From 1 January 2021, there is no longer a prohibition on loop structures in South Africa. This is a significant exchange control relaxation that will impact many structures for both corporates and individuals.
A loop structure is essentially an arrangement whereby a South African resident invests in an offshore vehicle which, in turn, invests in South African assets.
Loop structures were previously prohibited on the basis that they created a channel for the direct or indirect export of capital from South Africa. This prohibition has been in place for decades and has been the subject of much debate as well as various court cases. Limited exceptions have been made in the past, especially for inward listed vehicles. More recently, South African resident individuals and companies have been allowed to invest in up to 40% of an offshore vehicle that invests in South African assets.
In terms of the new provisions, with effect from 1 January 2021, South African companies and South African resident individuals with authorised foreign assets may invest in South African assets provided that where South African assets are acquired through an offshore structure, the investment is reported to an Authorised Dealer. It will also be required to verify that the transactions are entered into on an arms length basis and for market value consideration.
Existing unauthorised loop structures must still be regularised with the Financial Surveillance Department of the South African Reserve Bank.
It will be interesting to see how this relaxation is implemented in practice and whether, for example, it will apply in circumstances where a South African company wishes to sell shares in a South African subsidiary to a foreign buyer in exchange for shares in that foreign buyer.
Please click here to see the circular from the South African Reserve Bank.