Andrew Wellsted, Tax Director at Osborn Wellsted Paulsen
Emigration has been a relatively hot topic in South Africa. It has not escaped the attention of the revenue authorities that the continued reduction of the South African middle class has a hugely negative impact on the already minute tax base, which is decreasing at an alarming rate. This will add to the country’s economic woes as its revenue collections will continue to diminish.
The reasons for the ongoing brain drain are numerous, and it is in most residents’ contemplation that a move one day may be necessary. However, for those staying behind, permanently or otherwise, some estate-planning or ownership solutions can make remaining in South Africa more palatable, at least from a commercial perspective.
The genesis of this discussion arises due to the change to the so-called loop structure rules, which came about in early 2021.
A loop structure is an ownership structure where a South African resident owns South African assets via an offshore entity. These types of structures were prohibited for many years but, as was mentioned, ceased to be prohibited, with various benefits arising. Most importantly, an enhanced opportunity to optimise one’s offshore asset base.
Externalising Capital
The first and longest-standing channel for offshoring funds is the so-called Foreign Investment Allowance (FIA) and the discretionary allowance. These are available to individuals and permit natural persons over the age of 18 to export an aggregate R11m per annum.
Funds moved via this channel can be invested directly by the individual in question or loaned to a trust or other estate-planning structures.
Where one chooses to loop, i.e. own a local asset via an offshore structure, one can create a second “channel” to assist in the balancing of one’s asset portfolio. Often, the type of asset which is owned from abroad constitutes shares in a local company, and therefore the flows which are channelled to the offshore structure comprise dividends (often) and equity growth.
The “looping” channel is also friendlier to use than the individual foreign investment allowance: there are fewer administrative requirements, and the tax implications of using this channel are often enhanced.
Tax
The impacts on the so-called ownership taxes in question can be summarised as follows:
- Capital Gains Tax will often not be payable at all in respect of South African assets disposed of by an offshore structure, unless those assets constitute immovable property;
- dividend withholding tax can often be reduced from 20% where the asset is owned in South Africa, to 5%, if it is owned in a country that has a double tax treaty with South Africa;
- often no estate duty will arise on funds going via a loop channel because the funds never “touch” an individual, which is different from the individual foreign investment allowance.
Benefits
Rethinking one’s ownership structure to incorporate a loop arrangement will often lead to a more optimised estate-planning structure for the family. Not only will your tax position be enhanced, but you will be spreading your asset base to de-risk yourself from a South African scenario through no longer having your capital base solely in South Africa.
How?
There are a number of possible transactions available to affect a loop transaction in an efficient manner. Loops give rise to complex considerations, particularly from a tax perspective, so one either needs to be very sophisticated when formulating the structure, or to consult a professional.
Don’t be dissuaded by the fact the transaction may give rise to an early tax event, or that you may not immediately have cash abroad to fund such a transaction; there are many ways and means through which these things can be structured to ensure that some benefit is achieved.
Where?
A final question which vexes many clients is: where should I locate such a structure? There are many jurisdictions that fit the bill. One is looking for:
- political stability;
- a financial centre where people have the skills to administer the structure; and
- palatable tax rates.
There are many jurisdictions that offer these and we generally start with Mauritius as a default jurisdiction for clients to consider. It has low taxes, is proximate geographically and is used to dealing with South African clients.
In addition, it has a comprehensive treaty network with many jurisdictions on the African continent which make trade and investment in Africa quite a bit easier.
In conclusion, it is conceivable that a loop may not be for everybody. What is clear in our view is that every person who is serious about estate planning and their ownership structure should at least make sure that they understand what changes have been introduced, and how their structure could be enhanced by using loops.
It may not be for everybody, but being up to date on the options is important when one is trying to ensure that the legacy left for the family is the best that it can be.
