INTERNATIONAL INVESTORS ADVICE- UPDATE IN PROPERTY LAW 
(Courtesy: Buchanan-Boyes Attorneys at Law Cape Town)

1. NON – RESIDENTS
1.1 With the ideal climate, beautiful environment, friendly people and favourable exchange rate, foreign purchasers have been actively acquiring immovable property in South Africa. This foray into our property market has predominately been into the residential property sector. There is no reason why it should be less attractive for foreign developers to invest in the commercial property sector also.

1.2 ALIENS CONTROL ACT
No restrictions on property ownership by aliens (an alien being a non-resident) exist, save for a prohibition on illegal aliens owning immovable property. The Aliens Control Act (1996 of 1991) stipulates that a South African Citizen who lets or sells or in any manner makes immovable property in the Republic available to any alien who is in the country in contravention of the provisions of the Act, is guilty of an offence.

1.3 COMPANIES ACT
There are, however, procedures and requirements that have to be complied with when entities such as companies registered outside South Africa wish to acquire immovable property. Every external company is required to in terms of the Companies Act (1 of 1973) to lodge certain documents, Inter alia a copy of it's memorandum and details of it's auditor, with the Registrar of Companies within 21 days after establishment of a place of business in the Republic. IT is important to note that “establishment of a business” includes the acquisition of immovable property. The Act proceeds to clearly stipulate in Section 324 that “no external company” shall be capable of acquiring the ownership of immovable property unless its memorandum has been or is deemed to be registered with the Registrar. Every external company, as well as local companies with non-resident shareholders, shall at all times have a public officer who is a person resident in the Republic authorized to accept service of process on the company's behalf. Non-compliance with the requirements constitute an offence.

1.4 BORROWINGS
Borrowings by non-residents
There are certain restrictions placed on local borrowings by non-residents.
All loans to and by non-residents are subject to prior exchange control approval by the South African Reserve Bank. Applications for exchange control approval are efficiently handled on behalf of the borrower by all South African commercial banks and approval of straight forward loans can usually be obtained within a few days of making application.

The basic position regarding non-residents is that same may only borrow up to a maximum of the amount invested by the non-resident, which translates to 50% to value borrowing ratio. Until 1996, it was required that debt/equity ration of 3.1 be maintained. This has been abolished but remains consideration for income tax purposes as interest in excess of this sum will not be permissible as a deduction for income tax purposes and will be deemed to be a dividend and subject to secondary tax on companies (STC).

The formula to determine the ambit of an affected company's ability to utilise local borrowings is:

100% + [ local shareholding x 100] The total
effective
[ foreign shareholding 1] capital of
borrower

total effective capital is basically the net worth of the company, which includes capital, preference shares, undistributed reserves and foreign shareholder's loans.

The percentage is therefore 100% of the total effective capital if the South African company is wholly foreign owned.

e.g.

A company has a local shareholding of 20% and a non-resident shareholding of 80%. The total effective capital is R1 000 000.00

To determine the local borrowing percentage

100% + (20 x 100)
(80 x 1 ) = 125%

Accordingly the company may borrow R1 250 000.00 locally.

1.5 INTRODUCTION AND REPATRIATION OF FUNDS
There is no restriction on the introduction of foreign funds to South Africa, but certain procedures must be adhered to in order to ensure that same together with profits realised on resale are remittable back to source in due course. This includes the endorsement of Deeds of Transfer of a property acquired with foreign funds as “non-resident” and the endorsement of share certificates, which are similarly acquired. Funds, introduced into South Africa in the form of a foreign loan may be repatriated in terms of the original loan approval by the South African Reserve Bank.

1.6 INTEREST
Where foreign loans have been utilised to finance developments within RSA and the requisite exchange control approval obtained, there are no restrictions on interest payments provided that interest rates fall within the limits prescribed by the South African Reserve Bank from time to time. Where the loan is denoted in Rands, the current prime rate will be considered acceptable. Where the loan is denoted in a foreign currency the prima rate of that country + 1.5 – 2% will be acceptable.

1.7 DIVIDENDS
All dividends declared to non-residents by unlisted South African companies require the prior approval of an authorised dealer in foreign exchange, which is generally a commercial bank. This is true where companies local borrowings fall within the local borrowings formula referred to earlier. Where the local borrowings or facilities afforded to the company (even if not fully utilised) fall beyond the ambit of the formula, exchange control approval will be required in respect of the dividends declared.

