“Loop” structures and the controlled foreign company rules

Article by Carmen Gers, first published on Lexology

One of the welcome announcements by the Minister of Finance in his budget speech delivered in February this year, pertained to a potential further relaxation of the Financial Surveillance Department of the South African Reserve Bank’s (“SARB”) prohibition against so-called “loop” structures. However, this came with a caveat, this relaxation (or possibly scrapping) would coincide with amendments to the tax laws to curtail the mischief that loop structures attempt to prevent.

A loop structure is, broadly, a structure where a resident of the Common Monetary Area (“CMA”) holds an investment in a foreign vehicle which, in turn, holds an investment in the CMA. Note that this investment could be in the form of a share or loan. The SARB regards this type of transaction as a contravention of the Exchange Control Regulations in that they result in or have the potential to result in the direct or indirect export of capital abroad to a non-resident company or other relevant non-resident trust or entity for the ultimate benefit of a resident.

In terms of the SARB’s current policy, these structures are only permitted in limited circumstances as provided for in the Exchange Control Manual for Authorised Dealers and subject to approval being obtained for such an investment from the CMA resident’s authorised dealer.

The draft Taxation Laws Amendment Bill (“DTLAB”) was released for public comment on 31 July 2020 and details the proposed tax amendments alluded to in the budget speech.

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