South Africa’s Exchange Control Regulations and ‘Loop Structures’: The Income Tax Implications of the Removal of the Restrictions with Effect from 1 January 2021

• Author: Oguttu, A.W.
• DOI: https://doi.org/10.47348/SAMLJ/v34/i1a4
• Published date: 24 October 2022
• Date: 24 October 2022
• Citation: (2022) 34 SA Merc LJ 88
• Pages: 88-117

SOUTH AFRICA’S EXCHANGE CONTROL

REGULATIONS AND ‘LOOP STRUCTURES’:

THE INCOME TAX IMPLICATIONS ON THE

REMOVAL OF THE RESTRICTIONS WITH

EFFECT FROM 1 JANUARY 2021

ANNET WANYANA OGUTTU*

Professor, Department of Taxation and the African Tax Institute in the

Faculty of Economic and Management Sciences, University of Pretoria

Abstract:

This article analyses the implications of the income tax provisions

introduced to address the potential tax avoidance that could arise from

the lifting of the exchange control restrictions on ‘loop structures’ which

were effected from 1 January 2021. Most South Africans and foreign

investors do not quite understand the operation and implications of

exchange controls due to the complexity of these regulations, and the

perception that it is difficult to move money in and out of South Africa.

Since the removal of exchange control restrictions on loop structures

does not apply to existing unauthorised loop structures, this paper also

provides a broader understanding of the operation of exchange controls

regarding loop structures. The article first explains the administration

of exchange controls and how the restrictions of exchange controls on

loop structures have been relaxed over the years, and then it explains

the 2021 removal of the restriction on loop structures as well as the

amendments to the Income Tax Act to curtail tax avoidance risks.

Keywords: exchange controls, loop structures, tax avoidance, controlled

foreign companies, participation exemption, capital gains on the disposal of

shares

I INTRODUCTION

Exchange controls are implemented by some countries, particularly

developing countries (such as South Africa, Zimbabwe, Nigeria,

Morocco, Ghana, Libya, Namibia, Russia and Venezuela) to limit and

*LLD LLM (UNISA) LLB (Makerere) H Dip International Tax Law (UJ) Dip in Legal

Practice (Makerere).

88

https://doi.org/10.47348/SAMLJ/v34/i1a4

(2022) 34 SA Merc LJ 88

© Juta and Company (Pty) Ltd

control the outf‌low and inf‌low of capital.

1

In South Africa, the relation-

ship between capital f‌lows and exchange control regulations has been of

concern to f‌iscal policymakers for decades. Exchange controls were f‌irst

introduced in South Africa in the form of Emergency Finance Regula-

tions at the outbreak of the Second World War in 1939,

2

with the

intention of protecting South Africa’s foreign exchange reserves. How-

ever, from 1939 until the late 1950s, exchange controls restrictions on

capital transfers were minimal.

3

This changed during the apartheid era

(the period from 1961 to 1993) when South Africa had a negative

political reputation which impacted the price of gold mined from the

country in the international market, which necessitated restrictive

exchange controls to protect the currency from devaluation.

4

The

apartheid era was thus characterised by a comprehensive system of

exchange controls on current and capital account transactions over

residents and non-residents.

5

For residents, exchange controls were

tightened in response to the large-scale capital outf‌lows. For non-

residents, the repatriation of the proceeds of sales of South African

securities was prohibited.

6

At the end of apartheid, which ushered in the

democratic election of a government of national unity in April 1994,

South Africa was reintegrated into the global economy. This provided

opportunities for the gradual liberalising or relaxing of exchange

controls, and it has been the stated intention of National Treasury that

the liberalisation and deregulation of exchange controls would

continue.

7

Nevertheless, exchange controls continue to complement the anti-tax

avoidance legislation since they prevent the outf‌low of capital from the

country which could deplete the tax base.

8

Essentially, the term ‘tax

avoidance’ refers to the use of legal methods to arrange one’s affairs by

utilising loopholes in the tax laws so as to pay less tax.

9

Exchange control

regulations have been used to prohibit engaging in so-called ‘loop

1

Johnson, Export/Import Procedures and Documentation (AMACOM New York 2002) 22.

2

Spitz, Exchange Control Encyclopedia (2002, Service Issue 4, in Part 1) 2.

3

Gidlow, The South African Reserve Bank Monetary Policies under Dr TW de Jongh:

1967–1980 (SARB 1995) 180.

4

Olivier & Honiball, International Tax: A South African Perspective 4 ed (Siber Ink 2008)

524.

5

Levells, ‘The opportunities of relaxed exchange controls’ November 2015, available at

https://www.hoganlovells.com/en/publications/the-opportunities-of-relaxed-exchange-

controls, accessed on 31 March 2021.

6

Olivier & Honiball, (Siber Ink 2008) 438.

7

Olivier & Honiball, (Siber Ink 2008) 438.

8

Oguttu, International Tax Law: Offshore Tax Avoidance in South Africa (Juta 2015) 657.

9

Stiglingh et al, Silke: South African Income Tax (LexisNexis 2021) 1136; IRC v Duke of

Westminster [1935] All ER 259 (HL).

https://doi.org/10.47348/SAMLJ/v34/i1a4

SOUTH AFRICA’S EXCHANGE CONTROL REGULATIONS AND ‘LOOP STRUCTURES’ 89

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