued on 4 January 2021 (Circular), the SARB announced that with effect from 1 January 2021 the full “loop structure” restriction for private individuals and companies that are tax resident in South Africa had been lifted to encourage inward investments into South Africa.

The removal does come with caveats, however, in that such structures are subject to the normal criteria that applies to inward investments into South Africa, and must be reported to the Financial Surveillance Department (Finsurv).

Some History

In terms of Regulation 10(1)(c) no person shall, except in accordance with conditions imposed, enter into any transaction whereby capital or any right to capital is directly or indirectly exported from South Africa. Thus, residents may not (utilize funds or any other authorized foreign assets to) enter into a transaction or a series of transactions, where the purpose and/or effect is to export capital directly or indirectly from South Africa (i.e., to, directly or indirectly, through any structure or scheme of arrangement, acquire shares or any other assets/interests in a common monetary area (CMA) country (Transactions).

These Transactions –

  1. invariably entail the formation by (or at the instance of) a resident of an offshore structure that – by a re-investment into the CMA – acquires shares or some other interest in a CMA company or CMA asset
  2. contravene the Regulations, including Regulation 10(1)(c), as they result in and/or have the potential to result in the direct or indirect export of capital abroad

“Loop structures” are generally created by a South African resident individual, trust or company transferring authorized or unauthorized funds from South Africa to, for example, set up a foreign trust or foreign company. The foreign trust or company would then directly or indirectly (via another offshore entity) invest the authorized or unauthorized funds in South Africa, thereby creating a” loop structure”. The investment could be in the form of South African shares, loans or other assets. Returns accruing to the foreign company or trust on the South African investments could be in the form of dividends, interest or other amounts, resulting in profits from investments by the offshore trust or company into South Africa being accumulated offshore.

Over the years, the Finsurv has relaxed the restrictions around “loop structures”, initially with the relaxation of its policy in relation to “loop structures” into the CMA by companies (Exchange Control Circular No. 5/2018) and, more recently, the relaxation of its policy in relation to private individuals. Finsurv issued Exchange Control Circular No. 18/2019, which is applicable to “loop structures” formed after 30 October 2019, and provides that private individuals may individually or collectively acquire up to 40 per cent equity and/or voting rights, whichever is the higher, in a foreign target entity, which entity may, in turn, hold investments in, and/or make loans to, any CMA country.  Existing “loop structures” (i.e., created by individuals prior to 30 October 2019) and/or “loop structures” where the 40 per cent shareholding is exceeded, must be regularized with the Finsurv. Failure to do so may result in a fine or imprisonment or both. As an exception, and only in respect of “loop structures” formed after 30 October 2019, South African private, public, and listed companies may, on application to their Authorized Dealer, acquire up to 40 per cent equity and/or voting rights, whichever is the higher, in a foreign target entity, which entity may, in turn, hold investments in, and/or make loans to, any CMA country. This dispensation does not apply to foreign direct investments where the South African company on its own, or where several South African companies collectively, hold an equity interest and/or voting rights in the foreign entity exceeding 40 per cent in total.

Then, in his budget speech in February 2020, the Minister of Finance announced the intention to introduce a new capital flow management system over the next twelve months, with all foreign currency transactions being allowed unhindered except for a risk-based list of measures being introduced, including inter alia relaxing the exchange control requirements pertaining to “loop structures”. These changes would only be introduced after relevant income tax provisions have been amended and introduced that will be aimed at protecting the South African tax base.

The changes

The Circular notes that, with effect from 1 January 2021, the Currency and Exchanges Manual for Authorised Dealers (Manual) is amended by removing the restrictions on investing in “loop structures” by private individuals and resident companies (including private equity funds) provided the investment is reported to an Authorized Dealer and that the Authorized Dealer submits an annual progress report to Finsurv. An independent auditor’s written confirmation or suitable documentary evidence, verifying that the transaction is concluded on an arm’s length basis, for a fair and market related price, must be submitted to the Authorized Dealer.

Once a “loop” transaction is completed, an Authorized Dealer must provide the FinSurv with a report including inter alia:

  1. the name(s) of the South African affiliated foreign investor(s)
  2. a description of the assets to be acquired (including inward foreign loans, the acquisition of shares and the acquisition of property)
  3. the name of the South African target investment company, if applicable
  4. the date of the acquisition
  5. the actual foreign currency amount introduced including a transaction reference number

The Circular also provides that existing unauthorized current “loop structures” created prior to 1 January 2021 must still be regularised with FinSurv, including those where the 40% threshold has been breached.

Other consequential changes are as follows:

  • All inward loans from South African affiliated foreign investors must comply with the directives issued in section I.3(B) of the Manual.
  • Residents, who became entitled to a foreign inheritance from the estate of a resident and who are required to declare such foreign assets inherited via an Authorized Dealer to the Finsurv are now permitted, on application, to retain the assets abroad and invest in a “loop structure”; the only restriction applicable now is that the assets cannot be place at the disposal of other residents.
  • In respect of loans received from foreign lenders, these will no longer be subject to the restrictions that the loan funds may not represent or be sourced from a South African resident’s authorized foreign assets or that there may not be any direct/indirect South African interest in the foreign lender.

Tax considerations

As noted above, the removal of the “loop structures” prohibition was premised on the undertaking that there would be adequate tax provisions in place to protect the South African tax base. In line with this undertaking, amendments to the Income Tax Act, 1961 have been proposed and will be effective from 1 January 2021, being in essence:

  • Dividends received by a controlled foreign company (being a company where more than 50% of its shares, for example, are held directly or indirectly by South African resident) from a South African company will now be taxed at a ratio of the number 20 to the number 28 and taking into account any dividends tax paid.
  • The disposal of shares in a controlled foreign company will not qualify for the so-called participation exemption to the extent the value of the assets of the controlled foreign company are derived from South African assets. In other words, a resident will pay capital gains tax only in respect of that portion of sale price which represents the value of the South African assets.

The takeaway

Whilst the removal of the prohibition of “loop structures” is a welcomed change and a step in the right direction, it does come with the cautionary note that it is not an absolute removal of the prohibition, especially when one bears in mind that structures that were in contravention of the restrictions as at 1 January 2021 must be still be regularized. It would also appear that the restrictions would still be applicable to South African trusts looking to set up “loop structures”. Then there is the tax caveat, which requires that the tax considerations of any “loop structure”, or any structure for that matter, must be considered carefully before being implemented.


Virusha is a partner and head of Tax in Baker McKenzie's Tax Practice Group in Johannesburg. She has over 20 years' experience in tax matters relating to customs, excise and international trade.


Denny Da Silva is senior tax advisor and director designate in Baker McKenzie's Johannesburg office, with over 13 years' experience in corporate and international tax as well as the application of exchange control regulations. Aside from advising clients on tax and exchange control matters, Denny also guest lectures at the University of Johannesburg's M Com Tax programme.