Can the ownership of my South African assets vest offshore?

With a growing number of clients diversifying their estates offshore and when advising clients on their international estate planning, the question is often asked whether South African assets can be held by offshore structures formed by and for South Africans.

Before January 2021, such a structure was prohibited by a general prohibition on so-called “loop structures”. This prohibition essentially entailed that an offshore structure established by or on behalf of a South African resident was not allowed to invest funds expatriated from South Africa back into the Common Monetary Area (being South Africa, Lesotho, Namibia and Eswatini).

This prohibition was however abolished by the South African Reserve Bank (Reserve Bank) through Exchange Control Circular No.1/2021, published in January 2021. As result an investment into South African-based assets by offshore entities created by South African residents is now allowed subject to certain conditions. 

Most notably such an investment must be reported to an Authorised Dealer and an annual progress report must be submitted to the Financial Surveillance Department of the Reserve Bank (FinSurv) through the Authorised Dealer. The Authorised Dealer must also be provided with an independent auditor’s written confirmation (or suitable documentary evidence) verifying that the transaction is concluded on an arm’s length basis, for a fair and market-related price.

In order to meet the requirements set out above, it is evident that funding will be needed to enable the investment into the South African business on an arm’s length basis. This will also result in a disposal of assets by the current shareholders in South Africa, which will be subject to potential income tax on capital gains (CGT).

It is at this juncture that many advisors in the industry have explored the possibility of structuring the investment by the offshore entity into a South African company in such a way that CGT on the disposal of the shares by the shareholders in the South African company is avoided, or at least postponed. In addition to the CGT relief envisaged by these advisors, it is also their view that astute structuring may negate the need for a transfer of funds from offshore to facilitate this investment. That said, these views and approaches are however experiencing headwinds in practice.

As previously mentioned, one of the conditions is that FinSurv must be advised of such a loop transaction via the Authorised Dealer. In practice advisors experience Authorised Dealers to be reluctant to accept and record transactions of this nature where actual funds are not invested into the country as part of such transactions. According to the interpretation of the circular by many Authorised Dealers, the intention of the Reserve Bank was to only permit a loop transaction where the transaction will result in a physical investment into South Africa from offshore.

This interpretation by the Authorised Dealers has unexpectedly created some uncertainty in practice. There is however strong speculation that another circular by the Reserve Bank may be forthcoming which will hopefully address this uncertainty, but of course we will have to wait and see. 

Suffice for now is to know that investment into South African-based assets by offshore entities created by South African residents is now allowed, although you are strongly advised to consider any such potential investment carefully and obtain advice from a specialist in this field. Feel free to get in touch with our international estate planning team so we can sit down and discuss the options available to you.

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s). 

Related Sectors: Wealth Management