High-Tax Country Resident Planning To Stay Put: South Africa

If you are resident in South Africa (which will be the normal situation for a native-born South African individual) then you are taxable on your South African-source income and world-wide investment income. There are also inheritance and gift taxes, plus, since 2001, capital gains tax.

'Ordinary residence' is not defined in the law, but has been described as involving some continuity of residence, or as being the place where a person's belongings are stored, and to which he means to return. In the case of foreign-source interest income, a 183-day residence rule has been introduced to distinguish between those who pay or do not pay tax (which seems to clarify the meaning of ordinarily resident).

Many South Africans have wanted to shelter assets offshore, but far-reaching anti-avoidance legislation, limits on the export of capital and the requirement for registration of exported assets mean that tax advantages are hard to find.

In fact there are quite good investment opportunities at home for South Africans due to the incentives the Government needs to offer to try to retain precious currency reserves. Non-property unit trusts in particular have traditionally been viewed as tax-efficient, as long as they distribute their profits, because the dividends are tax-free both at the level of the unit trust and in the hands of investors to the extent that they are earned as trading income and not as interest (which is taxable). By contrast, most dividends received from stock exchange investment will have borne tax.

Despite this, most people will tend to do their utmost to establish asset pools outside the country. The impact of the anti-avoidance legislation, both specific and general, on offshore investment vehicles is unfortunately far from clear in many cases. Whether considering trusts, holding companies or other entities, is has to be accepted that income will be taxed, whether distributed or not, but it is less clear what happens to capital gains. Due to the uncertainty, expert professional guidance is necessary before setting up offshore structures; with care, it is often possible to invest in capital appreciation vehicles which will be fairly tax-effective.

Inheritance tax can be a major consideration for South African residents, and offshore trust structures remain one of the best ways of mitigating or completely avoiding the tax. There is plentiful information available on this subject from financial product providers.

For an individual wishing to explore the investment opportunities further afield, www.lowtax.net contains details of the investment and tax regimes for 35 offshore jurisdictions.

Individuals who have significant non-South African business income may be able to make use of offshore corporate tax shelters, especially involving Mauritius.

www.lowtax.net contains details of the corporate and partnership legal structures available in the 35 most prominent offshore jurisdictions, including Mauritius, together with descriptions of the most important business sectors in each jurisdiction, local tax regimes, and the international treaties entered into by each jurisdiction.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.