Overview of South African Exchange Controls for Foreign Investors
Introduction
The Exchange Control framework in South Africa (“SA”) is governed by the Exchange Control Regulations (“the Regulations”), orders and rules. The Regulations were issued in 1961 in terms of the Currency and Exchanges Act, 1933 (Act No. 9 of 1933). Exchange Control policy is continuously amended.
The Regulations are administered by the Exchange Control Department of the SA Reserve Bank (“Excon”), through the banking system. Banks authorised to trade in foreign currencies, i.e. Authorised Dealers, have sufficient discretion in administering the Exchange Control Rulings, but are obliged to submit matters outside their ambit to Excon for approval.
The Exchange Control system has been gradually liberalised over the past few years, and it is the stated intention of the Department of Finance that such liberalisation continues.
Local borrowing restriction
Non-resident investors establishing a presence in SA do not require prior approval from Excon. Any equity investment is subject to the procedural requirement that the relative share certificate be endorsed “Non-Resident”, indicating the funding source and thus preserving the transferability of dividends and its sale proceeds. An additional requirement is that confirmation would be required from a third party, e.g. the company’s auditors, that such investment is on an arms length basis, and at a fair and market related price.
Any shareholder loan funding introduced from abroad requires prior Excon approval. The repayment of such funding also requires Excon approval, which is usually forthcoming, subject to the company not being placed in an over-borrowed position locally, (see further detail below).
From an income tax point of view, and in terms of the Thin Capitalisation Rules, it is generally accepted that a safe harbour of a debt to equity ratio of 3 to 1 is maintained.
With regard to the local borrowing restrictions, an entity with a non-resident interest or control of 75% or more (directly or indirectly) is regarded as an “affected person”, and as such is restricted in terms of its use of local financial assistance. Generally speaking, borrowings from local banks and other local sources, as well as other forms of local finance are regarded as financial assistance.
A company which is an affected person may receive local financial assistance up to a set percentage of its total effective capital. The effective capital of a company usually comprises paid up equity, preference shares, undistributed earned profits and approved shareholder loans. This is commonly referred to as the company’s borrowing base.
Repatriation of capital earnings
Capital
There is no restriction on the repatriation of capital investment in SA companies by non-residents through normal banking channels, although compliance with control procedures in respect of the cancellation of the endorsement on share certificates is required, and such return of capital may not place the local company in an over-borrowed position. In order to remit sale proceeds offshore on disinvestment, the company would need to provide confirmation that the transaction is at an arms length price.
Dividends and branch profits
Dividends and branch profits earned by non-resident held companies in SA may be remitted abroad, provided that the local company is not placed in an over-borrowed position subsequent to such remittance.
Interest on shareholder loans
Provided that the relevant loan and related terms and conditions have been approved by Excon, interest payments are freely transferable.
Royalties and service fees
Agreements relating to the acquiring of rights, use of technology, trademarks, etc. from non-resident parties, require prior Excon approval.
SA resident companies may remit payment abroad for services rendered by non-residents, provided that such fee is charged on a specific basis and not as a percentage of sales, turnover, etc.
It is important to note that current Excon policy is subject to change without prior notice. We thus recommend that advice is sought from our exchange control specialists for any proposed cross-border transactions with SA residents or investment into SA.
Chantal Robertson
