Exchange control rules can be confusing at the best of times. When it comes to foreign investments, different rules apply to different types of clients. These can be summarised as follows:
Individuals (natural persons only) are allowed to transfer a total amount of R2 million from South Africa. Individuals are required to obtain a tax clearance certificate (for a foreign investment) from SARS, and complete the relevant forms at their banks.
The amount of R2 million is not an annual allowance. Once it has been transferred, the Reserve Bank shows little or no interest in the subsequent value of individuals’ overseas assets or how the funds are used, with one condition. The relevant offshore funds or the growth on these funds may be transferred back to South Africa only as repatriation by the individual. However, these funds may never be reinvested in South Africa or lent to a South African party, regardless of how many transactions or legal entities (such as overseas trusts) are involved. Simply put, these funds must be invested offshore.
Should individuals exceed the R2 million limit, they are likely to be fined to the tune of 20% of the excess amount transferred. The Reserve Bank is uncompromising in this regard, even in cases where individuals claim the excess amounts were transferred by accident, or that they cannot remember transferring funds some years previously. According to the Bank it is an individual’s responsibility to ensure that s/he does not transgress the rules. Only in very exceptional cases will the Bank allow for errors.
South African trusts and close corporations are not allowed to have overseas assets without Reserve Bank approval, which is unlikely. Should they acquire offshore assets, they are legally obligated to declare these within 30 days to the Reserve Bank.
For years South African companies have been allowed to set up overseas subsidiaries and branches after they obtained Reserve Bank approval and provided evidence of “benefit to South Africa”. This benefit had to be quantified in detail – a relatively easy task if the result involved increased export proceeds or service receipts but not so easy in other cases. In addition, the Reserve Bank would not approve requests from certain sectors, including property developers and investors.
The good news is that these requirements have been relaxed since 2008. Companies can now apply for foreign direct investments (FDI) where they hold a minimum of 10% in offshore entities. For investments of up to R50 million, the banks of the applicants may approve the transactions, and subsequently place it on record with the Reserve Bank. This has also opened the door to commercial property investment and development companies and various other sectors.
Many banks are nervous about approving these types of requests and refer them to the Reserve Bank if there’s any uncertainty about whether all the requirements have been met. It is therefore essential that companies’ submissions to their banks meet every single Reserve Bank requirement. Make sure submissions are technically correct and of a high standard!
For assistance with making representations or obtaining approval for corporate clients who qualify, contact Michael Heath on tel. 082 326 8480 or 021 873 1128 and e-mail firstname.lastname@example.org.