The South African Revenue Service (SARS) has historically been reluctant to approve the release of funds when resident trusts distribute to non-resident trusts. However, following numerous enquiries on this matter, SARS has provided clarity and outlined a process for obtaining approval for such distributions.
Background on SARS and South African trusts
SARS’s cautious approach to releasing funds from resident trusts to non-resident trusts has been motivated by the need to effectively manage associated risks. These risks include potential tax evasion, money laundering, and the circumvention of South African exchange control rules and regulations. However, with the South African Reserve Bank’s relaxation of exchange control requirements, SARS has reconsidered its position and introduced a formal procedure for obtaining the necessary approvals.
New approval process for trust distributions
To enable the distribution of funds from resident trusts to non-resident trusts, SARS has established a clear process for obtaining a manual letter of compliance. Trusts seeking approval must follow these steps:
- Application submission – Trusts must apply for a manual letter of compliance by emailing their request to MLCA@sars.gov.za. This application should include all relevant details about the trust, the distribution, and the non-resident beneficiary.
- Verification process – Upon receiving the application, SARS will conduct thorough verification processes. These verifications ensure that the distributions comply strictly with the relevant sections of the Income Tax Act and other applicable regulations.
- Compliance with trust instrument – It is essential that the non-resident trust is a bona fide beneficiary of the resident trust. The distribution must comply with the terms and conditions set out in the trust instrument of the resident trust.
- Tax liabilities – SARS will only approve the distribution if the resident trust demonstrates that all tax liabilities relating to the distribution have been or will be settled. This requirement ensures that the South African tax base is protected and that all due taxes are collected.
SARS’s decision to consider approving distributions from resident trusts to non-resident trusts represents a significant policy shift. By introducing a structured approval process, SARS aims to balance the need for regulatory compliance with the flexibility required by modern financial practices. Trusts intending to make such distributions must carefully follow the prescribed process and ensure full compliance with all tax and legal obligations.
Trustees and advisors should remain vigilant and stay informed about any further updates from SARS regarding this matter, ensuring that the correct documentation is submitted in support of the request. Proper adherence to the new process will enable smoother transactions and ensure that all parties meet their legal and tax responsibilities.
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