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DealMakers - Q2 2023 (released August 2023)


Exchange controls in Africa – be aware of the limitations

by Cor Kraamwinkel, Marissa Wessels and Shirleen Ritchie

A country’s rules on exchange control and the accessibility of foreign exchange should be important considerations for those contemplating doing business in a new jurisdiction.   

One of the first questions for businesses entering a new jurisdiction is how to structure a transaction to gain access to that market. But an equally important, but often forgotten, second question is how to extract cash from that jurisdiction.

Whether attempting to extract dividends, interest, or payments for goods or services rendered, it is vital that cash can flow efficiently and effectively. The danger of not asking the second question is that the cash flows are impeded. This may place shareholders, creditors or contracting parties in a position where an amount that has accrued is subject to tax without being able to extract the cash.

This is reasonably simple in European or American markets, where funds can typically be remitted cross-border with relative ease, but it is not the same for all jurisdictions. Many African jurisdictions have country-specific exchange controls, or experience foreign exchange shortages, which could significantly complicate or delay cross-border cash flows.

Exchange control rules, generally administered by a jurisdiction's central bank, are aimed at regulating inward and outward capital flows. Sometimes exchange control rules may prohibit certain categories of cross-border cash flows unless prior approval has been obtained.

In South Africa, which has one of the most developed exchange control rules in Africa, obtaining exchange control approvals can be a time-consuming and administratively burdensome process. In many instances, cross-border cash flows can practically be implemented, completely or partially, without prior approval. But without prior approval, it may be impossible to declare dividends, settle foreign loans or interest payments, pay royalties and service fees, et cetera. Specific terms may apply to payments such as trade debtors, which need to be paid in cash within 90 days of the invoice date.

Cor Kraamwinkel WWWW-100773-01.jpg
Cor Kraamwinkel
Marissa Wessels WWWW -02.jpg
Marissa Wessels
Shirleen Ritchie WWWW-2178-01.jpg
Shirleen Ritchie

Regularisation of exchange control contraventions after the fact is exponentially more difficult and time-consuming than obtaining prior approval. Contraventions could also result in the imposition of fines, penalties, and other sanctions.

Certain African central banks also ration, or do not have reliable or sufficient access to, dollars and other hard currencies to facilitate or allow for significant cash flows out of their jurisdictions. In such cases, even if funds are freely transferable, delays in securing foreign currency or the inability to obtain it could render cross-border payments impossible.

Overlaying the tax aspects gives rise to a further potential challenge stemming from the failure to obtain prior approval; or a currency shortage. This could mean that income that accrues to a recipient in law is subject to tax even though the cash may be restricted from flowing. In this case, it would have to be determined whether the recipient may be entitled to a tax deduction or other concession under the provisions of their local tax laws to defer taxation of the "blocked" foreign funds until the cash can flow.

There may be further consequential tax considerations relating to foreign currency gains and losses. 

Both exchange control rules and foreign exchange unavailability may pose significant stumbling blocks to trade and investment, and should be carefully considered before doing business in any jurisdiction, especially in Africa.  

Kraamwinkel is a Partner, Wessels a Senior Associate and Ritchie a Partner | Webber Wentzel.

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