Understanding the complexities of offshore investments for South Africans
In an increasingly globalised economy, many South Africans are exploring offshore investments as a way to diversify their portfolios and mitigate local economic risks. However investing offshore is more complex than investing in South Africa and requires a thorough understanding of both South African rules and the regulations of the foreign jurisdictions in the investments are based.
South African residents are entitled to a single discretionary allowance (SDA) of ZAR1 million per calendar year when transferring money out of South Africa. The SDA may be used for any legal purpose abroad, including for investment.
In addition, each South African resident has an annual foreign investment allowance (FIA) of up to ZAR10 million per calendar year. To utilise the FIA, taxpayers must obtain an Approval for International Transfer (AIT) from the South African Revenue Service (SARS). A SARS tax compliance status (TCS) must be provided to an authorised dealer before the funds can be transferred offshore.
It should be noted that all cross-border foreign exchange transactions carried out by authorised dealers on behalf of clients, irrespective of the value, are captured on the FinSurv Reporting System and reported to the Financial Surveillance Department of the South Africa Reserve Bank (SARB).
South African residents are taxed on their worldwide income, such that any income earned abroad is subject to local tax laws. This includes dividends, interest, rental income and capital gains. It is essential for individuals to disclose these earnings in their annual tax returns to and ensure compliance with the South African Revenue Service (SARS) and avoid penalties.
South Africa’s Controlled Foreign Company (CFC) rules are designed to prevent tax avoidance through foreign entities. A CFC is any foreign company that is directly or indirectly held by one or more South African residents. Under the CFC rules, an amount equal to the net income earned by a CFC in relation to a South African resident is subject to tax in the hands of the South African resident shareholder even if no income is repatriated back to the South African shareholder.
All tax treaties entered into by South Africa provide for a credit in South Africa for foreign taxes paid on foreign income that is also taxable in South Africa. This credit helps mitigate the risk of double taxation on the same income but the credit is limited to the amount of South African tax payable on foreign income.
Individuals considering offshore investments should be aware of international tax initiatives such as the OECD’s Common Reporting Standards (CRS) which facilitates the automatic exchange of financial information between revenue authorities worldwide to ensure transparency in respect of income reported by taxpayers who have investments outside their country of tax residence.
The CRS requires Reporting Financial Institutions to report information on financial assets to their domestic tax authorities, who will in turn exchange information with other revenue authorities in participating jurisdictions. Any foreign persons who are tax resident in a reportable jurisdiction or reportable country and have financial accounts with financial institutions inside the reportable jurisdiction will be reportable.
The CRS is a broader version of US Foreign Account Tax Compliance Act (FATCA), which also requires tax reporting on US investors or entities controlled by US investors who hold financial accounts outside the US.
South African residents with substantial offshore assets may therefore find themselves subjected to increased scrutiny and SARS is likely to discover undeclared offshore funds, which could result in criminal prosecution and understatement penalties.
To navigate the complexities of offshore tax regulations, South African taxpayers should always seek tax and exchange control advice before making any material offshore investment and ensure that they complete the investment in a secure manner.
It is only by understanding the implications of domestic tax laws, CFC rules, foreign tax credits and international reporting standards, that individuals can successfully manage their offshore investments and minimise potential tax liabilities. Proper planning and compliance is essential if individuals are to enjoy the benefits of offshore investments and secure their financial futures.
