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Exchange Control Relaxations for Fund Managers? 

by Magda Snyckers

Published: April, 2017

Submission: April, 2017


In the 2017 South African Budget Review, specific statements were made from a tax and exchange control perspective in relation to fund managers. We briefly consider below whether these statements constitute a relaxation of the exchange control restrictions applicable to South African residents, and the taxes to be considered. 

The first statement in the Budget Review entitled “Tax treatment of foreign member funds” reads as follows:

“The South African government will be establishing foreign member funds to enable local and foreign fund managers to establish and manage funds targeted for investments into the rest of Africa and the world. To make foreign member funds attractive, they will benefit from a special tax dispensation. Foreign investors investing in the funds for onward investment into the rest of Africa or elsewhere will be exempt from withholding tax on interest. However, fees earned by local asset managers and collective investment scheme managers for investment management services will be subject to tax in South Africa.”

The above statement implies that a special dispensation for foreign investors investing into Africa and abroad via South Africa will be created. A fund vehicle typically would constitute a company, partnership, trust or collective investment scheme. As the objective of a fund vehicle is to pool funds for investment without additional layers of tax, provided the dispensation achieves this, and is not subject to exchange control restrictions, it may be very attractive to foreign investors. 

From an exchange control perspective, the above statement does not contain reference to specific exchange control relaxations for such a fund. Currently, fund vehicles established in South Africa are subject to exchange control restrictions and may only in certain instances invest offshore. For example, a company may only invest offshore in terms of the direct foreign investment dispensation. A partnership is regarded as a separate entity for exchange control purposes and it may only invest offshore if it is a private equity fund that is a member of the South African Venture Capital Association and it is mandated to invest offshore or by investing into an inward listed instrument. A trust is not able to directly invest offshore other than by way of subscribing for inward listed instruments. A trust may obtain indirect exposure through a fund manager’s foreign investment allowance or by investing into a portfolio of a collective investment scheme of which the manager has a foreign investment allowance. A collective investment scheme manager is entitled to invest 35% of retail assets under management abroad.   

The reference in the first statement to the interest withholding tax implies that the fund will be paying South African source interest to the foreign investors. It is noted that the Income Tax Act, 1962 contains statutory provisions dealing with the source of interest income and a fund vehicle that constitutes a tax transparent vehicle (such as a partnership) would not necessarily result in the interest income from investments outside of South Africa being subject to the withholding tax on interest. However, a specific exemption from the withholding tax on interest will ensure greater tax certainty for investors. 

It is noted that the first statement does not deal with any other potential tax implications that may arise for foreign investors investing via a South African vehicle (eg income tax, capital gains tax, dividends tax and foreign taxes).  

The second statement entitled “Exchange-traded funds referencing foreign assets” reads as follows: 

“Government proposes that local collective investment scheme management companies registered with the Financial Services Board and regulated under the Collective Investment Scheme Control Act (2002) [“CISCA”] be allowed to list exchange-traded funds referencing foreign assets on South African exchanges. These funds will not be subject to macroprudential limits on amounts that may be invested offshore. South African institutional investors and authorised dealers will be allowed to invest in such funds, subject to their respective macroprudential limits. These funds will be classified as foreign assets for prudential purposes. The Reserve Bank has released circulars on these policy measures.”

The circulars subsequently released do not elaborate on these policy measures and the updated Exchange Control Manual for Authorised Dealers (the “Manual”) merely contains the following statement: 

“…Local collective investment scheme management companies registered with the Financial Services Board and regulated under CISCA are only allowed to inward list exchange traded funds referencing foreign assets on the JSE Limited. These entities require prior written approval of the Financial Surveillance Department in respect of all issuances of inward listed instruments.” 

The reference to the inward listing of exchange traded funds (“ETFs”) in the Manual implies that the ETFs will be issued by a foreign entity (seemingly established by the local manager or a foreign entity).

From an exchange control perspective, the benefit of investing into ETFs lies in the fact that South African companies, individuals, partnerships and trusts may invest in approved inward listed instruments without restriction. It is noted that an institutional investors will still be required to utilise their foreign investment allowance to invest in the ETFs. However, certain South African residents, namely companies, individuals and trusts may invest into the ETFs without restriction. 

It is noted that the second statement contains no reference to the tax implications of either the foreign issuer, the fund manager or the investor. It is recommended that the income tax, capital gains tax, dividends tax, withholding tax on interest and securities transfer tax implications for all the parties to such an arrangement be considered. 


Magda Snyckers

tax director [email protected] cell: +27 83 289 3885







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