South Africa’s National Treasury has been steadily whittling down exchange controls for individuals for years. The final phasing out of this longstanding regime – the elimination of the exchange control (Excon) mechanism for South Africans emigrating from South Africa – was brought into force on 28 February this year. As of 1 March, South Africa’s Excon regime no longer recognises the concept of ‘emigrant’ or ‘emigration’.
South Africa introduced exchange controls in 1985 in response to significant capital outflows resulting from debt default and economic sanctions. The sanctions were an anti-Apartheid measure applied by many of the country’s major trading partners and their business entities. The exchange controls were implemented through the dual rand system, which set one exchange rate for current account payments for residents and another rate for capital account payments for non-residents. This meant that foreign investments in South Africa could only be sold for financial rand, limiting the outflow of capital from country.
After the democratic election of a new Government of National Unity in April 1994 and the lifting of international sanctions against South Africa, there was general consensus within the new government that exchange controls should also be removed. But distortions were so embedded in the South African financial structure by that time that the sudden removal of exchange control would not only have exerted pressure on the country’s low level of official foreign exchange reserves, it could also have forced painful immediate structural changes that would have unduly disrupted the domestic economy in the short term.
The South African authorities therefore decided on a gradual phasing-out of the existing exchange controls. As a first priority, all exchange controls applicable to current account transactions were removed.
Secondly, controls on non-residents were removed. The debt standstill arrangements of 1985 were finally rescheduled towards the end of 1993, and the financial rand system (two-tier exchange rate) was terminated in March 1995. Non-residents were free to introduce funds for any purpose into South Africa, to repatriate such funds and to transfer out of the country current and capital gains earned on their investments without restriction.
Resident companies were gradually enabled to make direct investments in foreign subsidiaries, branches or joint ventures by transferring limited amounts of funds from South Africa, and by raising funds abroad through equity and loan issues, while resident institutional investors were given permission to diversify part of their total assets into foreign currency denominated investments. In June 1997, private individuals were given permission to make limited investments in their own names outside of South Africa.
Many other smaller exchange control restrictions were either eased or removed, for example on short-term trade financing, inter-bank financing arrangements and the transfer of legacies, donations and emigrants’ funds. Administrative procedures were simplified and banks (authorised dealers in foreign exchange) were mandated to approve many transactions without prior reference to the Reserve Bank. But since then, the going has been slower.
The changes to the exchange control emigration rules, set out in Exchange Control Circular No. 6/2021 (Circular 6), are therefore long overdue. South African exchange control residents no longer need to formally apply through the Financial Surveillance Department (FinSurv) for approval upon emigration. This includes the transfer of income from trusts, interest and rentals subject to certain conditions. It does not, mean that emigrants can remit funds offshore freely. This will still require a verification process that could include a risk assessment.
As a result of the removal of the exchange control restrictions on individuals, National Treasury also advised in the 2020 Budget Review that natural person residents and natural person emigrants would be treated identically and the concept of an ‘emigrant’ would no longer apply in respect of exchange controls. The previous process of controlling or blocking an emigrant’s remaining assets in South Africa in a special ‘blocked account’ will also therefore no longer apply and all transfers from these accounts will be subject to the same requirements as any other foreign capital allowance transfer applicable to residents.
The is means that natural persons, whether resident in South Africa or residing abroad, enjoy the same single discretionary allowance of ZAR1 million without the need for a tax clearance status (TCS) PIN from SARS. Authorised Dealers may also allow all individuals to transfer funds of up to ZAR10 million subject to submission of a TCS PIN. However any funds in excess of ZAR10 million will now be subject to a more stringent verification process and subsequent approval by FinSurv.