Every transaction between a South African resident person or entity (“Resident”) and a non-resident person or entity (“Non-Resident”) in which funds are likely to flow (either in or out of South Africa) is subject to regulation by the South African Reserve Bank (“SARB”) in accordance with the Exchange Control Regulations that were promulgated in 1961 (“Regulations”). Many entrepreneurs and investors alike who are looking to expand their businesses in or into South Africa are unaware of the existence of the Regulations and the fact that these Regulations might be applicable to their ventures. In one of our previous articles posted on our website during March 2015 we focused on the procedures relating to the release of inward-flowing funds as a result of foreign equity investments into South Africa. This article, however, will provide you with some practical insight into the procedures for the release of inward-flowing funds in respect of incoming foreign loans, by asking: “What, Why, and How?”.
What are inward flowing funds?
Any funds flowing into the South African economy from an external (foreign) source are regarded as inward flowing funds for exchange control purposes. Generally speaking, in commercial scenarios inward-flowing funds most often take the form of loans or equity investments from Non-Residents provided to Residents.
What are they?
Foreign loans, as the name suggests, are funds that Residents borrow from Non-Resident credit providers (“Non-Resident Creditors”), whether these Non-Resident Creditors are natural or juristic persons.
Why is this important?
Any foreign loans that are received by a Resident from a Non-Resident Creditor have to be repaid to the Non-Resident Creditor, most often together with interest on the borrowed amount, by the Resident. This entitles the Non-Resident Creditor to call on the country’s foreign exchange reserves at the time of repayment by the Resident.
How to receive inward flowing foreign loans?
While permission is generally granted for Residents to raise foreign loans, it is necessary for prior approval to be obtained from an authorised dealer (or the Financial Surveillance Department of the SARB in certain instances) to release such foreign loans. Authorised dealers (usually the Resident’s bank) may approve applications by Residents to release foreign loans from any Non-Resident Creditor, subject to the following specific criteria in respect of the foreign loan being met. Furthermore, these foreign loans are recorded via the Loan Reporting System by the authorised dealer:
1. the term of advancement of the foreign loan facility must be at least one month;
2. depending on whether the foreign loan is denominated in Rand or a foreign currency, different interest rates will apply. For foreign currency denominated loans, the rate of interest being charged may not exceed the prime interest rate (for shareholder loans) or the prime interest rate plus 2% (for third party loans). Interest payable on Rand denominated loans may not exceed the prime interest rate (for shareholder loans) or the prime interest rate plus 3% (for third party loans). For trade finance facility loans – interest may be charged at up to the prime rate plus 10% (including shipping and confirming fees, handling costs, administration fees, bank charges, commissions and raising fees);
3. the foreign loan may not be sourced from the following funds:
3.1. a Resident’s foreign capital allowance;
3.2. any other funds originally transferred from South Africa;
3.3. foreign earnings retained abroad;
3.4. funds for which amnesty has been granted; and/or
3.5. foreign inheritances.
In short there may not be any direct or indirect South African interest in the Non-Resident Creditor (not just the by the Resident, but by any South African natural or juristic person);
4. the foreign loan may not be invested into so-called “sinking funds”; and
5. importantly, no upfront payments of commitment fees, raising fees and/or any other administration fees are allowed to be paid by the Resident (these fees may be payable over the term of the foreign loan facility if so agreed by the relevant parties).
If the above application criteria are met by the Resident, the Regulations prescribe that documentary evidence be provided to the authorised dealer within 30 days of receipt of the funds into the bank’s systems in order to release any such funds to the Resident. The exact documentary evidence that may be required by the Resident’s bank is not defined in any great detail in the Regulations, but would, at a minimum, include the written loan agreement recording the detailed terms of the advancement of the foreign loan; the full details of both the Resident and the Non-Resident Creditor and a statement as to whether any non-resident (other than the Non-Resident Creditor) has any direct or indirect interest of 75% or higher in the Resident (interest includes shareholding, power of control, voting rights and right to capital or income).
If all the above requirements are met to the satisfaction of the authorised dealer, the foreign loan may be released to the Resident.
Any Resident wishing to do business with a Non-Resident, or vice versa, that involves the flow of funds (whether into South Africa or out of South Africa) must comply with the Regulations regulating the flow of those funds. With regard to incoming foreign funds, any failure to follow the correct procedures is likely to result in the release of those foreign funds being delayed by the relevant banks. This can of course have far-reaching implications for business-owners who are heavily reliant on the receipt of the foreign funds. In considering your own business activities, if you are dealing with the cross-border inflow or outflow of funds, do feel free to contact us and we will gladly assist you.