Navigating the minefield of offshore structures

By: Tanya van Schalkwyk, Structured Solutions Analyst: Bravura

Tanya van Schalkwyk

The creation and preservation of wealth is a delicate balance between adequate planning, obtaining the right advice, ensuring the correct establishment of an offshore structure, and the implementation of transactions to bring the structure to life.

When setting up an offshore structure, there is no detail that can be neglected. Every step needs careful consideration to ensure that no adverse implications are triggered. The investment objectives and type of investments recommended by wealth managers could also play a role in the type and complexity of any offshore structures.

South Africans have many reasons for wanting to set up an offshore structure. Some want to shield themselves against currency risks, others from political risk, or simply wanting to ensure family members offshore will also be able to benefit from generational wealth. Doing business without the hassle of exchange control restrictions is also one of the common reasons for establishing an offshore structure. It’s always important that there’s a commercial rationale for the set-up of the offshore structure that doesn’t only result in a tax benefit.

The way wealth is transferred offshore will form part of the planning and implementation phase of the offshore structure set-up. During this phase, consideration needs to be given to exchange control approvals and the tax implications of transferring the wealth. There are many ways to transfer wealth. It can be done by way of donation, sale, loan or capital contribution. Each person’s specific set of circumstances will determine the best way. The South African Reserve Bank has relaxed certain of the exchange control restrictions that allows for the creation of loop structures, foreign direct investments by South African companies and trust-to-trust distributions. Even though the transactions are now permitted, all transactions require disclosure to be made and, in some instances, approval may be required. Considerations from a tax perspective would include the amount of tax payable as a result of the method chosen to transfer wealth. Donations tax, capital gain tax or tax on interest income may be payable. Disclosures and the deadline for payments to be made to the South African Revenue Services should be done in a timely manner to ensure that interest and penalties are avoided.

After an offshore structure has been set up and transactions have taken place, the implications of repatriating funds back to South Africa is often overlooked. Factors impacting the tax treatment of the funds flowing back to South Africa include the shareholding structure, the tax residency status of beneficiaries, and funds being subject to exchange control restrictions again once it flows back to South Africa. Tax legislation in South Africa relating to distributions by offshore trusts to South African tax resident beneficiaries has been amended in recent years, with the main impact being that income or capital gains distributed in a subsequent tax year will no longer be regarded as non-taxable capital distributions made to the South African beneficiaries. Beneficiaries of the offshore trust will have to ensure that the correct disclosures are made when completing their tax returns and that the relevant taxes are paid.

Another consideration often overlooked is that distributions received from an offshore trust will form part of an estate for estate duty purposes. In many instances, this is counterintuitive to the objective of making use of an offshore trust that would shield a beneficiary against estate duty. Retaining wealth in an offshore trust also provides greater asset protection against creditors and potential divorce claims. Therefore, depending on the quantum of the distributions and the reason for the beneficiaries wanting to repatriate or use funds, it’s recommended that advice obtained is tailormade to the beneficiaries’ needs and financial objectives.

The costs relating to the set-up and maintenance of offshore structures is often high, therefore a cost versus benefit analysis also needs to be done to ensure the expense of establishing an offshore structure doesn’t exceed the benefits. Offshore structures should also link seamlessly with succession planning, expansion plans and tax strategy. Failing to plan and not obtaining inputs from trusted advisers can cost you dearly.

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