CONSIDERATIONS FOR FOREIGN LENDERS AND SOUTH AFRICAN BORROWERS
The need to consider the South African Exchange Control Regulations, 1961 (the Regulations) in the context of cross-border loan transactions was addressed in a previous newsflash. In addition to the Regulations, further requirements in respect of each of the borrower and lender in such transactions must typically be considered.
The National Credit Act, 2005
The granting of funding or credit to a South African borrower is governed by the National Credit Act (NCA). It is important to determine in each transaction whether a credit grantor is required to register as a ‘credit provider’ under the NCA, as non-registration in a situation requiring registration under the NCA can have serious consequences for the credit provider. A lender who is required to be registered as a credit provider but who is not so registered, will not be able to enforce a loan agreement against a South African borrower as that loan agreement will be void in terms of the NCA.
The NCA applies to every credit agreement entered into between parties dealing at arm’s length that is made within South Africa, or which has an effect within South Africa. This is the case regardless of whether the credit grantor (i.e. the lender) concerned may have its principal business in or outside of South Africa.
There are a number of exemptions from the application of the NCA. Noteworthy in the present context is that the NCA does not apply to a credit agreement (i.e. facility agreement) extended to a South African juristic person where the net asset value or annual turnover of all persons related to that juristic person equals or is in excess of ZAR 1 million.
A juristic person is considered to be ’related’ to another juristic person if (a) one of them has direct or indirect control over the whole or part of the business of the other; or (b) the same person has direct or indirect control over both of them. Incidentally, the NCA will not apply to credit agreements (or facility agreements) extended to juristic persons whose net asset value or turnover falls below ZAR 1 million where the principal debt owing under that credit agreement or loan equals or exceeds ZAR 250 000.
Typically, the cross-border transactions that are implemented in the capital markets will fall outside the ambit of the NCA and within the exemption described above. It is nonetheless important to bear in mind the triggers for the application of the NCA in making this determination, as the NCA enjoys general application to offshore lenders offering or extending loans and credit to South African residents, subject to the exemptions mentioned.
Another consideration that a foreign lender must take cognisance of when advancing funding to a South African borrower is the requirement under the South Africa Companies Act, 2008 (the Act) for the South African borrower to pass the requisite financial assistance resolutions. Briefly, the Act makes a distinction between financial assistance for the subscription of securities and financial assistance in respect of the advancing of money, guaranteeing of a loan or other obligation and securing any debt or obligation of a related or inter-related company or a director of the company or a related or inter-related company.
Noteworthy however is the fact that if the correct financial assistance resolutions are not passed in both instances, the financial assistance and the agreement in respect of which that assistance is provided are void and cannot be retrospectively approved. The financial assistance resolutions will typically require the company granting the financial assistance to pass the solvency and liquidity tests pursuant to a board resolution, as well as a shareholder resolution approving the financial assistance.
From a South African borrower’s perspective, leaving aside the exchange control approval that is required under the Regulations in order to obtain a loan from a foreign lender, it is necessary to consider the withholding tax and tax treaties with other countries that apply to the facility agreement being concluded with the foreign lender.
A relatively new withholding tax on interest came into effect in South Africa on
1 March 2015. The withholding tax is applicable to interest received by non-residents (i.e. the foreign lender) to the extent that the interest has been received or is accrued from a source within South Africa. It is imposed at a rate of 15% subject to any reduction that might apply in respect of a double taxation agreement.
The Income Tax Act, 1962 (ITA) imposes a duty on the South African borrower to withhold the amount of withholding tax on any interest payable to the foreign lender. The ITA deems interest to be paid on the earlier of the date on which the interest is paid or becomes due or payable.
There are a number of exemptions that apply to withholding tax on interest under the ITA. For example, interest paid by the South African Government, a South African bank or in respect of any listed debt is not subject to withholding tax on interest.
In syndicated loan transactions, providing security to a separate entity from the lenders obviates the need to re-create security every time the lenders change in the syndication. For a number of reasons, the English law security trust structure is not recognised or valid under South African law. Instead, the use of a special purpose vehicle (SPV) as security holder and guarantor of a syndicated facility is common when a South African borrower is involved.
This security structure requires (a) an SPV and an owner trust to be established, (b) the SPV to provide a guarantee to the security agent acting on behalf of the lenders, (c) the borrower (and possibly other obligors) to indemnify the SPV for any payments made in relation to the enforcement of a claim under the guarantee issued to the security agent and (d) the borrower (and other obligators, if any) to provide security for that indemnity.
The benefit of the SPV structure is that it creates a substantially similar result to the English law security trust structure, i.e. that a separate entity holds the security and allows for trading in the syndicated loan (and related security) without affecting the security or requiring it to be re-created.
Each of the considerations touched on, in addition to the exchange control approval required under the Regulations, requires in-depth analysis in the context of cross-border transactions to ensure that both the foreign lender’s and domestic borrower’s South African regulatory obligations are adequately addressed.
For further information please contact Lischa Gerstle.