Offshore Investing: Structures and Implications
20 September 2018 | Martin Strauss
 


Offshore investing has been a major trend in South Africa of late, and for obvious reasons. Political risks, currency devaluation and stagnated growth are merely a few reasons why local investors have been adopting a policy of "economic emigration" so to speak.

Putting the fear factor aside, sound economic principles and investing would dictate an approach of reducing risk by not only diversifying across asset classes, sectors and industries, but also geographically.

Another important aspect is that every investor should be forward looking when making investment decisions. The challenge is to constantly ask yourself questions like: "Where is the growth going to come from?" or "Where do I see the world in 5, 10 or even 20 years from now?"

Buzz words like artificial intelligence, cloud or edge computing, cyber security, robotics, nano-technologies, virtual reality and block chain would immediately spring to mind. Due to efficiencies in ETFs (Exchange Traded Funds) offered offshore, investors can gain diversified exposure in these sectors and industries to take advantage of an ever-changing landscape, as well as direct equity in companies that will give you underlying exposure in these developments.

What is important to consider are the various structures available to individuals and entities to move monies offshore, as well as the cost, liquidity, legal and tax implications under the numerous alternatives.

Annual allowances:

Each individual is entitled to an annual offshore allowance of R1000 000, this includes offshore travel and offshore credit card purchases, you need no tax clearance to expatriate these moneys.

Tax Clearance:

Should an individual obtain tax clearance from the SARB (South African Reserve Bank), you are entitled to expatriate up to R10000000 per annum.

Both of these allowances run on a calendar year, from 1 January to 31 December.

Situs Taxes:

On death, the tax levied in South Africa is called estate duty. Deriving from the Latin word for "position" or "site", situs taxes are "death taxes" levied on foreigners for holding assets positioned in the US and the UK for example. In the UK it is known as "inheritance tax" and in the US it is called "estate tax", collectively they are called situs taxes. Should an investor come to pass whilst funds are invested in assets “positioned” offshore, one can pay up to 40% situs tax on the value of assets held offshore above certain thresholds. Comparable to a maximum of 25% estate duties payable in South Africa.

These thresholds become applicable only above certain amounts invested in US/UK assets:

U.S.: The first $60000 are exempted from situs taxes.

U.K.: The first 325000 are exempted from situs taxes.

Alternative investment structures should be considered should one want to invest more than the abovementioned limits in these jurisdictions.

A couple of structures available to investors, as well as some of the advantages and disadvantages of each, can be listed below:

Option 1:

Investment in personal name

  • Above expatriation limitations are applicable.
  • Capital gains taxes (CGT), Income taxes and Dividend Withholding Taxes (DWT) payable at standard rates.
  • Funds can be kept offshore upon liquidation.
  • No liquidity limitations, funds can be accessed at any time.
  • Situs taxes applicable.

Option 2:

Offshore endowment wrappers

  • A wrapper is an endowment, comparable to an insurance policy, the investor is exposed to the insurer’s underlying balance sheet over the investment term.
  • No situs tax issues.
  • Funds cannot be kept offshore upon liquidation.
  • No expatriation limitations as above come into play.
  • Lower tax rates are often payable in these structures.
  • Liquidity restrictions: Even though this can differ based on the underlying provider used, investors are only entitled to make a limited amount of withdrawals over the investment period (usually 5 years).
  • Certain depository limits are enforced over the life of the wrapped product.
  • Additional wrapper fee charges are payable.
  • Minimum investment amounts are applicable, normally about $25000.

Option 3:

Asset Swap

  • No expatriation limitations.
  • No situs tax issues.
  • Individuals use an approved entity’s balance sheet to expatriate funds, risk exposure to the underlying balance sheet.
  • Capital gains taxes (CGT), Income taxes and Dividend Withholding Taxes (DWT) payable at standard rates.
  • Funds must be repatriated upon liquidation of the investment.
  • No liquidity limitations, funds can be accessed at any time.
  • Additional asset swap charges are usually payable.
  • Minimum investment amounts are applicable, normally about $25000.

The above investment options are all available through Sharenet Wealth as your trusted partner. Contact us any time for professional advice on the best structures available to you for taking advantage of offshore investment opportunities.

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martin

Martin Strauss

Martin joined Sharenet Wealth in June 2018 to lead our Investment Strategy Group. Prior to this, Martin was a Portfolio Manager at Standard Bank Stock Broking heading up offshore investment strategy. He was previously Head of Trading at PSG Wealth and has more than 7 years experience in the investment management industry. Martin holds a B.Com Honours degree in Accounting, is a qualified Chartered Financial Analyst, holds the CFP designation and is a member of the Investment Analyst Society of SA.


Disclaimer:
The information contained in this article is for informational purposes only and must not be regarded as a prospectus for any security, financial product or transaction. It is neither to be construed as financial advice nor to be regarded as a definitive analysis of any financial issue. Investors should consider this research/article as only a single factor in making their investment decision. We recommend you consult a financial planner/advisor to take into account your particular investment objectives, financial situation and individual needs. The views and opinions (where expressed) in this article are those of the author and do not necessarily reflect the official policy or position of Sharenet.

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