This article is based on insights provided by Esther Geldenhuys and Julie Oppenheim (Partners), and Robyn Berger (Tax Executive), Bowmans, on the risks associated with cross-border set-offs under South Africa’s exchange control regime.
South Africa: Cross-Border Set-Offs Pose Hidden Exchange Control Risks for Multinationals. Multinational enterprises (MNEs operating in South Africa) are being cautioned against a commonly overlooked compliance risk: the use of cross-border set-offs to settle obligations without prior regulatory approval.
Under South Africa’s exchange control framework, settling cross-border liabilities through netting or set-off arrangements is treated as a form of capital export and is prohibited unless approval is obtained in advance from the South African Reserve Bank’s Financial Surveillance Department (FinSurv).
This position exposes multinational groups to significant financial, regulatory, and reputational consequences if not properly managed.
Exchange Control Rules Treat Set-Offs as Capital Exports
South Africa’s Exchange Control Regulations, 1961 impose strict controls on all cross-border payments, receipts, and settlements involving South African residents.
In particular, Regulations 3(1), 10(1)(c), and 22 require that any settlement of obligations between a South African resident and a non-resident must be processed through an authorised dealer, typically a South African commercial bank.
Where a South African entity owes money to a foreign counterparty, the obligation must generally be discharged through an approved cross-border payment. Netting or offsetting reciprocal obligations across borders, even where commercially logical, is not permitted without prior approval from FinSurv.
Why Multinationals Often Get It Wrong
Globally, multinational groups frequently use set-off arrangements for intercompany transactions, including:
- Management fees
- Intra-group loans
- Royalties and licence fees
- Dividend payments
- Cross-border supply arrangements
These transactions are often settled through accounting entries rather than physical cash movements.
While such practices may be acceptable in other jurisdictions, implementing them in South Africa without regulatory clearance constitutes a direct breach of exchange control regulations — regardless of intent.
Regulatory Enforcement Powers and Penalties
Non-compliance with South Africa’s exchange control rules carries serious consequences.
FinSurv is empowered to investigate suspected contraventions and may:
- Declare transactions unlawful
- Order transactions to be unwound or regularised
- Impose substantial administrative penalties, potentially up to the full value of the transaction
- Require forfeiture of amounts involved
- Issue directives to authorised dealers and affected entities
Beyond financial penalties, affected businesses may also face ongoing operational disruption and reputational damage.
Heightened Scrutiny Increases Compliance Risk
Tax and regulatory analysts note that South Africa’s exchange control regime is subject to increasing scrutiny as authorities tighten oversight of cross-border flows.
In this environment, multinationals are being urged to assess local regulatory requirements carefully before implementing global treasury, tax, or settlement strategies that involve South African entities.
What may appear to be an efficient internal settlement method could, in practice, expose the group to regulatory enforcement action.
What Multinationals Should Do
Experts advise multinational groups with South African operations to:
- Review existing cross-border settlement and netting arrangements
- Identify any historic or ongoing set-off transactions involving South African residents
- Seek FinSurv approval where required
- Align treasury and tax practices with South Africa-specific exchange control rules
Early compliance is widely viewed as more cost-effective than post-transaction remediation.
Why This Matters for Tax and Corporate Governance
While exchange control rules are often viewed as a regulatory issue, their implications extend into tax compliance, corporate governance, and risk management.
For multinationals operating in South Africa, understanding and complying with exchange control requirements is now a critical component of managing legal exposure and maintaining regulatory credibility.
As cross-border transactions continue to grow in complexity, South Africa’s strict approach to capital flows reinforces the need for jurisdiction-specific compliance planning.
Disclaimer
he views expressed in the original analysis belong solely to the author and do not necessarily represent the views of Africa Tax Review.
