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Kemp Munnik, head of Structured Solutions, draws attention to the swooping changes in the exchange control regulations and the subsequent tax amendments.

The 2020 Budget of Finance Minister Tito Mboweni was a watershed budget in which it was announced that South Africa’s existing exchange control system would be modernised.  To promote and encourage inward investment into SA, the entire loop structure restriction was lifted as of 1 January 2021, permitting SA entities to invest in an offshore structure that would invest back into SA. While the relaxation on loop structures will boost capital inflows into the country, it does come with certain requirements that should be borne in mind.

What is a “loop structure”?

Previously, it was a contravention of the exchange control rules for a South African resident to set up an offshore structure that re-invests into the Common Monetary Area (CMA) –  consisting of South Africa, Namibia, Lesotho and Eswatini – through the acquisition of shares or other interests in a CMA company or CMA asset (known as a loop structure). Loop structures were prohibited as it had the result that returns on the South African investments accruing to the offshore structure (in the form of dividends, interest or other amounts), were accumulated offshore.

Before the 2021 exchange control amendments, South African resident shareholders had to obtain specific approval from the Minister of Finance to hold shares in a foreign company that either held or acquired assets in a South African company. Approval was generally granted only under exceptional circumstances such as to facilitate a significant B-BBEE transaction, or if it were deemed to be in the national interest. More recently, corporate entities and private individuals have been permitted to acquire up to 40% of the equity shares or voting rights in a foreign company, which may in turn hold investments (including loans) into the CMA.

Tax implications following from the use of loop structures

When the 2021 exchange control changes were announced, it was made clear that income tax provisions would be introduced that will aim at protecting the South African tax base. It is essential that both the exchange control and tax implications are considered carefully before making use of now-permitted loop structures.

Before the relaxation of the loop rules, a controlled foreign company (CFC) (being a company where more than 50% of its shares, for example, are held directly or indirectly by South African resident/s)  would not have been allowed to invest in SA as this would have been considered a prohibited loop structure. The tax amendments focus specifically on the rules dealing with the taxation of such companies, which will now be allowed to invest into SA.

Dividend exemptions applicable to controlled foreign companies       

Previously, dividends received by a CFC from a South African resident company that qualifies for exemption would not be included in the net income of a CFC. To limit potential tax avoidance, CFC legislation has been changed so as to require a portion of a dividend received or accrued from a resident company to be included in the net income of the CFC. The portion to be included will be determined by applying the fraction 20/28 to the amount of the dividend received or accrued from the resident company.

The disposal of shares in a CFC

Previously, gains on the disposal of shares in a foreign company to a non-resident were exempt for tax. The exemption will no longer apply to the disposal of shares in a CFC to the extent that the value of the assets of the CFC is derived from South African assets, in other words, those assets that are directly or indirectly located, issued or registered in South Africa.


The relaxation of exchange controls provide the opportune time to consider the correct structuring of investments into South Africa.  As always, the tax consequences should be carefully considered and assessed with the assistance of a seasoned investment advisor to avoid any pitfalls or unintended consequences.