In recent years, it has become easier for individuals and businesses in South Africa to invest and do business abroad. South African individuals often think that investing abroad will diversify their investment portfolios or enable them to take advantage of another country's favourable tax regime. South African companies, especially those that operate in the financial sector, can also establish offshore tax structures in an attempt to lawfully reduce their tax liability. In deciding whether to invest abroad and which country to invest in, taxpayers will usually consider whether South Africa has a double tax agreement with that country.

However, taxpayers should also ensure that they comply with South Africa's exchange control rules when making an offshore investment. One of the biggest pitfalls to avoid in this regard is the creation of a loop structure, which is considered to be a serious contravention of these rules.

What are loop structures and why are they unlawful?

A good description of a loop structure is set out in the Exchange Control Special Voluntary Disclosure Programme policy dealing with 'loop structures' (including 74/26 structures) policy document released by the South African Reserve Bank's Financial Surveillance Department (FinSurv) on 17 November 2016. This document sets out FinSurv's policy regarding the regularisation of loop structures under the Exchange Control Special Voluntary Disclosure Programme that existed between 1 October 2016 and 31 August 2017.

According to the policy document, 'loop structures' entail the formation by a South African resident of an offshore structure which, by reinvestment into South Africa, acquires shares, loan accounts or some other interest in a South African-resident company or a South African asset. The policy document adds that transactions creating loop structures contravene, among other provisions, Regulation 10(1)(c) of the Exchange Control Regulations 1961. Under Regulation 10(1)(c), no person can enter into any transaction whereby capital or any right to capital is directly or indirectly exported from South Africa except with permission from the treasury and in accordance with such conditions as the treasury may impose.

According to the policy document, a loop structure will be created when a South African-resident individual, trust or corporate entity transfers authorised or unauthorised funds from South Africa (or uses existing offshore funds or a combination thereof) to set up, for example, a foreign trust or entity. ('Authorised funds' are foreign funds held in a manner that does not contravene the regulations.) The foreign trust or entity involved would directly or indirectly (via another offshore entity) reinvest its authorised or unauthorised funds in South Africa, thereby creating a loop structure. The reinvestment could be in the form of South African shares, assets or loan accounts being acquired or created.

The South African resident would in some instances thereafter export returns made on the South African investment by way of, among other things, the payment of dividends, profits, interest or loans to the foreign structure.

Such a loop structure would mean that the investment of funds from the offshore structure into South Africa and the payment of dividends, profits or interest offshore would result in the accumulation of value over and above the nominal foreign investment that was initially made.

From the above example, it is clear that loop structures reduce South Africa's tax base and can reduce any taxes that an offshore structure would have to pay in South Africa.

South African residents should note that although the regulations and the policy document refer only to the "republic", the prohibition against creating loop structures applies to reinvestment into all Common Monetary Area (CMA) countries – namely, South Africa, Swaziland, Lesotho and Namibia. This is stated in the Currency and Exchanges Manual for Authorised Dealers, which must be read with the regulations.

Are loop structures unlawful in all circumstances?

As stated above, Regulation 10(1)(c) states that transactions which result in the export of capital from South Africa may be entered into only with the treasury's permission and on such conditions as the treasury may impose. According to the Currency and Exchanges Manual for Authorised Dealers, the word 'treasury' refers to both the minister of finance and the National Treasury, including the persons to which the minister has delegated this authority, such as the governor and deputy governor of the South African Reserve Bank. Loop structures may therefore be created only where the treasury has given its permission for this to take place.

Under the manual, some of the circumstances under which loop structures may be created are as follows:

  • Section B.2(B) of the manual states that loop structures are permitted where a South African resident has created one unintentionally by investing with non-resident asset or fund managers that invest in foreign companies with CMA assets or in offshore global investment funds that hold CMA investments (directly or indirectly) over which the South African investor has no control. In such cases, the South African investor must have made the investment after taking the invested funds abroad legally.
  • Under Section B.2(F) of the manual, South African technology, media, telecoms, exploration and other research and development companies may establish an offshore company to raise foreign funding for their operations, subject to certain conditions. These conditions include registering with FinSurv and ensuring that the established offshore company is a tax resident in South Africa. Such companies may hold investments and make loans into South Africa, even though the investment or loan would create a loop structure.
  • Under Section B.2(A) of the manual, South African companies can acquire up to 40% of the equity or voting rights, whichever is higher, in a foreign market entity, which may in turn hold investments and make loans into a CMA country. This dispensation does not apply to foreign direct investments where the South African company on its own or where several South African companies collectively hold an equity interest or voting rights in the foreign target entity that exceed 40% in total. Loop structures that exceed the 40% threshold require FinSurv approval with due consideration to transparency, tax, equivalent audit standards and governance. Previously, a South African company could not hold an interest in a foreign entity that exceeded 20%. The increase to a maximum of 40% interest that may be held was announced in the 2018 Budget and was set out in Exchange Control Circular 5/2018, which was released on 21 February 2018.


When considering investing abroad or setting-up offshore structures through which to invest or do business, South African residents must ensure that they comply not only with South Africa's tax laws, but also its exchange control laws. FinSurv has broad powers under the regulations and, at worst, could declare that foreign assets held in contravention of the regulations, such as through an unlawful loop structure, must be forfeited to the state. It is therefore important that South African residents ensure – before investing or doing business abroad – that they receive accurate tax and exchange control advice, especially where large sums of money are involved.

For further information on this topic please contact Louis Botha at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email ( The Cliffe Dekker Hofmeyr website can be accessed at

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