On 31 October 2019, a favourable and welcomed Exchange Control Circular, which amends the Currency and Exchanges Manual for Authorised Dealers (Manual), was issued by the Financial Surveillance Department of the South African Reserve Bank (FinSurv).

In terms of Exchange Control Circular No. 18/2019, the restrictions on so-called “loop structures” pertaining to individuals have been further relaxed. Previously, and in terms of the section B.2(B)(h) of the Manual, individuals were not allowed to utilise funds in terms of their annual allowances to enter into a transaction or series of transactions that creates a loop structure, unless it was created with allowances invested with non-resident asset or fund managers or unless it formed part of an offshore share incentive scheme.

Loop structures are created where an exchange control resident, who is a resident of the CMA (being the Common Monetary Area consisting of South Africa, Namibia, Eswatini and Lesotho), invests in an offshore structure (including being appointed as a beneficiary of an offshore trust) which, in turn, invest back into the CMA through the acquisition of shares, or provisions of loans to a CMA resident.

Following the amendment, individuals will now be allowed to utilise their annual allowances to acquire up to 40 per cent of the 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 the CMA.

The amendment may however have limited application as it may be difficult for South African exchange control residents to rely on the relaxation when they are beneficiaries of offshore trusts structures wanting to make investments into the CMA. The FinSurv would need to be consulted.

The amendment only applies to loop structures created by individuals through direct offshore ownership on or after 30 October 2019. Existing loop structures and/or where the 40 per cent threshold is exceeded, will still have to be regularised with the FinSurv.