Non-Resident Investment in South Africa: Exchange Control, Tax implications, and Appropriate Treatment

South Africa, with its diverse economy and investment opportunities, often attracts non-residents (foreign nationals) looking to invest in the country. It is crucial to understand the implications and proper treatment of non-residents introducing funds into South Africa indirectly, such as through attorney-client trust bank accounts or corporations. This is often done incorrectly on the advice of conveyancers and/or estate agents inexperienced with foreigners, leaving clients with headaches when they one day want to extract their funds from South Africa.

When non-residents (foreign nationals) choose to invest in South Africa, they need to be aware of several critical implications:

  1. Exchange Control Regulations and the Currency and Exchanges Manual for Authorised Dealers: South Africa has stringent exchange control requirements governing the in– and outflow of funds. Non-residents must navigate these requirements to ensure compliance and avoid legal issues.
  2. Withholding Taxes: Various forms of South African sourced income, such as interest, rental income, and dividends may be subject to taxes. Capital Gains Tax are also applicable to the sale of property. Non-residents are typically subject to these taxes, and understanding the associated obligations is essential to prevent penalties.
  3. Legal Compliance: Compliance with South African laws and regulations is vital. The source of funds, the purpose of the investment, and the entities involved should all adhere to the country’s legal framework.
  4. Anti-Money Laundering (AML) and Know Your Customer (KYC) Requirements: Since South Africa has been ‘greylisted’ by the Financial Action Task Force (FATF) there are now robust AML and KYC requirements to prevent illicit financial activities. All parties involved in the investment process should strictly adhere to these measures.

Foreign nationals are required to declare on arrival in writing to an Authorised Dealer (AD) whether they own foreign assets and on receipt of such completed declaration an AD may permit such foreign nationals to conduct their banking on a resident basis, dispose of or otherwise invest their foreign assets, foreign income without interference from the FinSurv Department. Transfer funds accumulated during their stay in SA provided that the foreign national can substantiate the source from which they have acquired such funds, and the value of such funds is reasonable. AD may permit foreign nationals to retransfer abroad capital that has been introduced into South Africa, provided that they can substantiate the original introduction of such funds.

The proper treatment of non-resident investments in South Africa involves several key considerations:

  1. Regulatory Approvals: Non-residents must secure necessary regulatory approvals from relevant authorities, including the South African Reserve Bank’s (SARB), Financial Surveillance Department, when making investments. Complying with exchange control regulations is critical. For instance, a loan from foreign nationals needs prior SARB, FinSurv approval before introducing funds into SA.
  2. Trust Accounts and Corporations: Attorney-client trust accounts and corporate entities often serve as channels for non-resident investments. The conveyancer’s trust account is often unable to handle foreign currency and the funds get automatically converted to ZAR, at a terrible exchange rate and leaving the client without proof of introducing the foreign currency into SA, making it difficult for the client to one day take the funds out of SA.
  3. Legal Expertise: Engaging legal experts, specialising in cross-border transactions, is advisable to ensure investments align with South African laws and regulations. Experienced legal practitioners or foreign currency exchange specialists can guide the best methods for introducing funds into SA.
  4. Tax Compliance: Non-residents must also comply with South African tax laws. They should be aware of their tax obligations and may need to enlist the services of tax professionals to ensure correct tax treatment.

Non-resident investment in South Africa through attorney-client trust accounts or corporations presents a wealth of opportunities. Nevertheless, navigating the intricacies of exchange control and tax regulations is essential for a successful and legally compliant investment. Being well-informed, seeking legal advice, and adhering to all applicable laws and regulations are crucial steps in making the most of non-resident investments in South Africa.

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