When is the right time to go offshore with your money?

South Africans can start with one basic certainty: nothing in the South African Income Tax or Reserve Bank regulations prohibits South African nationals from opening a bank account, investment account or setting up a trust overseas.

Opening an offshore account or setting up an offshore trust is a prudent financial strategy because it provides currency protection against rand depreciation, helps to diversify your investments and allows access to a far greater range of investment opportunities.

Personal circumstances will dictate the timing, but opening an offshore bank account will typically be a practical and helpful move long before you’ve build up significant wealth to justify setting up an offshore trust. Once the decision has been made to go offshore, the next question is how to do it as quickly and cost effectively as possible.

Offshore bank and investment accounts – factors to consider

We are finding that many South Africans have international transactional needs for both business and personal reasons, yet some are only aware of one-dimensional foreign currency accounts, often referred to as Customer Foreign Currency (CFC) accounts. This type of account allows the account holder to manage foreign receipts and payments through their local bank, but it is all subject to Exchange Control regulations.

In comparison, an offshore bank account will enable South African accountholders to conveniently receive payment for work done outside of the country, make international payments and to access international funds by way of a debit, credit or prepaid card. From here the funds can be transferred to a variety of different investment accounts, also based offshore.

While there may not be any tax liability in the jurisdiction where the account is being held, accountholders will typically still be taxable in South Africa in respect of any interest or capital gains that are earned on the account because South Africa imposes taxation on worldwide income.

South African residents are required to declare all income and assets in foreign accounts. The Common Reporting Standard (CRS) is a global information sharing regime designed to provide tax authorities with information regarding financial accounts held by local taxpayers outside of their country of tax residence. The account details, balances and interest earned will therefore automatically be shared with the South African Revenue Service (SARS).

South Africa also has strict exchange control regulations that may limit the amount of money you can transfer from South Africa or hold in foreign currency. It is therefore essential to consult a tax advisor for guidance on complying with these obligations.

In opening an offshore account, there are a number of factors to bear in mind:

• Some international banks require significant minimum deposits.
• Foreign accounts often incur high service fees, monthly charges and transaction fees.
• Required documents will include proof of identity (typically your passport), proof of address and, in some cases, financial references.
• Some banks may require applicants to open an account in person, while others are comfortable to work through a licensed service provider like Sovereign Trust, in which case, a face to face meeting will not be required.
• Some jurisdictions are identified as ‘high-risk third countries’ by organisations like the Financial Action Task Force (FATF), requiring financial institutions to apply Enhanced Due Diligence (EDD) measures to all customers, both new and existing, who are established in those countries.

Offshore trusts – factors to consider

At what point should you consider setting up a trust to house the funds in your offshore bank or investment account and why? Although many of the tax benefits that were associated with trusts have been eroded by anti-tax avoidance legislation in recent years, they can still offer great advantages in the following areas:

• Preservation of your assets and legacy for future generations.
• Estate and succession planning solutions that can help to avoid lengthy and expensive probate procedures
• Enhanced asset protection in respect of potential creditors, litigation or marital breakdowns.
• Look after the needs of minor or disabled beneficiaries (special trusts).
• Ensuring your beneficiaries benefit from an asset that cannot be easily subdivided, such as a holiday house or farm.
• Separation of personal capital assets from business and trading assets.
• Provide for dependents and relatives who are incapable of managing their money or taking care of their own affairs.

If you intention is to achieve any or a combination of these goals, setting up a trust and investing in the trust’s name, may be an option. You will first need to ensure that setting up an offshore trust is cost effective.

You will need to consider the annual trustee fees (which will depend on the jurisdiction, the type of trust and also the activity levels of the trust), the amount available to invest, as well as the possible returns that can be achieved.

Corporate trustees provide a professional service that is simple and easy to use. They will carry out trust administration – the trust reporting, tax returns, accounts and registration – whilst ensuring the settlor’s and the beneficiaries’ interests are balanced appropriately.

Licensed corporate trustees must adhere to certain standards and meet various statutory obligations. They are also impartial and discreet. Importantly, they can serve as a neutral party in the event of a dispute by considering the views of all parties in equal measure.

As an absolute minimum requirement, the trust’s returns should cover the annual trustee and other annual costs associated with the trust and investment. Trust fees in Mauritius are typically the lowest, starting at USD2,000 per year.

There are a number of different countries worldwide that have enacted trust legislation but the quality and suitability of that legislation can vary. When selecting the best jurisdiction for establishing a trust it is important that it should offer:

• A strong tradition of enforcing trusts
• An English common law system
• An established reputation for trust business
• Modern legislation, including contemporary trust concepts
• Low or no taxation for trusts.

Some jurisdictions are not recommended due to legal or political uncertainties or because their courts or professionals have limited trust experience. Some jurisdictions have not kept pace with the modern trust legislation or are unsuitable because of high tax regimes.

Sovereign generally recommends that trusts are established in Cyprus, Gibraltar, Guernsey, Hong Kong, the Isle of Man, Malta, Mauritius and Singapore. Sovereign is fully licensed to act as professional trustees in all these jurisdictions.

It should also be remembered that the practical advantages of a trust are gained from the distinction that is drawn between the legal owner of property, the trustee, and those people that have the use or benefit of the property, the beneficiaries.

It is vital that the trustee remains independent and exercises proper control over the trust property. A trust may be deemed to be invalid if the settlor continues to exercise power over the trust assets by retaining benefit or control, or by giving directions to the trustees. You will therefore need to have complete confidence in your trustees.

By Coreen van der Merwe, director at Sovereign Trust (SA) Limited