Isle of Man emerging as territorial forerunner among SA investor expats

By Sthembile Mkhize, Expatriate Tax Specialist at Tax Consulting SA

As the South African Revenue Service (SARS) intensifies its focus on the tax compliance of high net-worth individuals (HNWI), a self-governing island nation located in the Irish Sea has steadily emerged as an appealing emigration destination for prospective South African expatriates.

HNWIs targeted

A long-standing trade, economic and financial partner to South Africa, the uptick in interest in emigration to the Isle of Man (IoM) and other countries by HNWI South Africans is largely being driven by the ratification in the National Budget 2022 of intensified tax scrutiny on the country’s wealthy and the establishment of SARS’ HNWI Unit in 2021.

Additional recommendations that appear to be aimed at ensuring consistency with the HNWI Unit include provisional taxpayers with business interests now being required to submit their assets (at cost) and liabilities in their tax filings each year. This is aimed at assisting in the detection of non-compliance or fraud through the presence of unexplainable wealth.

Among the proposals are that provisional taxpayers with assets exceeding R50 million be required to declare specific assets and liabilities at market value in their 2023 tax returns.

This should not come as a shock, as financial experts have long cautioned that SARS has heightened its focus on wealthy individuals.

SARS has previously declared that they have identified and profiled several HNWIs who live a ‘luxurious’ lifestyle and have unexplained wealth relative to their claimed income. SARS has access to several databases that track high-ticket items such as luxury cars and expensive real estate.

HNWIs should not underestimate SARS’ commitment, particularly if your lifestyle is incompatible with your declared tax information. This could result in dire consequences in accordance with Section 234 of the Tax Administration Act No 28 of 2011 or even in criminal prosecution.

Further driven by concerns around poverty, education, healthcare, energy supply and political stability, emigration has steadily increased in recent years, particularly among HNWIs and ultra-HNWIs. 

Institutional strength of the Isle of Man

Boasting a long-standing history with South Africa dating back to the 19th century, perhaps the most notable historical interaction with the IoM occurred in 1993 when the island nation sent its first trade delegation to the country as it was preparing to take its first steps into democracy. 

South Africa has since become one of the island’s finest trade relations success stories. 

Despite the fact that its total land area of only 572 km2 could fit into South Africa almost 2 000 times, it has become an increasingly attractive centre for South African firms and employees. 

South Africans working in medical, information communication technology (ICT), financial services, and a variety of other industries have found good synergies with IoM’s regulatory dispensation and economic strengths.

Along with the appeal that the IoM does not apply income tax to inhabitants or non-residents, the highly diversified nature of the IoM’s economy has proved a favourable pairing with innovation-driven and highly-skilled South Africans.

In addition, offshore investors to the IoM are well protected and have the right to privacy, while no capital gains tax, stamp duty or inheritance tax is applied. It also provides investors with the option of establishing several types of trusts based on their wealth-protection requirements.

Boasting a Moody’s government rating of Aa3, the IoM, while a UK crown dependency, is completely self-governed, with an independent Parliament, legal system, and economy, and is not constrained by the requirements of the UK or European Union (EU) member states. 

The island has a customs arrangement with the UK that aids in commerce but ensures legal independence from both the United Kingdom and the EU.

Economic diversification push

Having moved away from a reliance on offshore banking, the government is now focusing on the development of its ICT, insurance, e-gaming, fintech, blockchain and medicinal cannabis sectors.

This has been supported by government policies that include low-tax legislation.

“Despite the IoM’s small size, its institutions are robust and benefit from close ties to the UK […] they have shown themselves to be proactive and effective in dealing with the exogenous shocks of Brexit and the coronavirus pandemic. The government’s very strong public finances are a key credit strength,” states ratings agency Moody’s in its annual credit analysis of the island in 2021.

It adds that the IoM’s economic strength is underpinned by high wealth levels and a track record of strong economic growth. E-gaming and ICT are now one of the island nation’s largest sectors, accounting for a combined 24.5% of gross value add in 2018-19.

