Can SA residents still trust foreign trusts to hold their foreign company?
In an effort to boost the public purse, the South African Revenue Service (SARS) has, in recent years, been tightening its rules concerning South Africans holding foreign structures such as trusts and companies. Two recent changes will particularly affect South Africans that are discretionary beneficiaries of foreign trusts which hold shares in offshore companies. As a result of these changes, it may legitimately be asked whether it is still a good idea from a tax perspective to maintain these structures.
The first of these changes will impact South African corporate groups that, in their annual financial statements, consolidate the assets of offshore companies held through foreign trusts.
South African income tax legislation has so-called “Controlled Foreign Company” or “CFC” rules which attribute the income (bar certain exceptions) of foreign companies to South Africans that control 50% or more of the shares in them. In the past, South Africans had argued that even if their accountants included the assets of these companies in their balance sheets, they were not CFC’s as South Africans did not legally control them if a foreign trust held their shares.
With effect from 1 January 2018, the stricter rules provide that foreign companies consolidated for accounting purposes into South African groups are to be treated as CFC’s for South African tax purposes going forward.
The second of these changes affect the tax treatment of dividends distributed to South African beneficiaries of foreign trusts that hold offshore companies. Previously, if these dividends derived from the profits of those offshore companies or proceeds from their sale, South African tax advisors would always caution patience before having a foreign trust distribute them. It was possible for South African income tax on such dividends to be avoided if they were declared in a financial year subsequent to that in which the trust received them.
However, from 1 March 2019, this “loophole” has, for the most part, been closed. Now, if that foreign trust holds 50% or more of the shares in a foreign company, then the dividends it distributes to its South African beneficiaries will be taxed regardless of the financial year in which they were received by the trust. The only tax advantage now in the foreign trust holding back on the distribution of that dividend will be a timing difference.
In conclusion, while there may still be some South African tax benefits in holding offshore structures through foreign trusts, the recent changes discussed above have removed some of the advantages previously enjoyed.
Contact us if you would like your offshore structure re-assessed in light of the new rules.
How can we help?
How you structure your business is a critical question as you expand globally. The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.
Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.