Chapter 5: Foreign Investment


Chapter 5: Foreign Investment



5.1 Government Attitude towards Foreign Investment

Although foreign investment is encouraged, currency flows are subject to exchange controls. It is government policy to offer encouragement to foreign companies wanting to establishment branches in the country. Growth in the South African economy was slow during the 1980s and this factor, as well as subsequent restraints on the economy encourage South Africa to consider foreign investment as a significant means to increase economic growth and stability.

5.1.1 Restrictions on Foreign Investment and Investors

Exchange control exists as a measure to protect South African currency. The Exchange Control Act and Treasury regulations define the range of transactions that may take place in South Africa or may be carried out with the permission of the Treasury by residents of South Africa. These regulations are broadly stated and are managed by the exercise of discretionary powers. The Treasury has delegated authority to deal with most exchange control matters to the Reserve Bank which, in turn, has delegated authority to the commercial banks as the authorised dealers. Applications to the Reserve Bank involving matters outside the authority given to the commercial banks must still be made through the applicant's bankers. The Reserve Bank adjusts its controls according to the prevailing economic situation.

5.1.2 Restrictions on Foreign Ownership

There are no real restrictions on foreign ownership of a business in South Africa.

5.2 Exchange Controls

5.2.1 Inward Investment

No prior exchange control approval is generally required for the transfer of funds to South Africa.

5.2.2 Registration of Foreign Capital

5.2.2.1 Capital

No exchange control permission is required for the inward transfer of equity share capital.

5.2.2.2 Foreign Loans

The policy is to require a minimum debt to equity ratio of 3:1. Loans should usually be fixed for a minimum period of 6 months. Foreign loans that are not for property development, consumer credit or speculative purposes will be considered by the authorities. Repatriation is subject to submission of an application prior to repayment.

5.2.2.3 Local Borrowings

The Exchange Control regulations provide that when 50% or more of the voting stock, capital or earnings of a local company is held or controlled, directly or indirectly, by a non-resident, a local loan may not be made or credit granted to the company without the prior approval of the South African Exchange Control.

The exchange control regulations limit the local borrowings of such companies in terms of a formula related to the funds invested in the company by the respective shareholders. The commercial banks monitor and report on compliance with the formula.

The formula is stated as follows:

Maximum local borrowings = A x B, where:

A = (100%+(South African Participation x 100%)) Non- resident Participation; and

B = Aggregate of share capital, share premium, retained reserves and shareholders loans in proportion to equity

5.2.2.4 Other Types of Non-Resident Investment

Funds may be remitted to and from South Africa.

5.2.2.5 Technology Agreements

Royalty and technology agreements require the prior approval of the Exchange Control. Once approved, royalty payments and technical service fees are freely transferable.

5.2.3 Repatriation of Capital and Earnings

5.2.3.1 Dividends and Branch Profits

There is no restriction on the transfer of dividends or profits of local branches of foreign parents, provided such transfers are made out of trading profits and are financed from available cash funds without resorting to excessive local borrowings.

5.2.3.2 Interest, Royalties and Service Fees

Interest payments are freely transferable, provided the rate is reasonable with regard to the nature of the loan, current interest rates and past practices. Payment of service fees by wholly owned subsidiaries to their foreign parents comes under particularly close scrutiny as the Exchange Control prefers to see foreign investors withdrawing their profits from South Africa in the form of dividends.

5.2.3.3 Imports and Exports

Some imports are subject to permit but most goods may be imported without restriction. Export licenses are required only for strategic goods, some foodstuffs and a few other categories. For all exports, the necessary forms and documentary evidence must be filed with Customs and with the exporter s bank. The proceeds from exports must be remitted to South Africa within six months of the date of export.