1747. Approvals required
July 2009 – Issue 119
In recent times we have seen a number of cases of companies which have entered into a transaction without the necessary exchange control approval, purely because they were not aware that such approval was required. It should be noted that based on the decision of the Pratt case (Pratt v FirstRand Bank Ltd. (416/07)  ZASCA 92;  1 All SA 158 (SCA) 2009 (2) SA 119 (SCA)) an agreement entered into will be null and void if such an agreement required prior exchange control approval and such approval was not obtained. In other words no party will be able to enforce its rights under such an agreement as a court will not enforce an illegal contract.
Prior approval is required from the South African Reserve Bank (SARB) for; inter alia, the following transactions:
· outward capital transfers by residents above the limits;
· outward loan transfers by South African ("SA") residents;
· loans from non-residents to SA residents;
· local financial assistance to foreign controlled SA companies; and
· transfers by emigrants above the limits.
Prior approval is also required for all percentage based fees with regard to management fees and technical assistance fees. The SARB will consider the merits of such a fee and the value received for paying the fee in approving the percentage based fee.
The payment of royalties by a SA resident for the use of foreign developed intellectual property (IP) in SA also requires the prior approval of either the SARB or the Department of Trade and Industry (DTI). Royalties, license fees and patent fees for local manufacturing require approval from the DTI and royalty rates must be between 2% and 5%. Royalties for the use of technology will require approval from the SARB. The sale of SA developed IP from SA will not be permitted without prior approval from the SARB. The SARB will not approve such sale unless the owner disposes of the IP at its fair market value for a cash consideration.
SA resident individuals are also allowed to make investments offshore or remit funds overseas within certain set limits.
Outward capital transfers
For new outward foreign direct investment below R50 million per company per year approval must be obtained from an Authorised Dealer provided that the SA resident will hold at least 10% and the investment is located outside the Common Monetary Area (CMA). If such an investment includes a loan by the SA resident or if the investment is indirectly via an offshore holding company, the request for approval will be referred to the SARB for its approval.
Any outward capital investment in excess of the R50 million will be approved by the SARB only and the shareholding so obtained must be at least 10% and the applicant must provide full details of monetary benefits to SA, excluding the dividend flows. SA companies are allowed to expand their existing offshore business without prior approval from the SARB, provided that such acquisitions are in the same line of business and enhanced monetary benefits to SA can be demonstrated. Such expansions can be funded via offshore loans provided that there is no recourse to SA through funding or guarantees.
The granting of a loan by a SA subsidiary to its offshore holding company will in general not be allowed unless these are exceptional circumstances which require that such a loan be made.
Loans by SA holding companies to their offshore subsidiaries are generally approved, even if such a loan is interest free with no fixed repayment terms.
Loans from non-residents
Foreign loans to SA companies require prior approval from the SARB and there are no restrictions on the payment of interest but the interest rates levied are limited for connected party loans to the SA prime rate for loans denominated in Rands or the relevant base lending rate for loans denominated in foreign currency.
For loans from third party lenders the interest rate will be limited to SA prime rate plus 3% on Rand denominated loans or the base lending rate plus 2% for foreign denominated loans.
These loans will be approved without any repayment terms but any repayment will require SARB approval before it can be effected.
Investments by foreigners
No approval is required for the investment by non-residents into SA equities. However, the Authorised Dealer will normally insist on an audit certificate confirming that the foreign investor subscribes for or acquires those shares at an amount equal to the market value of such shares. The sale of SA shares to non-residents on loan account will require prior approval from the SARB.
The Authorised Dealers will only stamp the shares "Non-resident" once proof is provided that the consideration or subscription price has been received in SA by the seller or the company. It is important that SA shares held by non-residents are indeed stamped "Non-resident" as this is required to enable the foreign investor to repatriate from SA any dividends or sale proceeds received.
Local financial assistance
Approval must be obtained from the SARB for the granting of financial assistance in excess of the allowed amounts by SA banks to SA companies with a foreign shareholding of 75% or more.
Using a prescribed formula a wholly non-resident owned SA company may borrow from SA banks up to 300% of the shareholder’s investment. A 25% SA shareholding will increase the maximum allowable local borrowings to 333% using the same formula.
Emigrants can on application to the SARB request to transfer blocked assets in excess of the limit of R4 million per family unit or R2 million per single person, subject to the discretion of the SARB and subject to an exit charge of 10% of the excess amount.
SA resident individuals
Authorised dealers may allow individuals over the age of 18 years who are taxpayers and whose tax affairs are in good standing with the SA Revenue Service (SARS) to invest up to R2 million outside the CMA. A completed Tax Clearance Certificate (TCC) must be issued by SARS and must be submitted to the Authorised dealer.
In addition the SARB will consider applications by individuals to invest in fixed property in Southern African Development Community (SADC) countries on the submission of a TCC.
SA residents over 18 years of age may use the single discretionary allowance up to the limit of R500,000 per person per year, without obtaining a TCC, for:
· A travel allowance;
· Monetary gifts and loans to non-residents or SA residents temporarily abroad;
· Donations to missionaries, provided that a letter from an official or recognised religious body is submitted confirming that the person is a missionary abroad; and
· Maintenance transfers to father, mother, brother or sister who are in need, upon documentary proof signed by a magistrate or civic official of the foreign city.
The discretionary allowance is in addition to the existing R2 million individual capital allowance and may not be availed of by residents living temporarily abroad, nor may the allowance be used to disguise a transfer for which approval may normally be refused. For this reason it is understood that the discretionary allowance may not be used by individuals to make capital investments seeing that these investments are dealt with under the R2 million allowance.
A travel allowance of R160,000 per year is available for all persons under the age of 18 while a resident may use his credit card to avail of up to 100% of the authorised travel allowance.
Individuals may use their credit cards to make permissible foreign currency payments for small transactions, limited to R20,000 per transaction.
The legal framework of exchange control is one of total prohibition except with the permission of and subject to the conditions set by the National Treasury. The economic policy underlying exchange control is however not totally prohibitive as such an approach is not conducive to conducting normal international transactions.
It is therefore essential that companies obtain prior approval from the SARB before they enter into transactions for which the approval of the SARB is required. If companies do indeed enter into such transactions before approval is obtained it is essential that such agreement contains a condition precedent regarding the obtaining of SARB approval. As stated above, any agreement entered into without the approval of SARB, where such approval is required, will be illegal and will not be enforceable. This could result in the non-resident being unable to effect the repayment of loans made to SA companies, while SA companies may suffer damages to their reputation if they enter into agreements which cannot be enforced due to the non-compliance with exchange control.
Edward Nathan Sonnenbergs
SARB Exchange Control Manual
Immigration Act No. 13 of 2002