“Earlier this year, in January 2021, the Reserve Bank issued new Exchange Control Regulations which effectively legalises what is commonly referred to as the ‘loop structure’.”
Even though we have experienced some financial instability because of the Covid-19 pandemic and the recent looting, the effects of what’s currently happening in the country is yet to be fully realised. This has caused many investors in South Africa to look outside our borders. But what does this mean for anyone who would like to move investments offshore?
Earlier this year, in January 2021, the Reserve Bank issued new Exchange Control Regulations which effectively legalises what is commonly referred to as the “loop structure”. We often hear talk of Discretionary Allowance and Investment Allowances which is inevitably followed by a reference to loop structures. But what does it all mean and how does the change in control regulations affect your deceased estate?
A loop structure in laymen terms is the investment of your funds in a foreign entity which in turn reinvests in South Africa. Until recently, loop structures were considered illegal in South Africa and pre-2021, South Africans were given two opportunities to declare their loop structure and were then required to either dissolve it or restructure it. In its communique issued in January, FinSurv, the Financial Surveillance Department of the South African Reserve Bank, issued new Exchange Control Regulations which effectively legalise loop structures, if they are declared through an Authorised Dealer. As South Africans, we are allowed to “export” a total of R 11-million annually which comprises R 10-million in Foreign Investment Allowance and R1-million in Foreign Discretionary Allowance.
Prior to the legalisation of loop structures, the tax implications were different. However, now that this structure has been legalised the Income Tax and Capital Gains Tax on these have been aligned to that of a South African-based business or entity. Prior to 2021, depending on the taxation agreement between South Africa and the country where the offshore structure was based, a 15% tax was levied as opposed to the 45% tax levied if the loan was made from abroad rather than locally. Similarly, the dividends tax was levied at 15% and withholding tax for foreign shareholding could have been as low as 5%.
“When a South African resident decides to make use of a loop structure, they may hold up to 40% shares in the foreign company or structure and invest in a South African asset.”
With the legalisation of the loop structure, the benefits of CGT and dividends percentage has been changed and is no longer necessarily favourable in an offshore structure as opposed to a local structure.
When a South African resident decides to make use of a loop structure, they may hold up to 40% shares in the foreign company or structure and invest in a South African asset, but it must be reported to an Authorised Dealer, which in turn provides this information to FinSurv through an annual progress report. The auditor’s report needs to show that the transaction was concluded at arm’s length and at fair market value. Additionally, it is no longer necessary to show that a foreign lender holds no interest in South Africa when money is being lent to a South African entity and the foreign investors no longer need to report if they invest in one of the other Common Monetary Areas (CMA), such as Namibia or Botswana.
“You need to be able to answer questions such as what happens to my business interests if my offshore structure is registered in a country with forced heirship, or perhaps one that follows civil law, federal or Shari’ah law?”
However, one thing you should consider is that between the date of you investing in the South African asset and the day you pass away, any value accrued on your investment will be taxed as though it was a gain on a South African asset, and it will accordingly influence your estate’s value with the tax payable by your estate. Your succession planning, should you wish to set up a loop structure, needs to take this into consideration. You need to be able to answer questions such as what happens to my business interests if my offshore structure is registered in a country with forced heirship, or perhaps one that follows civil law, federal or Shari’ah law? The new regulations allow individuals to invest any foreign inheritances they receive in South Africa, as opposed to the previously restrictive regulations. This means that should your business interests be liquidated and devolve on your beneficiaries, that Capital Gains Tax will be applied as your shares are “sold”, and therefore it has a similar effect to that of a local business entity. However, it would be prudent to also establish what the effect on your Estate Duty would be.
Despite what is currently happening, there is still much potential in South Africa so, it is important to consider all aspects before registering your business interests offshore – especially from an estate planning point of view.
Contact us should you wish to ensure that your succession planning truly considers all aspects. As one of the leading providers of Wills and estates, Capital Legacy is equipped to advise you on local, offshore, and worldwide Wills as well as how they all affect the legacy you wish to pass on one day.
Written By Ken Newport, National Manager, Succession Planning at Capital Legacy