Unpacking the enigma around overseas bank, investment and trust accounts

Overseas investment for South Africans starts with one simple certainty; nothing in the South African Income Tax or Reserve Bank regulations prohibits South Africans from opening overseas (offshore) bank accounts, investment accounts or setting up trusts.

Many South Africans feel uncertain about taking wealth offshore and understandably so. The spread of Covid-19, the economic forecasts for South Africa (and the rest of the world) and the weakening of the Rand are enough to make any South African nervous, but exposure to international assets is essential for the following reasons: protection against the depreciation of the Rand, geographical diversification of investments and access to a greater range of investment opportunities.

Given the complexity involved in moving wealth offshore, the real question is how to do it as quickly and cost effectively as possible, and whether you should consider setting up an offshore trust.

Offshore bank and investment accounts

In our experience many South Africans have international transactional needs – both for commercial and personal reasons – but are only aware of one-dimensional customer foreign currency (CFC) accounts. CFC accounts allows the account holder to manage foreign receipts and payments through their local bank, but they are subject to exchange control regulations.

By contrast, an overseas/offshore bank account enables South African accountholders to receive payments for work performed abroad, make international payments and to access international funds by way of a debit or credit card. The general rule is that if income was earned abroad while the South African resident was physically outside South Africa, then the income can be retained offshore. Such funds can then be transferred to a variety of different investment accounts that are 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 is earned on the account. The amount of tax you may be required to pay will depend largely on the way you choose to invest and the type of investment account. Generally any interest or gains, wherever they are realised, should be included in your taxable income for the year because South Africans are taxed on their worldwide income.

All offshore bank or investment accounts will need to be declared in South Africa. This is not just a legal requirement but the account details, balances and interest earned will also be shared with the South African Revenue Service (SARS) by the tax authorities in the jurisdictions where the accounts are held under the OECD Common Reporting Standard (CRS), which provides for the automatic exchange of information (AEOI) regarding financial accounts between tax authorities on a global level.

While your financial information will be shared with SARS, your assets will remain outside South Africa. In terms of de-risking your wealth, this is a completely legal and acceptable solution to escape the volatility of the rand and to diversify your investments.

When exploring the benefits of opening an overseas bank account, you should take into consideration the minimum balance requirements and transactional fees, as well as the reputation and sophistication of the jurisdiction. Some banks require face-to-face meetings with the account holder while others are comfortable to work through a licensed service provider like Sovereign Trust.

For offshore investment companies, you should also take into consideration the annual platform and trading fees. Investment companies generally do not require a face-to-face interview, but an introduction by a regulated financial advisor may be required before an account can be opened.

Overseas/offshore Trusts

At what point should you consider setting up a trust to hold the funds in your offshore bank or investment account and why? We will start with answering the question ‘why’. If your intention is to achieve any or some of the goals listed below, setting up a trust and investing in the trust’s name, can be a sensible option:

• To preserve your assets as a legacy for future generations;
• To protect your assets from creditors or claims as a result of relationship breakdowns;
• To look after the needs of minor or disabled beneficiaries (special trusts);
• To ensure your beneficiaries can benefit from an asset that cannot be easily subdivided, such as a holiday house or farm;
• To separate personal capital assets from business and trading assets; and
• To provide for dependents and relatives who are incapable of managing their money or taking care of their own affairs.

To ensure the viability of setting up an offshore trust, you should consider the annual trustee fees (which will depend on the jurisdiction, the type of trust and also the activity levels of the trust) and the amount available to invest, as well as the possible returns that can be achieved. As a minimum requirement, the projected returns should cover the annual costs associated with the trust and underlying investments.