With reform of South Africa's Exchange Control Rules, the restrictions on the use of "loop" structures have been lifted so that South African residents are no longer prohibited from using funds or assets held in offshore structures to invest back into South Africa.
In simple terms a "loop" structure was generally created when South African resident individuals, companies, trusts and private equity funds transferred funds or assets from South Africa into a foreign structure, which then directly or indirectly invested the funds or assets back into South Africa. The restrictions have been lifted to promote inward investment by South Africans into South Africa, subject to the normal criteria applying to inward investments and reporting to the Financial Surveillance Department.
The British Virgin Islands ("BVI"), Bermuda, the Cayman Islands, Guernsey and Jersey (the "Channel Islands") have for many years provided South African individuals, companies, trusts and private equity funds with broad and flexible structuring opportunities for investment and asset protection. This note runs through some of the most popular offshore vehicles that might be of use – for more detailed advice, please contact one of our team listed below.
Companies are the most common form of offshore structure given the broad range of options available, with the following being the most popular for South African residents:
- BVI Business Companies in the BVI.
- Companies limited by shares in Bermuda.
- Exempted Companies in the Cayman Islands.
- Private Limited Companies in the Channel Islands.
The benefits of using offshore companies generally include:
- Separate legal identity, limited liability for shareholders and ease of transfer of ownership.
- Share capital (or, in the case of BVI companies, the authorised shares) can be denominated in any currency and issued in various classes, including redeemable shares.
- Subject to any particular restrictions set out in their constitutional documents, all types of companies can also be migrated into and out of these jurisdictions with relative ease.
A trust is a legally binding arrangement whereby, typically, one person (known as the settlor) transfers assets to another person (known as a trustee) to hold for the benefit of other persons (known as beneficiaries) or for a specified purpose. Trusts are highly flexible and can be adapted to the settlor's needs and circumstances whilst providing anonymity and confidentiality. As such the settlor can reserve certain powers including investment powers to themselves or their wealth adviser, and/or can be appointed as a protector of the trust
Whilst South African trust law is based on the law of contract and particularly stipulatio alteri, Jersey, Guernsey, Bermuda, BVI and Cayman trusts are underpinned by equitable principles. The separation of the legal and beneficial ownership, which is the hallmark of a trust, means that the trustee and not the beneficiaries will be the registered owner of the trust assets. However, as trusts do not have separate legal personality, the trust acts through its trustees.
Trusts have a number of commercial uses, particularly in the real estate context, where purpose trusts or unit trusts are used. A unit trust is a trust in which assets are held for the benefit of holders of units in the trust, in a similar manner to shareholders in a company.
Partnerships are commonly used where the pooling of capital is required amongst multiple investors, such as in collective investment vehicles and funds. A limited partnership ("LP") is a partnership between one or more "general" partners (who manage the partnership and have unlimited liability) and one or more "limited" partners (passive investors who have no involvement in the day to day running of the partnership and have limited liability). A LP has no legal personality separate from its partners, in a similar manner to partnerships under South African law.
The benefits of the LP model include:
- Versatility in scaling, as the partnership is not constrained by a minimum or maximum number of investors.
- Tailoring the relationship between the partners via the limited partnership agreement to suit investor requirements.
- Access to debt financing is widely available given the familiarity of the structure within the financing market.
In the Cayman Islands, an exempted limited partnership is the most commonly used type of partnership for international transactions. Partnerships in the Channel Islands also come in two additional forms being a separate limited partnership (having separate legal personality from its partners) and an incorporated limited partnership (being a body corporate with perpetual succession).
Foundations and Foundation Companies
In the Channel Islands, foundations blend the highly attractive features of both companies and trusts. A foundation has separate legal personality but does not have shareholders. The assets of the foundation are held in the name of the foundation and for the benefit of beneficiaries or for a specified purpose. A founder will typically provide an initial endowment of nominal value to the foundation (similar to a settlor in a trust). The principal decision making body is the council, made up of council members who owe fiduciary duties to the foundation itself, not to the beneficiaries.
Foundations are therefore useful in structures where an 'orphan' juristic entity is required or where a jurisdiction does not recognise the concept of a trust. The structure of the foundation allows for transparency and a high level of involvement by the client or the client's wealth adviser by acting as a council member or guardian, without the client retaining a legal or equitable interest in those assets.
In the Cayman Islands, a foundation company offers a flexible form of company designed to function in a similar way to a civil law or common law foundation. The foundation company has separate legal personality and limited liability, and is incorporated and registered with the Cayman Registrar of Companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.