Foreign Capital

The Exchange Control Act and Treasury Regulations protect the South African currency. These rules define the range of transactions that may take place in South Africa or may be carried out with the permission of the Treasury by residents of South Africa. These regulations are managed by the exercise of discretionary powers. The Treasury has delegated authority to deal with most exchange control matters to the Reserve Bank, which, in turn, has delegated authority to the commercial banks as the authorised dealers. This appointment gives these banks the right to buy and sell foreign exchange, subject to conditions and within limits prescribed by the Exchange Control Department of the South African Reserve Bank. Matters outside the authority given to the commercial banks must be made through the applicant's bankers to the Reserve Bank. The Reserve Bank amends its controls in relation to the existing economic situation.

The exchange control system has been gradually liberalised over the past few years, and it is the stated intention of the Department of Finance that the liberalisation and deregulation of Exchange Control will continue. The South African Rand is a free-floating currency, which is subject to normal market forces of supply and demand. Foreign exchange rates of the Rand against other currencies are quoted in the daily press and are available from all commercial banks.

Restrictions on Foreign Investment and Investors
Although foreign investment is encouraged, currency flows are subject to exchange controls. It is government policy to offer encouragement to foreign companies wanting to establishment branches in the country.

Restrictions on Foreign Ownership
There are no real restrictions on foreign ownership of a business in South Africa.

Inward Investment
No prior exchange control approval is generally required for the transfer of funds to South Africa.

Registration of Foreign Capital
No exchange control permission is required for the inward transfer of equity share capital.

Foreign Loans
The policy is to require a minimum debt to equity ratio of 3:1. Loans should usually be fixed for a minimum period of 6 months. The authorities will consider foreign loans that are not for property development, consumer credit or speculative purposes. Repatriation is subject to submission of an application prior to repayment. Once approval is obtained, the commercial bank monitors and reports on the receipt and usage of the loan funds.

Local Borrowings
These are restricted - the maximum is determined in terms of a formula and is linked to the amount of owners' funds (share capital, loans and accumulated profits). The restriction commences with a foreign holding of 75% or more. In the case of a wholly-owned subsidiary of a foreign company (and a branch of a foreign company), the maximum local borrowing allowed is an amount equal to 200% of the owners funds. In instances where a non-resident wants to borrow locally to finance a foreign direct investment into South Africa, application can be made to borrow up to 300%. As local participation in the company increases, so does the permissible ratio of borrowings to owners' funds. The limits may be temporarily increased in certain circumstances.

Interest, Royalties, Technology Agreements and Service Fees
Interest payments are freely transferable, provided the rate is reasonable with regard to the nature of the loan, current interest rates and past practices. Payment of service fees by wholly owned subsidiaries to their foreign parents comes under particularly close scrutiny. Management and technical fees may be paid to the holding company/head office if reasonable. No withholding tax is deductible in respect of management fees. Exchange control approval is not required, provided a proper invoice supports the fee. A fee calculated as a percentage of turn-over will not be allowed as the Exchange Control prefers to see foreign investors withdrawing their profits from South Africa in the form of dividends.

Royalty and technology agreements require the prior approval of the Exchange Control. Once approved, royalty payments and technical service fees are freely transferable. Licence agreements must be approved by the Department of Trade and Industry. Acceptable rates vary - 2% to 4% for manufacture of consumer goods and up to 6% for capital goods. Minimum and/or upfront payments (even if recoupable) are not allowed, unless there is immediate benefit, for example, training. The payment is subject to a withholding tax of 12% (unless the rate is reduced or eliminated in terms of a double tax agreement).

Repatriation of Capital and Earnings
Repatriation of capital investment may be authorized by the commercial bank on production of proof of liquidation or sale at fair market value

Dividends And Branch Profits
There is no restriction on the transfer of dividends or profits of local branches of foreign parents, provided such transfers are made out of trading profits and are financed from available cash funds without resorting to excessive local borrowings.

Shares issued to non-residents must be endorsed as being non-resident shares.

Interest: Interest payments are freely transferable, provided the rate is reasonable with regard to the nature of the loan, current interest rates and past practices

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