To support South Africa’s growth as an investment and financial hub for Africa, the Minister of Finance, Mr. Tito Mboweni, announced a considerable relaxation of regulation 10(1)(c) of the Exchange Control Regulations of 1961.
In January 2021, the Exchange Control Circular No. 1/2021 (“ECC No. 1/2021”), introduced a relaxation of the existing legislation regarding the exportation of funds by South African residents to an offshore structure which, in turn, reinvests these funds into a Common Monetary Area. These transactions are commonly referred to as “loop structures”.
Between 1970 and 2017, South Africa lost over US$300 billion due to capital flight. To provide some perspective, US$300 billion is the equivalent to:
Almost half of the US$300 billion left South Africa in the past ten years. These funds, as well as taxation revenue from these funds, through re-investment in capital programmes could have been used to develop the local economy.
Over the years South Africa faced challenges with the management of state owned entities, add to this a global pandemic and a countrywide lockdown, the economy took a massive blow. South Africa’s GDP contracted by a record 7.1% in 2020, with gross external debt levels reaching an all-time high. Compounding this was the RMB/BER business confidence index in South Africa falling to its lowest point since being measured. These events resulted in the South African Rand weakening significantly against all major currencies.
In an effort to protect their portfolio against Rand depreciation, a significant amount of capital flows moving offshore came from High Net Worth (“HNW”) individuals.
The decision to decrease the restrictions imposed on the loop structure could not have come at a better time. This new change provides South Africans with the opportunity to protect their wealth by moving capital to more stable jurisdictions without losing the opportunity to invest in the abundance of opportunities South Africa offers (subject to the normal criteria applying to inward investments into South Africa and the reporting to the Financial Surveillance Department).
South African individuals, companies, and private equity funds are now allowed to hold an unrestricted interest in an offshore entity, with the previous limitation of 40% no longer applying. The new rules that should now be adhered to are:
The date of the acquisition, as well as the foreign currency amount, introduced, including a transaction reference number.
It is important to note that the rules relating to foreign investment allowances for individuals and companies are still limited to R10 million and R1 billion, respectively.
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