Financial emigration demystified: South Africans need the full picture

Financial emigration is often misunderstood, and with the jump in the number of South Africans applying to shift themselves and their wealth offshore, it’s time to unpack the big questions before you dust off your suitcases. International trust and corporate services provider Sovereign Trust (SA) examines why investing in an overseas retirement plan can be a less dramatic move that will still offer a tax-efficient way of preserving and growing wealth.

Financial emigration, also known as formal emigration, is the process of changing your South African resident status with the South African Reserve Bank (SARB) to that of a non-resident. Many South Africans believe they are then 100% tax exempt in SA – this is one of the biggest misconceptions.

Once you have formally emigrated for exchange control purposes, you will no longer be a South African tax resident provided that you do not meet either of two separate tests that determine whether or not a natural person is a resident – the ‘ordinarily resident test’ and ‘the physical presence test’.

Under the ‘ordinarily resident test’, a natural person is a resident if his or her permanent home, to which he or she will normally return, is in South Africa. The ‘physical presence test’ is based on the number of days during which a natural person is physically present in South Africa.

It doesn’t stop there. Non-resident status does not mean that you stop paying South African taxes altogether. If, for instance, you receive rental income from immovable property that you own in South Africa, then you will be liable for tax in South Africa. And if you decide to sell the property, you will also be subject to South African capital gains tax.

You also need to throw tax migration into this mix. “When you live in a country that has a double taxation agreement with South Africa and it is your permanent home, you will be taxed on your foreign salary in that country and not in South Africa,” says Coreen van der Merwe, Managing Director of Sovereign Trust (SA) Limited.

“If, on the other hand, you have a permanent home in that country and also in South Africa, then the question becomes, where is your centre of financial influence? If the answer is permanent residency in the other country, then South Africa can’t tax you on your salary, although the rules in respect of rental income and capital gains tax will still apply to South African property.”

Overseas retirement plans
Financial emigration is a complex process and there is a simpler alternative that is often overlooked – an overseas retirement plan. “Apart from the obvious benefit to South Africans of protecting themselves from certain local taxes and currency volatility, one of the most important benefits is that retirement savings and annuities can be withdrawn and transferred offshore, even if the person is under the age of 55.”

Sovereign often advises clients asking about diversification and offshore investments to use their foreign investment allowance to contribute to an international retirement plan. You should choose one that generates future retirement benefits that can be paid anywhere in the world, including South Africa.

The Sovereign Group offers a pension product called a Conservo, which qualifies as a Guernsey-regulated international Retirement Annuity Trust Scheme (RATS). This type of retirement plan is permitted to make payments to non-Guernsey resident individuals without deduction of any Guernsey tax, so the growth on investments can be optimised from the outset. And if the amount drawn down when the growth portion of the funds is accessed down does not exceed the capital investment, there should be no tax liability for a South African tax resident.

There is no limit to the level of contributions or to the fund size, and payments can be structured to suit the individual – a mixture of lump sum and regular income payments that can be made in any recognised currency and at any time. As a result, a Conservo is ideal for internationally mobile South Africans, wherever they happen to be working or residing.

South Africans can use their R10 million foreign investment allowance to diversify their investments and gain overseas exposure. It is also possible to move existing offshore assets into a Conservo. The portfolio can hold a wide range of investments, including shares in listed and private companies, derivatives and physical assets, such as art, but consideration must be given to how any investment will provide an income in retirement.

“Your investment can be a regular contribution and/or a lump sum that was earned outside South Africa, or you can use your foreign investment allowance. However, you cannot claim contributions to a RAT as a tax deduction in South Africa, as you can with contributions to a local retirement annuity fund, because the Guernsey fund is not registered under the Pension Funds Act in South Africa,” says van der Merwe.

Key questions
It you are considering financial emigration or moving your assets outside SA, the process should be done hand-in-hand with professional service providers. Here are some of the key points to assess:

  1. Tax efficiency – It is essential to research the tax efficiency of any proposed structures. You need to review the type of structure, where they will be domiciled and the associated costs.
  2. How assets are invested – You need to understand how your money will be invested and whether the investment strategy will enable you to achieve your goals. Your adviser should be knowledgeable about legislation in more than one jurisdiction and the advice must take into account your overall financial position, your tax status and your estate planning priorities.
  3. Where assets are invested – You need to ensure that the location is optimal in terms of tax efficiency but you should also ensure that any structure is governed by a reliable law that can be enforced in a reputable jurisdiction.

Some clients simply want to hedge against the volatility of the rand by opening a bank account abroad. Generally speaking, overseas banks will rrequire you to complete ‘Know your Client’ (KYC) documentation that is similar to Financial Intelligence Centre Act (FICA) documentation in South Africa. This will include a certified copy of your passport and proof of address, CV, professional reference letter and or bank reference letter, as well as proof of the source of the funds. This is not an exhaustive list and additional documents may be required.

Mauritius is a good option to consider, because the KYC process doesn’t generally require face-to-face interviews with the bank. You should also take into consideration which countries are more difficult to get money out of in the event of death or where inheritance taxes or estate duties are high – South Africa, the UK and the US would fall into this category.

There are good people with the right answers when it comes to unpacking the baggage around financial emigration and expatriate tax. Just make sure you take off the rose-tinted shades and do the groundwork. It will make all the difference to mitigating risks and navigating the right path.

For further information contact Coreen van der Merwe.


Contact Coreen van der Merwe
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