In his Medium-Term Budget Policy Statement on 30 October, Minister of Finance Tito Mboweni announced that “rules on active currency hedging, loops and mortgages for individuals working in South Africa will be reformed. To support regional integration, the HoldCo regime will be extended to all banks.”
The following day, the Financial Surveillance Department of the South African Reserve Bank (FinSurv) issued several circulars, including Circular 18/2019 stating that the ‘loop dispensation’ currently available for South African corporates under the Foreign Direct Investment (FDI) dispensation will be extended to private individuals.
This represents a significant change to the Reserve Bank’s prohibition in respect of so-called ‘loop structures’ – the formation by a South African resident of a foreign company which, by reinvestment into South Africa, acquires shares, loan accounts or some other interest in a South African resident company or a South African asset.
Currently there are limited exceptions to this policy applicable to investments made by South African companies, but no such exceptions were available to individuals. Authorised dealers are allowed to approve requests by South African companies to invest up to ZAR1 billion (USD70 million approx.) per company per calendar year in companies, branches and offices outside the Common Monetary Area (CMA), which comprises South Africa, Namibia, Lesotho and Eswatini.
Requests for investments of more than ZAR1 billion must be approved by the Reserve Bank, which allows a so-called ‘permissible loop’ – a South African company is permitted to acquire up to 40% equity and/or voting rights, whichever is the higher, in a foreign target entity, which may in turn hold investments and/or make loans into any CMA country. The percentage threshold was previously 10% to 20% and was then increased to 40% in 2018.
Under the new Circular, private individuals will now be permitted – individually or collectively – to acquire up to 40% equity and/or voting rights in a foreign entity, which may in turn hold investments and/or make loans into any CMA country. This dispensation will only apply in respect of loop structures formed after 30 October 2019. Any existing loop structures will have to be regularised with FinSurv.
In addition, unintentional loop structures created with authorised foreign capital invested with non-resident asset or fund managers, who invest in foreign companies that have CMA assets/interests and/or offshore global investment funds that directly or indirectly hold CMA investments over which the South African investor has no control, are permitted.
South African individuals must also ensure that any income they derive from their investment in the foreign target entity is correctly declared to SARS from a tax perspective. It is important to note that this dispensation is extended to private individuals only and not to trusts.
The move to relax the loop structuring constraints is not coming a moment too soon. It is a clear sign that the South African Treasury is looking to support FDI by all means and opening the doors for re-entry of capital is most welcome.
Although the amendment to the looping rules provides South African individuals more flexibility in investment, it is not a full relaxation of looping provisions and great care must be taken. If a South African individual acquires equity and/or voting rights in a foreign target entity, the individual should also have to establish from the entity whether any other South African residents hold equity and/or voting rights as the collective holding by South African residents may not exceed 40%, unless the residents have obtained prior approval from FinSurv.
Any South African individual wanting to invest in a foreign entity that in turn invests in the CMA should consult a qualified tax advisor and Sovereign Trust to ensure that any such arrangements are structured correctly.