• Lawtons Africa

Out of the loop

Authors: Bernard McLeod – Consultant & Marissa Wessels – Associate


The South African Reserve Bank (SARB), in its first Exchange Control Circular of 2021, announced the lifting of all loop structure restrictions on South African tax resident companies, individuals and private equity funds with effect from 1 January 2021. According to the SARB, these restrictions have been lifted as a means of encouraging investment into South Africa at a time when such investment is arguably more crucial than ever.



Loop structures in a nutshell

In essence, a loop structure exists where a South African resident person (whether natural or juristic) enters into a transaction or a series of transactions which have the effect of exporting capital out of South Africa. This is ordinarily achieved through the formation of an offshore entity or structure, which then reinvests back into a Common Monetary Area (CMA) country (including South Africa, Namibia, Lesotho and Eswatini) by, for example, acquiring a CMA-based asset or an interest in a CMA-based company.


On the face of it, these types of structures posed significant risks to the South African tax base as they presented the opportunity for abusive tax planning, particularly in the context of dividends tax and capital gains tax (CGT). In context of dividends tax, in the absence of loop structure restrictions or other appropriate legislation (discussed in more detail below), it would theoretically be possible to implement a structure where a controlled foreign company (CFC) owns a South African company, with any dividends flowing from that South African company to a resident individual through the CFC being exempt in the hands of the individual. Using this structure, South African resident individuals could thus reduce their tax liability in respect of dividends declared by a South African company from the standard rate of 20 per cent to as low as zero per cent (depending on the applicable double taxation agreement). A South African resident could also qualify for the CGT participation exemption in instances where that resident disposed of shares in a CFC which owns South African assets.


The SARB’s efforts to mitigate these risks came to a head in 2016 with the introduction of the joint tax and exchange control Special Voluntary Disclosure Programme (SVDP). The SVDP allowed South African residents a limited time in which to voluntarily declare their unauthorised foreign assets (including loop structures), and to pay substantially reduced levies in order to regularise any contraventions.


In recent years, however, the SARB has also on various occasions relaxed the restrictions applying to loop structures. On 21 February 2018, the SARB announced that South African companies would be permitted to acquire up to 40% of the equity shares and/or voting rights in a foreign entity which holds investments in and/or makes loans into a CMA country. Following this amendment, only structures which exceeded the 40% limit required prior approval from the SARB’s Financial Surveillance Department. On 31 October 2019, the SARB granted a similar dispensation in favour of South African resident individuals.


These changes, coupled with National Treasury’s aims of promoting investment into South Africa and modernising and improving the burdensome SARB approval process for cross-border flows, have thus culminated in the lifting of loop structure restrictions on South African tax resident companies, individuals and private equity funds in their entirety.


Tax reforms

In its 2020 Budget Review, National Treasury acknowledged that one of the purposes of the exchange control restrictions relating to loop structures was to protect the tax base and that, therefore, tax legislation may be a more appropriate tool to address concerns relating to loop structures. The following tax amendments which have the aim of reducing the negative impact of loop structures on the South African tax base, thus allowing for the relaxation of the loop structure restrictions, have thus been enacted as part of the Taxation Laws Amendment Act No. 23 of 2020:

  • Section 9D of the Income Tax Act 58 of 1962 (ITA), relating to CFCs, has been amended to ensure that CFCs include portions of a dividend received or accrued from a South African resident company in their net income. The ITA now includes a formula with which to determine the non-exempt portion of a dividend (and therefore the portion required to be included in net income). This amount will be equal to the ratio of the number 20 to the number 28 of the dividend that is received or accrued from a resident company and may be further reduced to the extent that any dividends tax has already been paid. This amendment came into operation on 1 January 2021 and applies to all dividends received by or accrued to any CFC on or after that date.

  • The CGT participation exemption contained in paragraph 64B of the Eighth Schedule to the ITA no longer applies in respect of any capital gains or losses realised as a result of the disposal of any share in a CFC to the extent that the value of the assets of that CFC is attributable to assets directly or indirectly located, issued or registered in South Africa. This amendment came into operation on 1 January 2021 and applies in respect of any disposal on or after that date.

  • The “look-through” rule in respect of capital gains, as contained in paragraph (f) of the proviso to section 9D(2A) of the ITA, also no longer applies to natural persons and special trusts as the attribution of an amount of net income of a CFC to South African residents does not retain the character or nature of the underlying elements of net income for those residents. This amendment also came into operation on 1 January 2021.

Going forward

What does this mean for those who have already approached the SARB in an effort to regularise existing loop structures by submitting an application through an Authorised Dealer? Likely in fairness to those who have already invested the time and effort, existing unauthorised loop structures created before 1 January 2021 are still required to be declared to and regularised with the SARB’s Financial Surveillance Department.


Although no longer strictly prohibited, loop structures created on or after 1 January 2021 will also still have to comply with a range of SARB requirements in order to be validly constituted. The SARB has published the following regulations in this regard:

  • Resident individuals, corporates and private equity funds with authorised foreign assets (being assets taken or accumulated offshore with the necessary SARB approvals in place) may invest in South Africa on condition that, where South African assets are acquired through a loop structure, the investment is reported to an Authorised Dealer as and when the transaction is finalised.

  • Annual progress reports must be submitted to the SARB’s Financial Surveillance Department via an Authorised Dealer.

  • The Authorised Dealer must have had sight of an independent auditor’s written confirmation or other suitable documentary evidence which verifies that the transaction was concluded on an arm’s length basis, for a fair and market related price.

  • All inward loans from South African-affiliated foreign investors must comply with the directives issued in section I.3(B) of the Authorised Dealer Manual (Borrowing abroad by residents).

  • Once a transaction is completed, the Authorised Dealer must submit a report to the SARB’s Financial Surveillance Department setting out: the name(s) of the South African affiliated foreign investor(s); a description of the assets to be acquired (including inward foreign loans, the acquisition of shares and the acquisition of property); the name of the South African target investment company, if applicable; the date of the acquisition; and the actual foreign currency amount introduced, including a transaction reference number.

In the event of noncompliance with the SARB’s regulations, applicants who approach the SARB voluntarily may expect to pay settlement amounts of between 10% and 40% of the total amount involved in the contravention, whilst those do not voluntarily declare may forfeit up to 100% of the amount involved in the contravention.

Lawtons Africa is a South African law firm. With roots that grew out of seeds sown in down-town Johannesburg in 1892, our history features various changes and different names. Our team of lawyers, including directors, consultants, associates and candidate attorneys is highly qualified, market-recognised and skilled. For further information, visit www.lawtonsafrica.com

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