Updates to the rules on transfer of income and capital distributions from inter vivos trusts

In the past, exchange control policy relating to distributions from an inter vivos trust were complex and restrictive, which meant that the processes involved in transferring money out of South Africa were time-consuming and onerous. Fortunately, in 2021, the exchange control policies relating to these transfers were updated and the restrictions eased.

Let’s take a look at what has changed and what you need to know now about trust distributions to non-resident beneficiaries.

A complicated past: SARB exchange control regulations and South African trusts

Exchange Control Regulation 4(2) previously granted the Financial Surveillance Department (FSD) of the South African Reserve Bank (SARB) the authority to issue directives to individuals or entities, enabling actions such as freezing assets or imposing controls on foreign exchange transactions to protect the country’s reserves and financial stability.

Previously, if an inter vivos trust was funded by a party other than the foreign beneficiary receiving the distribution, it was ruled that the distribution must be blocked in terms of Exchange Control Regulation 4(2). The funds were only transferable once the funder has died.

Trust distributions to non-resident beneficiaries today

Section B.2(J)(xii) of the Currency and Exchanges Manual outlines the requirements and procedures for distributing trust income and capital to non-resident beneficiaries.

Previously, section B.2(J)(xii) required that the transfer of trust distributions abroad could be processed where the trustees completed the Tax Compliance Status (TCS) process on behalf of the beneficiaries. However, a recent amendment clarifies that the TCS process must now be completed by the beneficiary receiving the distribution.

This shift in responsibility aligns with the overall objective of ensuring that all individuals and entities involved in cross-border transactions adhere to tax regulations and contribute to the integrity of the South African financial system.

Here is what you need to know about trust distributions to non-residents under Section B.2(J)(xii) of the Currency and Exchanges Manual.

Assets previously blocked under a specific directive, as per Exchange Control Regulation 4(2), can now be managed as follows:

1. Beneficiaries who have formally emigrated via SARB or who have ceased tax residency with the South African Revenue Service

• Income distributions of up to R10 million are transferable abroad, subject to a TCS Good standing being obtained on an annual basis.
• An Approval of International Transfer TCS is required for income distributions exceeding R10 million.
• An approval of International Transfer TCS are required for the transfer of capital distributions irrespective of the amount. Transfers exceeding R10 million are subject to additional requirements, including a more rigorous verification process by the South African Revenue Service and subsequent approval by the FSD.
• This process includes a risk management test assessing tax status, fund source, and compliance with anti-money laundering laws.

Once approval has been obtained from the FSD, an Authorised Dealer (i.e. local commercial bank) can execute the offshore transfer.

2. Beneficiaries who have never resided in South Africa

• Income and capital distributions are transferrable abroad with no requirement to obtain a TCS.

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To find out how FinGlobal can assist you in achieving your seamless cross-border financial transition, leave your contact details and we’ll be in touch shortly.