In its first Financial Stability Review (FSR) of 2024, the SARB refers to ‘Domestic institutional investors’ total offshore asset allocations being almost the size of SA’s nominal GDP at the end of last year.’ At market prices in 2023, this was R6.97trn!
SA investors have increasingly diversified offshore, with estimates suggesting that around 40% to 50% of their collective assets are held outside the country. Considering our article in the 2Q24 Navigator on situs and situs tax, entitled Understanding situs and situs tax, dated 17 April 2024, and this massive transfer of wealth outside of SA’s borders, we think it is crucial for investors to understand the options available to them to protect that asset base and why they should consider doing so!
Investors should consider the following when investing offshore:
1. Exchange control
SA has exchange control regulations that govern the movement of money in and out of the country. These regulations are designed to manage and stabilise the national currency (the rand) and to protect the domestic economy from excessive capital flight. Failure to comply with these regulations can result in fines or legal consequences. Investors can navigate these regulations more effectively and efficiently by using established offshore structures such as trusts, companies, or investment funds. These structures can often facilitate legitimate transfers of funds and investments across borders while ensuring compliance with local laws.
2. Asset protection and estate planning
Offshore structures can offer significant advantages in asset protection and estate planning. They can help safeguard your wealth against political instability, economic fluctuations, or changes in local laws. For example, placing assets in a trust or offshore company can provide a legal layer of separation between personal assets and potential creditors or litigants, instilling confidence in your financial security.
3. Diversification of assets
Offshore structures can enhance investment opportunities by providing access to a broader range of international markets, products, and currencies. Diversifying your assets globally can reduce overall risk and potentially increase returns over the long term.
4. Business opportunities
Whether you engage in international business or invest globally, offshore structuring can facilitate access to foreign markets, investment products, and opportunities. These may offer higher returns or better diversification prospects than those available domestically.
5. Tax considerations
Consider the tax implications in SA and the offshore jurisdiction when structuring assets offshore. Seek advice from tax professionals to optimise tax efficiency and ensure compliance with local tax laws and reporting requirements.
6. Legal and regulatory compliance
Ensure that any offshore structure complies with SA exchange control regulations and other relevant laws. Consulting with legal advisors specialising in international law and offshore structuring is essential to establish a compliant and effective offshore investment strategy.
Ultimately, the decision to diversify your assets offshore becomes a sums game: Does the cost of setting up a structure warrant the potential savings you may make? Structuring assets means holding said assets in a ‘structure’ and NOT in your name. Different structures will be more beneficial than others, depending on the amount of assets considered and your specific financial circumstances.
Options available
So, what are the various options available to investors?
Several options can effectively meet your financial goals while navigating the legal and regulatory frameworks applicable in SA, including:
1. Offshore trusts
Establishing an offshore trust can provide asset protection, estate planning benefits, and certain tax-planning scenarios to be considered. Offshore trusts are managed by trustees in a jurisdiction with favourable trust laws, separating assets from personal ownership and potentially providing beneficial estate and tax planning tools.
2. Offshore companies
Setting up an offshore company in jurisdictions like Mauritius, Seychelles, or the British Virgin Islands (BVI) can offer operational flexibility, tax efficiency, and asset protection. These companies can hold investments or intellectual property or serve as a vehicle for international trade and investment activities.
3. International investment funds
Investing in offshore mutual funds or hedge funds domiciled in reputable jurisdictions can provide diversification across global markets and access to specialised investment strategies unavailable locally.
4. International endowments
An insurance product that ‘wraps’ your investments and is taxed according to the four funds approach, whereby income is taxed at a flat rate of 30% and capital gains at 12%. This is less than the top personal SA income tax rates of 45% and 18%, respectively. No SA tax reporting is required, and proceeds are paid out tax-free. These products also provide an extra layer of protection from situs tax and reduce executors’ fees.
5. Banking services
A bank account in another jurisdiction in a foreign currency provides standard banking services outside of SA.
6. Offshore real estate
Purchasing property in stable offshore markets can diversify your asset base and provide potential rental income or capital appreciation. Offshore real estate investments can also offer residency or citizenship benefits in some jurisdictions.
7. Offshore investment accounts
Opening offshore brokerage or investment accounts lets you directly invest in international stocks, bonds, exchange-traded funds (ETFs), and other financial instruments. These accounts provide access to global markets and currencies, potentially offering higher returns and diversification benefits.
This is not an exhaustive list, but it covers investors’ primary options when investing offshore. Many of the above options can be used in conjunction with each other, but the correct combination will depend on your individual circumstances.
Conclusion
By carefully evaluating the abovementioned options and seeking guidance from experienced financial, legal, and tax advisors, investors can design an offshore asset structuring strategy that aligns with their financial objectives, risk tolerance, and long-term wealth preservation goals while adhering to regulatory requirements.
Our role is to assist you in finding the correct offshore investment structure for you. We strongly believe that it is worth considering all of the various options available to you and deciding which would be the right one, taking into account your unique personal circumstances. Understanding all your offshore investment options will empower you to make informed decisions about your financial future.
If you have any questions or need clarity on investing offshore and its possible financial implications, please contact Di Haiden for assistance.
