Looping the loop - clarity at last on the abolition of the SA loop prohibition!

Prohibition on Loop structures: Gone…. But not forgotten?

In our newsletter of 13 November 2020, we announced with much fanfare that the South African Reserve Bank (SARB) had finally abolished its ban on South African using investment vehicles known as “loop structures” from 2021. Shortly afterwards however the SARB Circular announcing the abolition was unexpectedly withdrawn. Whatever did this mean, many wondered? Had the ban been reinstated? All become clear though when a new circular was released on 4 January 2021: Loop structures are indeed permitted from the beginning of this year but there are now some strict compliance requirements governing them.

The prior position

To recap, a loop structure, according to the latest SARB manual, is an “offshore structure” (such as a trust or company) formed “by (or at the instance of) a SA resident that through a re-investment of funds into the Common Monetary Area or CMA (comprising South Africa, Lesotho, Namibia and Eswatini/ Swaziland)… acquires shares or some other interest in a CMA asset”. In other words, a loop structure is created when funds originating in the CMA are circulated or “looped” through an offshore structure back into the CMA.

SARB saw such vehicles as mechanisms to defeat its control over funds leaving the country hence their outright prohibition. Over time though, SARB’s stance softened and loops were permissible under certain circumstances.

With the general relaxation of exchange controls expected in March 2021, it was widely expected that their regulation would fall away altogether.

The new position

Unfortunately, it seems that this is not to be. While the new SARB Circular certainly allows private individuals, corporates and South African tax resident private equity funds (but, notably, not other kinds of trusts) to invest funds via a loop structure, there are some stringent reporting requirements. Investors will have to inform the SARB, via an Authorised Dealer (i.e. generally, their local bank), of the investment and submit annual progress reports. Most onerously, they will have to prove (e.g. through an auditor’s written confirmation or some other documentation) that the transactions involved in the loop are conducted at arm’s length.

Aside from these reporting rules, new tax legislation discussed in our previous newsletter remove any tax benefits arising from the now permitted loop structures.

Takeaway

The new circular certainly opens up opportunities for investment but there are strict compliance requirements. For advice concerning these and other opportunities related to the anticipated loosening of exchange controls, you are welcome to contact us.