No approvals are required in respect of dividends declared to non-residents by listed South African Companies.

2. THE IMMIGRATION ACT
Ripples of anxiety and concern have entered the property market since the media has begun coverage of the anticipated introduction of the Immigration Act due in force from 12 March 2003 (see however below with regards to the intended date).

In order to establish the consequences of the Act it is best to consider some of the categories of permits and specifically, those relevant to the property industry.

1. Temporary residence
a. Visitors permit
- three months duration at a time
-can be extended from within the country for another 3 months at a time but the applicant must be able to prove sufficient resources for the duration of his stay as well as provide a sound reason for the increased length of stay.

b. Work and entrepreneurial permits
-not directly applicable to any impact on the property market but in brief, applicants are able to obtain a business permit valid for 24 months with an investment of R2.5 into the country.

c. Retired person permit
-In the past, retired persons were only able to apply for the permanent residence permits but will now be able to apply for a retired person permit, valid for 4 years and further able to be extended for 4 years at a time
-The requirement of a minimum stay of 183 days within South Africa will no longer apply, thus the holder can reside here permanently or seasonally for the duration of the permit
-To be eligible, applicants will need to prove a pension, retirement annuity or retirement account with a value of R25 000 per month, alternatively to be able to prove R15m net value of assets.

2. Permanent residence
a. Direct permanent residence
-applicants must have permanent employment and have held a work permit for 5 years
-this will include the spouses and life partners as well as children under 21 years.

b. Permanent residence on other grounds
i. a person wishing to retire to South Africa can be granted permanent residence by proving retirement annuities, pensions or a retirement account with a value of at least R25 000 per month, alternatively possessing assets in the amount of R15m (as above, except on a permanent basis)
ii. alternatively, applicants can be granted permanent residence with proof of assets in the amount of R20m while making a once-off application fee to the Dept of Home Affairs costing R100 000
iii. the other means by which an applicant can apply for permanent residence would be work-related, including inter alia proof that there is no suitably qualified South African for the position.

What does the new Act entail and how does it differ from the current situation?
1. Those with temporary residence permits will now be able to request extensions of up to three years, which until now has proven extremely difficult. If however, an applicant continually so applies the Department can insist that permanent residence be applied for.

2. Applicants can no longer apply at ports of entry for any permit longer than 3 months – this can only be done from within this country and 30 days prior to expiry of the existing permit.

3. In order to so extend the permit, the foreigner must prove that he has sufficient funds to cover envisaged living expenses as well as a return ticket or have sufficient funds for this purpose. The constant reference in the media to this amount being no less than R20 000 per month is not applicable to all foreigners. It is specifically applicable to a category engaged in certain prescribed activities within South Africa and is not applicable to the usual foreign property owner merely visiting South Africa for limited periods a year.

4. Other than the once-off application fee for permanent residence, applications for permits will be much cheaper, costing approximately R1 500.00 as apposed to approximately R13 000.00 as is the current situation.

5. Finally, there will be implemented a more severe visa control. Although clients from the UK, Ireland and Australia will not be affected (foreigners from these countries will still not require visas), clients from other countries will have to make application for the requisite visa prior to leaving their country if they intend entering South Africa for stays longer than three months. Their intentions therefore need to be known prior to their departure.

Comment
Possibly the biggest disappointment with the impending legislation is that foreigners who own immovable property in the country will be subject to exactly the same permit requirements as those non-owners, including of course, the financial requirements and means necessary to maintain themselves in the country.

While the legislation should have no impact on the ordinary foreign tourist, it will have a direct impact on the so-called “swallows” (foreigners living six months of the year in South Africa and six months of the year in Europe) as they will need to apply for a further three month extension on their three month permit on each occasion. This must be done 30 days prior to the expiry of their existing permit, i.e. during their second month in South Africa and will require a sound reason along with proof of the financial resources necessary to sustain the applicant for the extended stay.

Although there has been much negative reaction to the impending legislation, its impact on the foreign property market should not be as dramatic as has been thought. Indeed, there are tighter restrictions but with these, come improvements too, as mentioned above. Further, these changes will bring South Africa in line with European immigration laws while nothing is contained in the new Act that can be considered out of the ordinary or unreasonable to potential applicants.

