ENSafrica

South Africa September 10 2019

A new world

The world of offshore trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. is now more dynamic than ever. The benefit of trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. as effective tools for the preservation of assets for future generations has been commonly known and accepted for decades. Globally, the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. environment has changed significantly due to the introduction of the Common Reporting Standards and resulting Automatic Exchange of Information between various revenue authorities around the world. The identities of original funders and beneficial owners are no longer protected.

In addition, some jurisdictions view offshore trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. as transparent vehicles with potentially significant tax implications for the funder and beneficiariesIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... of these vehicles. This increased transparency has made beneficiariesIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... more aware of their rights against trustees and their entitlement to information relating to the management and administration of the trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms..

The increased transparency and the fact that information is more readily available will focus the attention of revenue authorities around the world on these structures. There is no reason why the South African Revenue ServiceThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... should be an exception.

In terms our domestic law, an intricate range of tax provisions can apply to South African residents’ relationship with offshore trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms.. Foundations are also increasingly used which may have different tax consequences. The tax treatment of the funding of and distributions from offshore trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. has been the subject of debate for a number of years, culminating in amendments to the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act, no. 58 of 1962 (the “Act”) which were promulgated in 2018 (the “amendments”).

Income and capital gainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is... distributed from offshore trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. to South African resident beneficiariesIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... are taxed in their hands when such distributions are made. The funding of these vehicles can also trigger a donations tax liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure... and resulting attribution rules can apply to include income and capital gainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is... in the hands of the donors. Where a person connected to the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. sells assets to the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. on loan account, interest may be required to be charged.

The abovementioned amendments brought about an important change to structures where the assets are held by a company of which the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. is a major shareholder. Specifically, the payment of dividends from these companies and subsequent distributions to beneficiariesIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... have changed from March 1, 2019.

Some highlights of the amendments relating to the participation exemption

Attribution rules

Donors may be taxed on income received by or accrued to the offshore discretionary trustA Discretionary Trust is a form of trust where the trustee has the authority to decide how to allocate the income and capital of the trust among a group of beneficiaries. The trustee exercises this discretion according to the terms laid out in the trust deed, which typically defines the range of beneficiaries but does not mandate fixed entitlements. This... if this income was received by or accrued to the offshore trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. by way of donation, settlement or other disposition made by the resident, provided that such income would have been included in the offshore trust’s income had the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. been a resident. Interest-free loans or low-interest loans granted to the offshore trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. are also covered by these provisions.

Previously, this rule could have excluded dividends distributed to a non-resident trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. by a foreign company. Such a foreign dividend may not have constituted income had the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. been a resident, by virtue of the participation exemption in section 10B(2)(a) of the Act.

The participation exemption applies to the foreign dividends received by or accrued to a person that holds at least 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the total equity shares and voting rights in the foreign company declaring the dividend.

Capital distributions

Previously, a capital distribution to a South African resident beneficiaryIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... by an offshore trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. arising from a prior year’s foreign dividends derived from a foreign company held by the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms., may have been exempt from South African tax if the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. had qualified for the participation exemption. Therefore, such a capital distribution may not have been taxable in South Africa in the hands of the beneficiaryIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... on the basis that no amount of income (as defined) would have arisen for the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. if it had been a resident.

In terms of the recent amendments, capital distributions by an offshore trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. that are derived from such foreign dividends are now taxable in the hands of the South African resident beneficiaryIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... if certain conditions are met. However, South African residents would also still be able to benefit from the partial tax exemption applicable to foreign dividends.

Amendments to distributions of capital gainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is... from offshore trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms.

Paragraph 80(1) of the Eighth Schedule to the Act (“Eighth Schedule”) provides that if a trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. vested an asset in a resident beneficiaryIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust..., the beneficiaryIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... would be subject to capital gains taxCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price.... in respect of the related capital gain determined by the trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. in respect of the disposal of the asset. Paragraph 80(2) of the Eighth Schedule provides that if a trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. disposes of an asset and vests the resultant capital in a resident beneficiaryIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... in the same tax year, the beneficiaryIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... would be subject to capital gains taxCapital Gains Tax (CGT) is a tax imposed on the profit an individual or entity earns from the sale or disposal of a capital asset. This tax is not levied on the total sale price of the asset but rather on the capital gain, which is the difference between the asset’s acquisition cost (or “base cost”) and its sale price.... in respect of the capital gain.

Previously, these provisions may not have been applicable to offshore trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms.. Subsequent to the amendments, the resulting capital gain in respect of a disposal of an asset vested in a South African beneficiaryIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... of a trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. is to be taken into account in determining the aggregate capital gain or loss of the resident beneficiaryIn tax law, a beneficiary is the person or entity entitled to receive funds or other benefits from an arrangement, such as a trust or a will. Beneficiaries are often named explicitly in legal documents, ensuring that their rights and interests are protected. The concept of a beneficiary also extends to corporate contexts, such as when a company or trust... to whom the asset was disposed. This provision is now applicable to offshore trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. as well.

Reportable arrangements

Some arrangements in respect of offshore trustsA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. may need to be reported to the South African Revenue ServiceThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... (“SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently...”), unless they are excluded in terms of the Tax AdministrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... Act no. 28 of 2011. Such reportable arrangements include contributions made by a resident to an offshore trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. which exceed ZAR10-million, and where such resident has or acquires a beneficial interest in the offshore trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms.. These arrangements must be reported to SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... within 45 business days.

What to do?

Careful consideration should be given to current offshore structures. Firstly, resident taxpayers should be in touch with trustees and advisors acting in a fiduciary capacity to check what information is being exchanged with revenue authorities. It is likely that residents’ participation in these structures in one way or another will be audited by SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... in years to come. Secondly, it is critical that disclosures now being made by offshore institutions in terms of the Common Reporting Standards correspond with disclosures made by individuals in their own returns and the necessary reporting is done. Taxpayers carry the onus of proof in any dispute with SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... and will therefore be required to explain any discrepancy.