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Direct offshore investing: Here’s what it entails

There are significant tax and estate planning consequences that should be considered.

If you’re planning to externalise your rands through direct offshore exposure, there are a number of important steps to take to ensure the process happens smoothly and in line with your investment objectives.

As a resident South Africa taxpayer, you are permitted to externalise funds of up to R11 million per calendar year – which includes a R1 million single discretionary allowance plus a R10 million foreign investment allowance – in direct offshore investments in foreign currency denominated assets.

At the outset, however, it is important to understand your reasons for wanting to invest directly offshore, and any such investments should be viewed as part of your overall financial planning as there are significant tax and estate planning consequences that should be considered. While investing offshore enables you to achieve global diversification by accessing different regions, economies and companies, make sure that your foreign-domiciled funds are fit for purpose and not merely a knee-jerk reaction to local bad news.

Applying for tax clearance

While your R1 million single discretionary allowance does not require tax clearance, you will need to obtain tax clearance from the South African Reserve Bank to move your foreign investment allowance offshore. To qualify for these allowances, you must be a South African resident over the age of 18 with a green bar-coded ID or smart ID and have a South African income tax number.

To apply for your tax clearance, you can download the FIA001 Tax Clearance Certificate application from Sarb, keeping in mind that your tax returns must be up-to-date and you must be in good standing with Sars. You can also go directly to a branch of Sars to make an application. When applying, you will need to provide Sars with details of your personal assets and liabilities, as well as proof of availably of funds. You will also need to provide Sars with the source of funds as well as proof of the source of funds. For example, if the source of funds is from the sale of fixed property or as a result of an inheritance received, you will need to provide Sars with documented proof thereof.

Once you receive your tax clearance certificate, keep in mind that while your tax clearance certificate remains valid for 12 months from the date of issue, your annual allowances are allocated per calendar year and therefore expire on December 31 each year, with no carry-forward on unused amounts. Most reputable investment companies provide offshore investment platforms with a range of funds to choose from. Remember, the type and location of the fund you select should be fully aligned with your overall investment strategy, with all estate planning and tax consequences being fully considered. 

Transferring your money offshore

Once you have tax clearance, you are able to purchase foreign currency either through your bank or through a reputable currency provider, keeping in mind that they can only do so if they are in possession of your tax clearance certificate. Remember, the fee and commission structures offered by foreign exchange dealers and providers can vary greatly, so do your research upfront.

Also, many investment providers insist on a minimum investment amount, so be sure to find out what that amount is as it can vary from platform to platform. Once you have completed the necessary application form accompanied by your FICA documents, your chosen investment provider will then transfer your funds into the offshore investment fund that you have selected, keeping in mind that you do not have to transfer the full amount at once. With investment markets being volatile and keeping in mind fluctuations in the rand, you may want to consider investing your funds in tranches provided that your tax clearance certificate remains valid throughout your chosen timeline.

It is important to ensure that you do not exceed your annual allowance as there are penalties for doing so. If you do exceed your allowances and report the incident to Sarb’s Foreign Surveillance Department, you may be eligible for a fine between 20% and 40% of the excess amount transferred. Failure to report it to Sarb can result in the full excess being confiscated. 

Paying tax

If you are investing for the long-term, the disposal of any assets can attract capital gains tax, which is calculated on the difference between the proceeds at the time of sale and the base cost of the purchase. In the event of your death, your foreign assets will be deemed to have been sold at market value and, as such, CGT will be triggered, except where your foreign assets are bequeathed to your spouse in which case no CGT is triggered.

From an income tax perspective, as a South African resident, you will have to pay tax on the interest and dividends earned on your foreign-domiciled investments. This is because South Africa uses a residency-based system to calculate tax, and South African tax residents are required to pay tax on their worldwide assets. As a result, when filing your annual tax returns, be sure to disclose all interest and dividends earned from your foreign-domiciled investments.

Estate planning

Generally speaking, you will not require a foreign will in respect of your foreign-domiciled investments. However, if you own other assets, fixed property or have business interests in foreign jurisdictions, or if your investments are particularly complex, you may require a foreign will to deal with these assets. If you are in doubt, rather seek legal advice from an expert in the jurisdiction you intend investing in.

Also, keep in mind that while South Africans enjoy the freedom of testation, many civil law jurisdictions have what is referred to as mandatory succession rights or forced heirship and you may want to ensure that your offshore investment is not impacted by these laws. In the event of your death, your foreign-domiciled investments will form part of your South African estate and will therefore be estate dutiable. However, South Africa has entered into double-taxation agreements with a number of countries, with the purpose of these agreements to enable both administrations to eliminate double taxation. So, be sure to understand whether your chosen jurisdiction has a double taxation agreement with South Africa, and what the implications are for your estate planning. Remember, every country has its own legislation in terms of death and inheritance tax, so do your research to ensure that you are not required to pay death taxes in the country that you are invested in.

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