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Crossing borders: The not-so-golden loop structure
- 06 May 2020
- Corporate Tax
- Louis Botha
Monday, 20 August 2018
Important:
This article is based on tax law for the tax year ending 28 February 2019.
Author: Louis Botha (Cliffe Dekker Hofmeyr)
As time goes on, our world becomes smaller. One of the ways in which this manifests is in the world of doing business and investing, where it has become easier for individuals and businesses to invest and do business abroad. South African individuals will often consider investing abroad to diversify their investment portfolio or to take advantage of a favourable tax regime that is applicable in another country. South African companies, especially those that operate in the financial sector, would also often consider setting up 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 would potentially consider whether South Africa has a double tax agreement with a specific country.
However, it is important that taxpayers also consider South Africa’s exchange control rules and ensure that where an offshore investment is made, they comply with these rules. One of the biggest pitfalls to avoid, is creating a loop structure, which is considered to be a serious contravention of South Africa’s exchange control rules.
What is a loop structure and why is it unlawful?
A good description of a loop structure is set out in a policy document that was released by the South African Reserve Bank’s Financial Surveillance Department (FinSurv) on 17 November 2016 entitled “Exchange Control Special Voluntary Disclosure Programme policy dealing with ‘loop structures’ (including 74/26 structures)” (Policy Document). This document sets out FinSurv’s policy regarding the regularisation of loop structures in terms of the exchange control special voluntary disclosure programme that was in place 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 the Republic, 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, amongst other provisions, Regulation 10(1)(c) of the Exchange Control Regulations, 1961 (Regulations). Regulation 10(1)(c) states that no person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose, enter into any transaction whereby capital or any right to capital is directly or indirectly exported from the Republic.
Please click here to read more.
This article first appeared on cliffedekkerhofmeyr.com.