Important Considerations When Choosing A Foreign Trust Structure

Establishing a foreign trust has become increasingly attractive to many South Africans as these trusts are primarily based in low (or zero) tax jurisdictions. They are instrumental in holding offshore wealth and hedging against political and economic uncertainty. It is, however, essential to understand all implications of foreign trust structures for South African residents to ensure you make informed decisions that support your investment objectives over the long term.

Jurisdiction

Choosing the appropriate jurisdiction for your specific structure is critical as the foreign trust’s benefits and effective trust administration by the trustees will be impacted if it is established in an unfavourable jurisdiction. Other important factors to consider when choosing a jurisdiction include the following:

• a strong tradition of enforcing trusts.
• preferably an English common law system.
• effective regulation and supervision.
• good banking infrastructure.
• economic and political stability.
• a wide network of double taxation agreements (DTAs), and
• good accessibility.

Management of the trust

For a foreign trust to qualify for any beneficial tax treatment in a specific jurisdiction, the trust must not only be established in the chosen jurisdiction, but its place of effective management must also be located in that jurisdiction, usually through the use of an independent foreign trustee.

Therefore, a South African settlor must identify and appoint such an in-country person as a critical initial step in establishing a foreign trust. It is common for these foreign service providers to develop specific fiduciary services businesses, usually referred to simply as management companies. In most reputable offshore jurisdictions, the management and trustee companies must be explicitly registered with the local company registration office and licensed by the local financial services authority.

The differences in time zones, places of effective management and sometimes even language barriers should all be considered when dealing with foreign trustees.

Suppose a settlor or the beneficiaries are not happy with the manner in which the trust is managed by the trustee (usually a trust company). In that case, they could always request the trustee to retire in favour of another trustee. In some cases, this is straightforward, but depending on the specific law governing the trust, there may be specific requirements that must be fulfilled to discharge the retiring trustee properly.

Distributions

Distributions received by South African resident beneficiaries may be taxed in the hands of the recipient. The treatment of distributions of an income nature and capital distributions is different, and you will have to consult your tax adviser.

You will also have to consider the South African Reserve Bank’s Currency and Exchange Control Guidelines when remitting offshore distributions to South Africa and if any restrictions are placed thereon.

Reportable arrangements

Some arrangements in respect of offshore trusts can constitute reportable arrangements in terms of the Tax Administration Act and may need to be reported to SARS. Such reportable arrangements include contributions made by a resident to an offshore trust which exceeds R10 million and where such resident has or acquires a beneficial interest in the offshore trust. These arrangements must be reported to SARS within 45 business days, and failure to disclose a reportable arrangement carries severe fines.

Associated costs

It is essential to consider the associated costs when appointing a management company, administrative expenses of maintaining a bank account, trustee amendments, drafting and recordkeeping of trustee resolutions etc.

Conclusion

The essence is that foreign trusts offer attractive estate planning and risk management benefits to South African tax residents. Still, there are various factors to consider when establishing and managing a foreign trust.