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Mistakes that South Africans make when investing offshore

26 February 2024 Sovereign Trust SA
Dani van Vuuren

Dani van Vuuren

Investment analysts say that South Africans should not pin their hopes on the local stock market, as the big growth themes are all to be found abroad.

But, moving your investments offshore and gaining foreign residency aren’t DIY endeavours. There are numerous pitfalls that can cost a lot to climb out of – significantly eroding what you are trying to build in your destination country. In fact, moving yourself or your money offshore is not something you should attempt without specialised, professional support.

Dani van Vuuren is a Business Development Consultant at Sovereign Group, an organization which has been helping high net worth individuals to start businesses, invest, live, and retire in offshore domiciles for over 37 years, counts the dwindling number of investable stocks on local bourses, a flat performance in 2023, and an economy that has all but stalled due to a multitude of socio-political reasons, as motivation for taking your investments offshore.

However, Van Vuuren warns that there are many areas in which it is possible for the mis-or un-informed to make mistakes, including:

• Tax reporting obligations and tax treaties, both in South Africa and in the destination country.
• The offshore business or trust’s structure, substance, shareholding, and succession.
• Estate planning in multiple jurisdictions.
• Jurisdiction-specific legal frameworks, and access to legal and fiduciary recourse.
• Insurance and professional indemnity.

Van Vuuren emphasises the importance of working with an adviser who is knowledgeable about these factors, as well as the intricacies of multiple jurisdictions – not just one or two – so as to find the best destination, or combination of destinations, in which to achieve your financial goals. Limited jurisdictional options can cripple your structure, and create more administration. Moreover, the cost of unwinding a structure that proves unsuitable can be high, especially if a new structure must be set up – and this happens more often than you might think.

Other common mistakes that South Africans make when looking at offshore investment destinations include:

1. Not exploring the residency potential and limitations:
Just having a business in a country does not automatically mean that you can live and work there. However, it is possible that your offshore business may qualify you for residency. Find out whether you need temporary permits or visas, as well as what you would need to do to acquire permanent residency.

2. Not understanding all the costs or not knowing how to avoid unwarranted costs:
Many financial emigrants take on the high costs for services provided and fees charged in their destination country. While these costs can often be reduced by using SA-based lawyers and accountants, there are cases where key services and activities should be performed by local professionals as their South African counterparts may not be familiar with the local intricacies.

3. Failing to consult with tax specialists before making a decision:
Specific tax considerations may apply to your offshore assets and may be governed by the laws of the jurisdiction where the assets are located, in addition to South African tax laws. Likewise, there may be treaties in place that prevent or minimise double taxation. The tax laws governing investments, property, trusts, foundations, businesses, interest, royalties, and dividends, as well as dual residency, should be scrutinised. In addition, not all countries have freedom of testation like we do in South Africa, and forced heirship can be counter to how you wish to pass your assets on. Inheritance, capital gains, and other taxes could also impact your beneficiaries when your estate is being wound up, making it imperative to understand the tax structures in your investment destination, both before investing and while drawing up your will.

“Setting up offshore is a long-term journey, not an impulsive road trip,” says Van Vuuren. “Your adviser should be prepared to walk the journey with you, starting with comprehensive, jurisdiction-specific advice, and including the provision of additional benefits and opportunities down the line.”

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