3. MONEY LAUNDERING LEGISLATION
The stated purpose of the Financial Intelligence Centre Act (FICA) is to combat money laundering activities. The Act defines money laundering as:
“an activity which has or is likely to have the effect of concealing or disguising the nature, source, location, disposition or movement of the proceeds of unlawful activities or any interest which anyone has in such proceeds …”.

The Act places certain legal obligations to assist in combating money laundering on “accountable institutions” (hereinafter referred to as “institutions”), which include inter alia attorneys, estate agents, banks, insurance companies and stock brokers.

I begins by establishing a body called the Financial Intelligence Centre (“the Centre”), whose principal objective is to assist in the identification of unlawful activities and the combating of money laundering activities and to make such information available to the investigating authorities. The Centre is given wide reaching powers for this purpose.

The Act states that an institution may not establish a business relationship or conclude a transaction on behalf of a client unless it has taken the prescribed steps to establish, verify and keep records of the identity of the client or his or her agent or of any person on whose behalf the client is acting. In the case of an existing client, the institution must trace all accounts that have been involved in transactions concluded in the course of the business relationship with that client.

Records must also be kept of the following:

1. The nature of the business relationship or transaction;
2. The parties to a transaction, the amounts involved and all accounts involved;
3. The name of the person who obtained the information on behalf of the institution.

Such records may be kept in electronic form and must be kept for at least 5 years from the date on which the transaction is concluded or the business relationship terminated. A third party may be employed by the institution to keep such records but the institution itself will retain accountability for any failure to comply with the legislation. Records will be admissible in court of any fact contained therein of which direct oral evide4nce would be admissible.

An institution or its employees must report to the Centre, in the prescribed manner and within the prescribed period, the particulars of any transaction concluded where:

1. The amount received or paid by the institution on behalf of the client or its agent or any person on which behalf the client is acting is in excess of the “prescribed amount” (to be determined when the Regulations to the Act are issued);
2. Any manager or employee of the institution knows or suspects that the institution has received or is about to receive the proceeds of unlawful activities;
3. The transaction has no apparent business or lawful purpose;
4. The transaction facilitates the transfer of the proceeds of unlawful activities;
5. The transaction may be relevant to the investigation or attempted evasion of a duty to pay any tax, duty or levy;
6. The institution has been used or is about to be used for money laundering purposes;
7. Funds in excess of a prescribed amount are sent into or outside South Africa by electronic transfer.

The Centre may request additional information to be the report and the institution must without delay furnish the Centre with such additional information.

No duty of secrecy or confidentiality or any other common law or statutory restriction non the disclosure of information of affects compliance by the institution, except the common law right to legal professional privilege between an attorney and his or her client or a third party for the purpose of legal advise or litigation which is pending or contemplated or has commenced. Because of this far-reaching provision, it is important that employees be educated not to divulge more information to the Council than is strictly necessary to comply with the Act. If client information is disclosed which is not required by the Act, this could in fact constitute a breach of confidence and a breach of professional conduct rules.

According to Bester, the effect of the Act is that the client is denied the right to control the confidentiality of or restrict access to the records communication and information placed in the hands of the institution. The Act confers these rights on the institution which must:

1. Determine whether a particular transaction is “suspicious and unusual”
2. Decide what exactly must be disclosed to the Centre;
3. Decide whether it is under an obligation to comply with the Act or to apply to court for an order absolving it from compliance with the Act in respect of a particular client or transaction. The institution alone therefore has a discretion whether or not to assert the client's rights.

PROCEDURAL REQUIREMENTS
The Act imposes on institutions the obligation to formulate and implement a compliance policy containing rules to regulate:

1. The establishment and verification of the identity of clients;
2. The keeping of records;
3. The manner and place in which such records are to be kept;
4. The steps to be taken to determine when a transaction is reportable to ensure that the institution complies with its duties.

Such rules must be made available to every employee in transactions to which the Act applies and a copy of the rules must be made available to the Centre on request.

NON COMPLIANCE
If the Centre has grounds to suspect that an institution has failed to comply with the provisions of the Act, it may refer the matter to the relevant investigating authority or an appropriate supervisory body or authority affected by it. A failure to comply with the reporting or procedural provisions of the Act will constitute a criminal offence and such offences are laid out in sections 46 to 66 of the Act. Any person convicted under the Act is liable to imprisonment of between 5 and 16 years or a fine of between R1m and R10m, depending on the nature of the office.