“I noted an article the other day that referred to tax restrictions for loop structures. What is a loop structure and how have restrictions been reduced?”
A loop structure is where a tax resident of South Africa invests in an offshore or foreign entity, which in turn holds interests in or invests in South African assets. This structuring technique was previously prohibited by the South African government on the basis that it resulted in the South African tax resident holding an indirect interest in South African assets and potentially created a channel for the direct or indirect export of capital from South Africa.
The prohibition, however, was not absolute. Resident taxpayers were entitled to hold less than 40% of the interest in the offshore or foreign entity before the prohibition was triggered. Furthermore, the Minister of Finance was entitled to grant exception to the use of loop structures in certain instances, particularly where such structures involved or advanced black economic empowerment. While exceptions to loop structures have been granted, these exceptions were generally few and far between.
The prohibition on loop structures has as of 1 January 2021 been relaxed with the intent behind the exchange control relaxation being to encourage inward investments into South Africa. South African companies and individuals are now allowed to invest in South African assets through offshore or foreign entities, subject to certain conditions.
Previously, the approval of the South African Reserve Bank (“SARB”) was acquired before entering into a loop structure. This meant that a failure to obtain the approval of SARB or a rejection from SARB would render the loop structure taxable in accordance with the taxation laws of South Africa. According to the amended sections of the Currency and Exchange Manual for Authorised Dealers, the loop structure, or transaction that creates same, must be reported to SARB to ensure that the loop structure is concluded on an arm’s length basis and at a fair and market-related price. Accordingly, loop structures can be finalised without first obtaining the consent of SARB.
According to the amended sections of the Currency and Exchange Manual for Authorised Dealers, resident individuals with authorised foreign assets may invest in South Africa, provided that where South African assets are acquired through an offshore structure (loop structure), the investment is reported to an Authorised Dealer as and when the transaction(s) is finalised as well as the submission of an annual progress report to the Financial Surveillance Department via an Authorised Dealer. The aforementioned party also has to view an independent auditor’s written confirmation or suitable documentary evidence verifying that such transaction(s) is concluded on an arm’s length basis, for a fair and market related price. Accordingly, loop structures can be finalised without first obtaining the consent of SARB.
While the restrictions on exchange control regulations on loop structures have been eased, the regulations have not been totally abolished and can still hold tax liability for tax residents. It it therefore still advisable that any loop structure or involvement therein be carefully scrutinized by your attorney or tax advisor for liability and compliance beforehand.