Foreign Loans, Reserve Bank Approval and Pitfalls - Get Your House in Order

It is common practice for a South African resident (be it a company or a natural person) to borrow money from a non-resident, or for that matter, a non-resident to lend money to a South African entity or person.

This made ultimate commercial sense for many years, particularly with non-residents not having had to pay income Tax in South Africa on interest earned and/or accrued.

Interest Taxed

As of June 2013, interest is, however, taxed in South Africa in the hands of non-residents in the form of a withholding Tax of 15% to be retained and paid to SARS by the relevant borrower, similar to withholding Tax on Dividends.

Recording of the Loan

What happens more often than not is that monies are introduced into South African from a non-resident, and at the time of introduction into South Africa, it is recorded as either "Capital Investment", "purchase of immovable property" or some other description, where in fact it ought to be a "loan".

Description

When the monies are introduced and in the heat and excitement of the moment, the description of the purpose for the monies introduced may seem technical or irrelevant, the consequences are not thought through thoroughly, or the parties may intend to rectify matters in due course.

The fact is that monies cannot be paid to a non-resident by a resident in respect of a loan without the Reserve Bank approval to do so, and this will only be obtained if the original loan is/was approved.

The Risk

The risk is that over time the parties forget to obtain the necessary Reserve Bank approval for the loan, or worse yet, the relationship breaks down between the parties, and by the time the relationship is disturbed (possibly by death or a dispute between the parties), it is too late. Enormous costs are incurred in an attempt to rectify the situation by bringing an application for retrospective approval, which fails if both parties don’t cooperate.

It is not only the substantial costs involved, or the drawn out procedure and delays that are experienced that should be avoided. As is borne out in the case of Pratt (Pratt v First National Bank [2008] ZA SCA 92 (12 September 2008), the High Court held that the lender was unable to claim back the unauthorised loan without the Reserve Bank approval. Thus in the event of a dispute, the lender stands the risk having his/its claim against the borrower dismissed due to the fact that the approval of the Reserve Bank was not in place.

Prior Approval

While it is possible to obtain the Reserve Bank’s retrospective consent for a loan by a non-resident to a South African resident, (at a cost and waste of time), it is still, and always is, the best policy that the Reserve Bank’s approval be obtained from the beginning. After all, that is what the Act and Reserve Bank rules prescribe.

Conclusion

For those who do not have their house in order, it is strongly recommended that this is done without delay.

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