On 31 October 2019, the Financial Surveillance Department of the South African Reserve Bank (“Reserve Bank”) released Circular 18/2019 stating that the loop dispensation currently available for South African corporates under the Foreign Direct Investment (“FDI”) dispensation will be extended to private individuals.
It is important to note that this dispensation is extended to private individuals only and not to trusts.
This represents a significant deviation from the current policy of the Reserve Bank, in terms of which South African residents are prohibited from investing in a foreign company which in turn invests back into South Africa. This deals with so-called loop structures.
While in the past there were a few exceptions to this policy rule applicable to investments made by South African companies, no such exceptions were available for individuals.
Permissible loop structure dispensation available for South African companies
Authorised Dealers (i.e. most commercial banks) are allowed to approve requests by South African companies to invest into companies, branches and offices outside of the common monetary area (“CMA”), where the cost of the investment does not exceed ZAR1-billion per company per calendar year. Requests for investments in excess of ZAR1-billion must be approved by the Reserve Bank. Under this dispensation, the Reserve Bank allows a so-called permissible loop whereby a South African company is permitted to acquire up to 40% equity and/or voting rights, whichever is the higher, in a foreign target entity, which may in turn hold investments and/or make loans into any CMA country. The percentage threshold was previously 10% to 20% and was then increased to 40% in 2018.
Extension of permissible loop structure dispensation for individuals
In terms of Circular 18/2019 dated 31 October 2019, private individuals will now be permitted (individually or collectively) to acquire up to 40% equity and/or voting rights in a foreign target entity which may in turn hold investments and/or make loans into any CMA country. This dispensation will, however, only apply in respect of loop structures formed after 30 October 2019.
The circular further states that any existing loop structures, i.e. those which were created by individuals prior to 30 October 2019 and/or loop structures where 40% shareholding is exceeded, will have to be regularised with the Reserve Bank. In addition, any unintentional loop structures, created with authorised foreign capital invested with non-resident asset or fund managers who invest in foreign companies that have CMA assets/interest and/or offshore global investment funds that directly or indirectly hold CMA investments over which the South African investor has no control, are permitted.
The relaxation of the permissible loop structure for individuals is welcomed, as the mismatch between the dispensations available for South African companies and individuals resulted in many cross border groups having to structure their group shareholding to accommodate South African resident investors by either having a mirror structure in place to avoid the so-called loop structure or by housing the individual investor’s shareholding through a South African company to avail of the permissible loop dispensation provided to South African companies only.
The abovementioned relaxation of the loop structure may accordingly assist those entities to possibly unwind their mirror shareholding structure or to remove the complexity of a double structure for individual investors who hold their shareholding via a South African company.