Relaxation of the South African Reserve Bank’s Regulations on Loop Structures
Loop structures involve the formation by a resident of South Africa of an offshore structure which, by reinvestment into the Republic acquires shares, loan accounts or some other interest in a South African resident company or South African asset. These types of structures, barring certain exceptions, contravene Regulation 10(1)(c) of the Exchange Control Regulations, 1961 (“Regulations”).
Prior to the release of Exchange Control Circular No. 18/2019 on 31 October 2019 (“Circular”), the exception to the prohibition on the formation of loop structures known as the Foreign Direct Investment dispensation (“FDI Dispensation”) existed in terms of which South African resident companies (but not South African resident private individuals) were capable of collectively acquiring up to forty percent of the equity and/or voting rights in a foreign target entity holding investments and/or making loans into South Africa, Swaziland, Lesotho and Namibia (collectively known as the Common Market Area countries (“CMA Countries”)), subject to certain reporting and disclosure requirements.
Previously under the Regulations, private individuals were prohibited from:
entering into any transactions whereby capital or the right to capital will be directly exported from South Africa or the right to capital will be directly or indirectly exported from South Africa (e.g. may not enter into a foreign commitment with recourse to South Africa). However, private individuals may raise loans abroad to finance the acquisition of foreign assets without recourse to South Africa; and
utilising funds or any other authorised foreign assets to enter into a transaction or a series of transactions in order to, directly or indirectly through any structure or scheme of arrangement, acquire shares in a CMA Country company or a CMA Country asset. Similarly, such funds could not be re-introduced as a loan to a resident of a CMA Country.
Although the above Regulations are still in force, the Circular now provides for the exception that private individuals (in the same way as companies) are permitted, individually or collectively, to acquire up to forty percent 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.
It is to be noted that this exception only applies to loop structures created after 30 October 2019. Existing loop structures and/or loop structures in terms of which forty percent of the shareholding is exceeded will still have to be regularised with the Financial Surveillance Department if such loop structures were created by private individuals prior 30 October 2019.