In light of the recent changes to Exchange Control within South Africa, the Income Tax Act has also been amended to accommodate this. Below we explore what a loop structure is and what considerations to keep in mind.
An example of this is when a South African resident takes funds offshore by utilising their foreign investment allowance (R10 million per year per individual) and their foreign discretionary allowance (R1 million per year per individual) and places it in an offshore structure.
Then and now
Prior to January 2021 South Africa’s exchange control rules prohibited the creation of so-called loop structures.
The Voluntary Disclosure Program (VDP) and the Special Voluntary Disclosure Program (SVDP) were previously held in 2005 and 2013 granting amnesty from prosecution if an individual willingly reported to the authorities. Penalties were then levied and the individual would be required to unwind the structure and/or regularise the structure, and in certain instances repatriate any unauthorised funds.
But that was pre-2021. Fast forward to January 2021 and the loop structure prohibition is officially no more, after the release of the Exchange Control Circular 1/2021 (Circular) by the South African Reserve Bank (SARB), on 4 January 2021. The reason for such relaxation is “to support South Africa’s growth as an investment and financial hub for Africa [and therefore], it is advised that the full ‘loop structure’ restriction has been lifted to encourage inward investments into South Africa”. Should you take advantage of this relaxation, you will be required to verify that the transactions are entered into on an arm’s length basis and for market value consideration.
The income tax act 58 of 1962
Only two things are certain – death and taxes. And as with everything else, another important consideration to keep in mind is that the Income Tax Act 58 of 1962 (the Act) has specific tax consequences applicable to loop structures, since its amendment. This includes the potential application of the CFC rules contained in section 9D of the Act, tax treatment of dividends paid to a South African shareholder in an offshore loop structure, and provisions of paragraph 64B of the Eighth Schedule to the Act which deals with the participation exemption where shares are sold by a South African shareholder in an offshore structure.