2 minute read
Exchange control prohibition lifted
DR ALBERTUS MARAIS, Director, AJM Tax
In a much-anticipated move, the South African Reserve Bank’s Financial Surveillance Department published its first circular on 6 January 2021, whereby it ended the long-standing exchange control prohibition against so-called ‘loop’ structures. Previously, such ‘loop’ structures would involve South Africa exchange control residents holding interests 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, such as where SA residents held 40% or less of the shares in a foreign company that held interests back into SA.
The prohibition existed to address tax avoidance being perpetrated through using such structures, predominantly SA capital gains and dividend taxes. For example, if an SA individual would hold shares in an SA company through a Mauritian entity, the Mauritian entity would have been able to receive dividends and realise gains on sale of the SA shares at a much-reduced tax cost, had the SA individual held those shares directly.
In terms of a policy reconsideration, communicated by the Minister of Finance during the Budget of last year, government took a decision to no longer combat tax avoidance through use of exchange controls, but took the encouraging decision rather for tax avoidance to be addressed through tax avoidance legislation. In accordance with new government policy, exchange controls should be employed primarily to protect the rand; tax legislation should be developed to tax ‘loop’ structures more effectively. In advancing this policy narrative, government has introduced tax legislation over the past few years to more effectively tax both direct SA shareholdings in offshore companies, as well as distributions of trust capital from offshore trusts in low-tax jurisdictions.
While some uncertainty existed until recently whether government was going to proceed with this significant relaxation of exchange controls, the circular now issued confirms that that policy decision has been implemented.
The relaxation applies only to ‘loop’ structures created from 1 January 2021; it does not cater for unauthorised ‘loop structures’ that existed prior to that. It also only applies to persons who are both SA tax and exchange control residents.
It is good to see that investment into SA will be encouraged as a result of the amendment, as previously it was often the case that legitimate, non-tax-related reasons existed why investments from offshore were sought to be made in this country, yet hamstrung due to that investor having some distinct indirect SA interests held in them. The policy decision of the Reserve Bank, therefore, even though somewhat overdue, is to be applauded.
