Recent developments have yielded new opportunities for South African trusts to distribute funds to offshore trusts, marking a significant shift in financial and estate planning strategies.
Previously, strict regulations made it difficult for local trusts to externalise funds, especially when the offshore trust had South African resident beneficiaries. However, with the latest announcement, a new pathway has emerged provided the necessary approvals are obtained.
Why this matters now
For many decades, trusts have been a preferred estate planning vehicle for South Africans due to their ability to provide asset protection, wealth preservation, and intergenerational succession planning. However, onerous exchange control regulations previously restricted their ability to move capital offshore, making cross-border transactions almost impossible without explicit regulatory approval.
Given the current economic and political uncertainty in South Africa, the ability to establish and fund an offshore trust is an even more attractive option for those looking to diversify assets and safeguard wealth in a more stable international environment. The recent relaxation of certain exchange control provisions is thus well timed as it makes it easier for South African trusts to externalise funds, thus opening new, international doors for strategic wealth planning.
What has changed?
Historically, South African trusts were prohibited from making capital or income distributions to offshore trusts without obtaining prior approval from the Financial Surveillance Department of the South African Reserve Bank (SARB). This made it extremely difficult to move a South African trust value internationally.
However, in a significant development, SARS has now clarified its position and indicated that it will consider applications for South African trusts to distribute funds to non-resident trusts. The shift reflects a growing recognition of the need for more flexibility in managing offshore investments while still ensuring compliance with tax laws.
In August 2023, SARS published a notice stating:
"It has been the practice of SARS not to approve the release of funds when resident Trusts make distributions to non-resident Trusts. Following queries in this regard, SARS herewith clarifies its stance on the matter and confirms that it will consider approval for the release of funds/amounts distributed to non-resident Trusts…"
This statement represents a shift in regulatory power, moving decision-making authority from SARB to SARS in determining whether a trust-to-trust transfer can be approved.
How to obtain approval
Gaining approval to move trust assets offshore involves a two-step process, requiring clearance from both SARS and SARB.
Step 1: Tax clearance from SARS
The trustees must apply for tax clearance to distribute funds offshore. To do this, the trustees must submit:
• A copy of the trust deed.
• The latest Letter of Authority from the Master of the High Court.
• Trustee resolutions authorising the distribution.
• Details of the source of funds.
• Recent bank statements and financial records.
• The most recent share portfolio statement of the trust.
SARS will then assess whether:
• The offshore trust is a named beneficiary in the trust deed of the local trust.
• The trust deed explicitly permits such a distribution.
• The trust is fully tax-compliant, and all tax liabilities related to the distribution have been or will be settled.
If SARS is satisfied, it will issue a Manual Letter of Compliance, allowing the application to move forward.
Step 2: Exchange control approval from SARB
Once tax clearance is granted, trustees must apply to SARB through an authorised dealer as such as exchange bureaus, many financial institutions and most banks which are authorised by the Financial Surveillance Department. Applications are reviewed on a case-by-case basis, as no formal written regulations explicitly govern these trust-to-trust transfers.
SARB may impose conditions, such as requiring that any subsequent distributions by the offshore trust be repatriated to South Africa unless specific approval is obtained.
Key considerations and risks
While this development is positive, trustees should consider the following:
• Restrictions on in-specie distributions: The SARS notice refers only to "funds/amounts," suggesting that distributions must be in cash and not in the form of physical assets (in specie). This means that trustees cannot transfer property, shares, or other tangible assets directly to an offshore trust.
• Tax implications: Any income or capital gains distributed by the South African trust may be taxable before the transfer. Anti-avoidance rules may also apply, particularly if the offshore trust has South African tax-resident beneficiaries. These rules mean that certain tax effects may be attributed to the funder of the trust, and careful planning is required to ensure that the tax is paid by the correct taxpayer.
• Verification processes: SARS will conduct thorough compliance checks, applying a strict interpretation of the relevant tax and exchange control legislation to ensure that only fully compliant trust-to-trust distributions are authorised, thereby upholding regulatory integrity while enabling strategic international wealth management.
Embracing this new framework could be a strategic move for those looking to safeguard their wealth against local uncertainties while tapping into global investment avenues. However, given the complexities involved, it is essential for trustees to consult with experienced financial and legal professionals to navigate the application process and ensure full compliance with all regulatory requirements.
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