Trusts have been used in South Africa since the 1800s, and became a popular way to manage assets, given that they offered a variety of benefits including asset protection, tax benefits, succession planning, and confidentiality. These advantages have evolved over time, with a number of limitations coming into effect over time, including stricter rules on how trusts are taxed in South Africa. There are also exchange control implications for trusts in South Africa, that affect non-resident beneficiaries and prohibit certain offshore transactions. However, the exchange control rules have been progressively relaxed by the South African Reserve Bank. As such, this is now the ideal time to ask (and answer) the question: can a South African trust make a capital distribution to an offshore trust?
What are the rules around trusts in South Africa?
The primary exchange control rule that applies to South African trusts is Exchange Control Regulation 10(1)(c). This regulation prohibits any person, including a trust, from directly or indirectly exporting capital from South Africa without permission.
The updated status of non resident trust distributions
Earlier this year, the South African Revenue Service (SARS) released an update on the treatment of distributions to non-resident trusts by resident trusts. SARS has traditionally refrained from approving these types of requests. However, SARS has recently indicated their willingness to consider requests for approval regarding the distribution of funds to non-resident trusts. The approval process is initiated by applying for a Manual Letter of Compliance from SARS by using the email address mentioned on their website.
How will SARS handle requests for non resident trust distributions?
It is important to point out that SARS will only consider the approval of such distributions if the non-resident trust is a designated beneficiary of the resident trust, and the distribution aligns with the terms and conditions specified in the trust deed. Furthermore, approval will only be granted by SARS for distributions by resident trusts to non-resident trusts if the resident trust can show that all tax liabilities associated with the distribution have already been settled, or an arrangement has been made to do so.
With this, it is clear that the revenue authority’s main concern is the prevention of tax evasion in trust distributions, rather than the outright prohibition of such distributions to non-resident trusts.
As such, the requirements for SARS to approve a distribution to an offshore trust are:
- The non-resident trust must be a designated beneficiary of the trust in South Africa.
- The distribution to the non-resident trust must be made in accordance with the trust instrument that dictates how the trust is to be executed.
- All tax obligations arising from the non resident trust distributions must be clearly met or provided for.
- Updates to the rules on transfer of income and capital distributions from inter vivos trusts.
- Offshore trusts for South Africans: a guide to five key considerations.
What process needs to be followed to make a non-resident trust distribution?
The following documents must accompany the Manual Letter of Compliance application to SARS:
- A copy of the trust deed or instrument that established the trust.
- A copy of the latest Letters of Authority issued by the High Court Master.
- Resolutions from the trustees of the South African trust making the non-resident trust distributions.
- Details of the source(s) of funds to be distributed by the trust.
- The most recent share portfolio statement for the trust – not older than one month – which includes the description, the number of shares held and current market value, if applicable.
- Most recent Financial Statements or Annual Financial Statements of the trust in South Africa.
FinGlobal: cross-border financial specialists
Handling non-resident trust distributions can be tricky. That’s why it’s important to choose an international financial solutions provider who can handle both the tax and exchange control aspects of your South African trust distributions. From tax clearance to foreign exchange, FinGlobal is ready to assist every step of the way. Safe, convenient services, no upfront payment required.
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