Navigating the tax minefields of a foreign trust
With the impending relaxation of exchange controls, especially those relating loop structures, you, if you are a relatively well-off South African, may be keen to go out and invest overseas through a foreign trust. After all, they’re good for estate planning, great as a rand hedge and even better for hiding assets from greedy ex-spouses and profligate kids. Be warned however, you might also end up paying the South African Revenue Service (“SARS”) through the nose for them. If you are nevertheless keen to go ahead and set one up, you will need to navigate some pretty dangerous tax minefields along the way.
The potential pitfalls you may face with a foreign trust
The first of these is known as “attribution”. If you donate funds to the offshore trust or grant an interest-free loan to it or, in fact, make any so-called “gratuitous disposition” to a foreign trust, then anything the foreign trust earns by reason of your “generosity” will be taxed by SARS in your hands. A controversial interpretation note recently issued by SARS has even suggested that you could be taxed on income or capital gains distributed by the foreign trust to its South African beneficiaries, you can view a previous newsletter in this regard, here.
Interest-free loans are particularly problematic when granted to foreign trusts by South Africans. Transfer pricing rules can have you treated by SARS as having received market-related interest for the loan for tax purposes even if you did not earn a penny from it. Another rule in South African tax legislation hits you with donations tax on the deemed donation of the interest you failed to charge.
Even if these anti-avoidance provisions do not apply to your foreign trust (for example, your trust is set up through a loan which bears interest at a market-related rate) you are not yet out the woods. Recent amendments to South African tax legislation may result in the trust’s beneficiaries being taxed on all distributions made by the trust derived from dividends declared or capital gains from the disposal of foreign companies. This applies if more than 50% of the foreign company is held by the trust and regardless of when the trust makes these distributions. This means you may need to rethink the percentage of the foreign investments to be held by you directly and that to be held by the foreign trust.
Yes, admittedly this all sounds very complex but don’t be put off. There are still sound reasons of using foreign trusts and there are clear ways around these tax issues. You just need the right advice from the get-go. Should you be thinking of plunging into these potentially dangerous waters, we would suggest you contact us for a timely consultation.
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.