At the beginning of 2021, the South African Reserve Bank (“SARB”) announced a relaxation of the rules relating to loop structures. The Bank of Namibia (“BoN”) has yet to announce their alignment to the easing of these restrictions. In light of the anticipated alignment, people should begin looking now at their estate planning structures to explore how their current structures can be enhanced under the advantageous regulation amendment.
Willem Bodenstein who heads up the Namibian operations of investment banking firm Bravura, comments as follows: “We are of the view that the BoN could make a similar announcement shortly, following the upcoming quarterly meeting of the Exchange Control Authorities of the countries that make up the Central Monetary Area (“CMA”). This would be in line with the multi-lateral agreement amongst the CMA countries of South Africa, Namibia, Lesotho and Eswatini. Should BoN follow suit, the current restrictions on loop structures for private individuals and companies including private equity funds based in Namibia will be lifted.”
What is a loop structure?
Bodenstein explains that a loop structure is when a Namibian resident holds an interest in an offshore structure, which by reinvestment into the CMA, holds an interest in a CMA resident company or a CMA asset. This would include CMA beneficiaries of offshore trusts. A diagram included below depicts the income flow in a typical loop structure.
“Over the last few years, restrictions around loop structures have steadily been relaxed,” says Bodenstein, “The most recent relaxations included allowing loop structures where the Namibian exchange control resident in aggregate did not own more than 40% of the shares in a foreign company, which in turn held investments into any CMA country. Following this further relaxation, the 40% limitation will no longer apply.”
What will the potential changes mean for you?
Following an amendment of the rules around loop structures and assuming a similar approach would be followed to that of the SARB, the potential changes would be as follows:
- Individuals, companies and private equity funds with authorised foreign assets resident in Namibia, as well as non-CMA trusts with CMA beneficiaries, would be able to invest into the CMA. These types of investments would have to be reported to an Authorised Dealer as and when the transaction is finalised.
- An annual progress report would also need to be submitted to the Exchange Control Division of the BoN via an Authorised Dealer.
- The Authorised Dealer would review an independent auditor’s written confirmation or documentary evidence considered suitable verifying that the transaction was concluded on an arm’s length basis and reflecting a fair and market-related price.
Existing unauthorised loop structures, meaning loop structures that were created before the relaxation occurred, including those where the 40% limitation was breached, would have to be regularised with the BoN.
Other changes following from the scrapping of rules relating to loop structures include the following:
- A foreign inheritance might be retained abroad and invested in a loop structure. The only restriction that would still be applicable to foreign inheritance, is that these assets cannot be placed at the disposal of other residents.
- Inward loans would no longer be subject to the restrictions that the loan funds may not represent or be sourced from a CMA resident’s authorized foreign assets or that there may not be any direct/indirect CMA interest in the foreign lender.
Bodenstein says, “There are still a lot of ifs, buts and maybe’s around the potential changes. It is strongly advisable to seek professional advice now in preparation for the coming changes and before entering into any transactions. An investment advisor such as Bravura can help you navigate these changes and assist in structuring your affairs to take advantage of opportunities.”