The IoM’s financial services offering primarily comprises offshore banking, captive insurance, offshore life insurance, fund management, and trust and company services.

The island also has a clear and straightforward tax structure that encourages the accumulation and maintenance of wealth, economic stability, and security with a complete infrastructure of local and international law, accounting, as well as business services companies of the highest calibre. Nedbank, Standard Bank, Microgaming, and Derivco are just a few of the big South African corporations that have set up shop on the island.

Tax implications for South Africans

Despite its attractive economic and financial dispensation, IoM residency does not exempt South Africans emigrants from their tax obligations in South Africa.

South Africans living overseas, regardless of their decision, should thoroughly familiarise themselves with the tax laws that apply to them now and in the future.

Two primary tax options for those interested in relocating to the IoM:

  1. Remain a tax resident of South Africa

Should you choose to remain resident of South Africa while abroad, there are ways in which you can protect your foreign income, subject to you meeting the requirements. The foreign employment income exemption, section 10(i)(o)(ii) of the Income Tax Act, provides that foreign employment income received by a tax resident of South Africa will no longer be totally exempt from 1 March 2020, and the exemption under section 10(1)(o)(ii) will be restricted to R1.25 million for the year of assessment. Any overseas employment income received over and above R1.25 million will be subject to regular taxation in South Africa, at the usual tax rates in effect for the year of assessment.

2. Cease your tax residency

Should you choose to cease your tax residency, there are two options:

Financial emigration – Financial emigration allows you the freedom of not having to declare your foreign income once you have formally ceased your tax residency, and, because it is a once-off process, you have the flexibility to move anywhere in the world at any time without having to inform SARS. This process does not mean you are cutting ties with SARS though – if you are still accruing income in South Africa, you must declare it accordingly. 

One of the benefits of financial emigration, subject to you proving non-residency for three years (three-year lock-in rule), is that you can encash your retirement. In addition, you can still invest in South Africa and acquire assets while being a non-resident.

Double Taxation Agreement (DTA) – Should certain requirements be met, the DTA allows you to cease your tax residency annually. While the DTA allows you to protect your foreign income, it is restrictive in that one must research whether the country to which you plan to move has an agreement with South Africa. The provisions of that agreement must then be considered, and you must undertake what is a called a ‘tie-breaker’ test annually to determine which country has tax-claiming rights during that fiscal year. 

Also, unlike financial emigration, once you move to a different country or your situation changes abroad, you must notify SARS, because, while your foreign income is exempt, you still have the legal duty to declare your worldwide income.

Don’t forget the exit tax

The most important part of ceasing your tax residency is what is a called the ‘exit tax’, or ‘exit charge’, or deemed ‘disposal’ in a capital-gains tax calculation. 

Whether you cease your tax residency by financial emigration or DTA, SARS will require you to declare the original value of your assets and the market value of those capital assets the day before you formally cease your tax residency. If there is a gain, it will be taxable.

Immovable property in South Africa and personal-use assets are examples of assets that are not subject to the exit tax. The term “personal-use asset,” as defined in paragraph 53 of the Act’s Eighth Schedule, refers to assets that are used by an individual primarily for reasons other than carrying on a business. 

It is important to note that if you are a shareholder or director of a company in South Africa, ceasing your tax residency could potentially affect the tax residency status of that company as well. When most of the company’s board of directors relocates permanently abroad, it’s possible that the company’s effective management location is no longer in South Africa.

The company would generally cease to be a tax resident of South Africa, should its seat of effective management no longer be in South Africa, and it becomes a tax resident of a country with which South Africa has a double-tax treaty. This will trigger the exit tax indicated above from the company’s position and will also have triggered an exit tax from the directors’ individual perspectives.

So, before the draw cards of no inheritance tax, no capital gain tax, no wealth tax, and no purchasing restrictions on property takes you in, it is important to make sure that you have taken all the above mentioned into consideration, together with your personal circumstances.

It is thus vital that, before you move, you seek the advice of a professional practitioner to ensure that you make the best possible choice in terms of your tax residency and that you understand the obligations of the choice that you have taken.

Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za