November 29, 2023
Foreign Direct Investment (FDI) – What you need to know
What is an FDI?
Foreign Direct Investment is a strategic approach adopted by South African businesses to expand their operations, diversify portfolios, and explore new markets.
An FDI occurs when a South African company invests in an offshore entity by purchasing at least 10% of its shares and actively participates in the management and daily activities of the offshore entity. FDI’s are not available to NGOs, CCs, Sole Props, Partnerships, and Trusts under SA exchange control and Authorised Dealers (Banks) can approve any such FDIs below R5 billion and prior approval must be obtained before the investment can be made and is valid for a period of 12 months, after which it may be renewed.
Simplifying the FDI approval process with Currency Partners
Our team of specialists is well versed in assisting clients with obtaining FDI approvals. The process begins with a detailed discussion, followed by the Exchange Control team providing the relevant application form. Clients must submit a motivation letter explaining the Foreign Direct Investment in detail, as well as provide the latest audited financial statements of the South African entity. Details about how the investment will be funded and how the funds will be utilised abroad must also be included.
Changes to the Reserve Bank ruling
A significant change was introduced to the Reserve Bank ruling on February 23, 2022, providing more flexibility for companies with FDIs. Under the revised ruling, profits and income earned abroad can now be retained overseas, eliminating the previous requirement of repatriation to South Africa. Furthermore, the limit for companies investing funds offshore was increased from R1 billion to R5 billion, offering greater opportunities for international expansion.
Qualifying criteria for an FDI approval
- The investment must be made in a foreign or offshore entity that is not listed on any South African exchange.
- The investment must be made in a foreign or offshore entity that is controlled by the SA company to the extent of their voting rights. Passive investments are not permitted.
- When applying for the FDI, latest annual financial statements are required.
- The investment must be made from retained earnings on the balance sheet. If the SA company needs to borrow locally from, for instance, shareholders or a bank, then the SARB must be notified of this.
- The investment must be made for a legitimate business purpose. Historically one could only invest into the same industry as the SA company was operating in, however now you can invest into any industry.
- The investment must comply with South African laws and regulations.
- The investment must not conflict with South African foreign policy or Exchange Control regulations.
- The investment must not have a negative impact on the South African economy. For this reason, the investment must be active in nature, which means that you need to ensure that the foreign subsidiary makes a profit. By doing so, the SA company could raise management fees, which is a benefit to South Africa. You can’t simply transfer funds abroad, without any benefit to South Africa.
Subsequent conditions after a FDI approval has been obtained
Once approved, certain conditions must fulfilled under the FDI:
- All payments offshore must be converted into foreign currency in South Africa and cannot be remitted from a Customer Foreign Currency account (CFC account). This applies to any form of capital which consists of equity and loan funds, i.e., no capital payments can be made to or from a CFC account.
- On an annual basis, the SA company is required to submit to the SARB a progress report on the offshore investment, supported by their latest FinStats.
- Any changes to the foreign entity’s business model must be reported and if the foreign investment is sold, net sale proceeds must be repatriated to South Africa within 30 days and the SARB must be notified of this.
- Foreign entities must declare any excess profits as dividends annually and report to the Financial Surveillance Department, in the form of a Progress Report, on how any funds repatriated or retained abroad are utilised.
Conclusion
Investing in foreign or offshore entities can be a lucrative strategy for South African businesses. According to the annual Balance of Payments report from the SARB, there has been a substantial increase in FDIs out of South Africa since 2019 and we have experienced significant interest surrounding the topic. However, such investments are subject to foreign exchange controls and regulations.
The chart above reveals a decline in FDI inflows to South Africa compared to outflow FDI, likely signalling dwindling investor confidence in the local market due to uncertainties and/or unfavourable investable conditions. While the quantum of outbound FDI fluctuates significantly with no particular trend, local economic conditions, the weaker Rand and onerous regulations for investing offshore, may reduce the ability of local entities to identify and implement opportunities for investment abroad.
Currency Partners has successfully assisted numerous businesses with FDI applications, annual reporting and the renewal of lapsed approvals, simplifying and managing the process for our clients . Please don’t hesitate to contact us should you have any questions or would like assistance with a FDI.
To speak to an expert in our specialist business team, email enquiries@currencypartners.co.za or call us on +27 21 203 0081.
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