South African Budget contains further exchange control relaxation proposals

South Africa’s 2022 Budget Speech announced a new proposal to permit resident individuals to transfer up to ZAR10 million per year through offshore trusts for foreign investment purposes, subject to tax and reporting requirements. There was also mention that amounts in excess of ZAR 10 million would also be considered. This marks a substantive revision of the South African exchange control regime.

“This Budget Speech and particularly the authorisation for Trusts to transfer authorised capital to this degree, is a clear sign Treasury is committed to modernise our capital flow framework”, says Richard Neal, Managing Director of Sovereign Trust (SA) Limited.

Resident individuals will also be permitted to receive and retain gifts from non-residents offshore without requirement for repatriation and can lend or dispose of authorised foreign assets held offshore to other South African residents. In the latter case, this provision will not apply retrospectively, and past irregular transactions must be regularised.

The National Treasury announced in the 2020 Budget that it would undertake a revision of South Africa’s exchange control regime by implementing a new capital flow management system. The most significant reform subsequently brought forward was the lifting last January of the full ‘loop structure’ restriction for private individuals and companies that are tax resident in South Africa to encourage inward investments into South Africa.

“For the second year in a row, National Treasury has given substantive flexibility to its taxpayers. Companies are able to optimise their capital structure and individuals are able to better account for their offshore wealth planning” says Neal.

In the 2022 Budget Speech, the National Treasury has again confirmed its commitment to exchange control modernisation. Further proposals announced in respect of individuals include:

• The export of dual-listed securities to a recognised foreign securities exchange will be permitted subject to using their ZAR 1 million annual discretionary allowance or ZAR 10 million foreign capital allowance, provided this is placed on record with the individual’s authorised dealer.
• Residents may use their discretionary allowance to participate in online foreign exchange trading (but may not use credit or debit cards).
• Authorised dealers may, on a one-off basis, remit abroad the remaining cash balances (of up to ZAR100,000 in total) of people who have ceased to be residents for tax purposes, without reference to the South African Revenue Service (SARS).

The Budget also contained a number of exchange control proposals in respect of companies, as follows:

• Debt securities referencing foreign assets listed on a South African stock exchange will remain classified as foreign.
• The foreign direct investment limit for companies investing funds offshore will increase from ZAR1 billion to ZAR5 billion, provided the stipulated investment conditions, tax obligations and reporting requirements are met. Excess income or profits of offshore branches and offices of South African firms will be permitted to be retained offshore, subject to annual reporting.
• Authorised dealers will be permitted to process transfers from a parent company to a domestic treasury management company up to a maximum of ZAR5 billion per calendar year for listed entities, and up to ZAR3 billion per calendar year for unlisted entities. The limits were previously ZAR3 billion and ZAR2 billion respectively. Funds transferred under this dispensation may be used for new investments, expansions and other transactions of a capital nature.
• Excess income or profits of offshore branches and offices of South African firms may be retained offshore, subject to tax and reporting requirements.

In addition, for institutional investors the offshore limit for all insurance, retirement and savings funds is to be standardised at 45%, inclusive of the 10% African allowance. These limits were previously capped at 30% or 40% depending on the profile of the investor.

It is proposed that institutional investors will be permitted to open foreign‐currency accounts with authorised dealers for funding purposes and to accept foreign‐currency deposits from the disinvestment proceeds of foreign assets, pending the reinvestment of the funds offshore.