Removing the Loop ?
27 February 2020
For some time now Exchange Control has been concerned about loop structures. In essence you could not own a company offshore if that company then owns a company in South Africa – such structure was called a loop. Hylton Cameron, (insert title) highlights the changes announced at the 2020 Budget Speech.
The Reserve Bank recently relaxed its rules and an individual could own 10% of a foreign company which owned a South African company. The rules were then further relaxed, and you could own 40% of the offshore company. Any possible tax planning or legislation has been somewhat behind the changes as the structure was previously, not allowed. However, a 40% shareholding does provide some interesting opportunities.
The 2020 Budget even provides for the possibility of the 40% threshold being increased to 100%! In light of the 40% holding or more, tax opportunities, previously not considered due to the Exchange Control prohibition now exist.
The technical part: currently, ignoring anti-avoidance rules, it would be possible for an individual to hold an off-shore company (or part thereof) which holds the South African company, then when the South African company declares a dividend which “loops” back to the South African (i.e. from SA company to off-shore company back to the individual in SA), in limited scenarios such dividend would be received tax free. If there was no loop such dividend would have been subject to dividends withholding tax at 20%. A 20% saving! The possible 20% saving may involve some aggressive planning but it should be relatively to achieve a 5% tax which stills results in a 15% saving!
Further should a South African person own shares in a foreign company and such company owns shares in a South African company, should the South African person dispose of the foreign company shares (due to certain rules, called participation exemption rules) such disposal may not be subject to capital gains tax. This would not have happened if the South African person owned the South African company directly. An impressive potential saving!
Unfortunately, but understandably, the above loopholes will be closed.
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