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|Article title: A
Guide to Offshore Trusts and International Financial Planning
(S.A.) FILPA ADV Dip. TAX
Source: Institute of Commercial and Financial Accountants
of Southern Africa
of an Offshore Trust
An offshore trust is very similar to the discretionary family trust that
one sets up in South Africa with one or two variations, the main one being
that the individual setting up the trust cannot be a trustee and has to
appoint a professional trustee resident in the country in which he wants
the trust to be resident. Because of this, there is a need to appoint
a "protector" to ensure that the person setting up the trust
still has some form of control over the administration of the trust.
The parties to an offshore trust are generally the settlor, the trustees,
the beneficiaries and the protector.
is the person behind or wishing to form the trust (this is the overseas
term for the donor).
The Trustee is normally a corporate entity usually
situated in a tax haven which is responsible for the administration of
The Beneficiaries , which are normally of a
discretionary nature, are nominated in the Letter of Wishes set up by
the settlor and normally consist of family members of the settlor and/or
other trusts situated anywhere in the world.
This is a party to the trust which we are not particularly familiar with
in South Africa which is required because one has to appoint a third party
as a trustee. This person acts as a watchdog to the trustees and the trustees
require his authority in order to act for and on behalf of the trust with
regard to any major decisions.
Letter of Wishes
This is the initial documentation wherein the important aspects of the
trust, who the trustees are, who the beneficiaries are who the protector
is, is set out.
Reasons for setting up the trust
There are various reasons why an individual would want to set up an offshore
trust or company for that matter. These include :-
to avoid exchange
income tax saving;
estate duty and capital
gains tax saving;
the ease of international
acquisition and disposal
the holding of international
investments tax efficiently and confidentially;
a vehicle to acquire
and the ability to move residency of the trust;
hedge against Rand
devaluation and political uncertainty;
fund to finance children's
fund to build up and
hold overseas retirement funds.
of the trust
Obviously, for a trust to be an offshore trust it has to be registered
somewhere other than in South Africa.
Usually this country will be at the choice of the settlor and where the
trustees are resident. This is necessary because a trust is deemed to
be resident where the trustees are resident being, where the trust is
managed and controlled.
In most instances one would take advantage of tax havens or low tax countries
and accordingly these trusts are formed in tax havens such as Jersey,
Guernsey, Cayman Islands, Isle of Mann etc.
When determining residency for the trust, there are a couple of factors
to be taken into consideration, these being :-
the language and business
medium of the country
the culture of the
people being dealt with
whether it is going
to form part of the EEC
the legal system,
country has a financial watchdog or not.
Jersey as a Tax
We did a considerable amount of research as to the best tax havens available
to individuals, and Jersey came out tops, the main reasons being :-
Jersey has all the
characteristics as indicated above ie. it's got stability, both economic
It is a tax haven;
It has confidentiality;
The time zones coincide
We understand the
people with whom we deal;
It also has a very
good financial infrastructure and it is a lovely holiday resort to
visit, especially in the summer;
It has a financial
The costs are reasonable.
The issue of costs, is
of vital importance as the cost of setting up an offshore trust
ranges from £400 to over £1000 with the annual trustee fees varying from
as little as £325 per annum to as much as £1000 plus a percentage of the
trust's assets. Accordingly, one has to always weigh up the costs against
the benefits and again make sure that you are comfortable with the institutions
that you are dealing with.
All profits you earn from an active business operation conducted overseas
are not taxed. Active income includes dividends, proceeds from life assurance
policies and pensions for services rendered.
All your passively earned foreign income such as interest, royalties,
annuities, rentals and so on, is taxable on the same basis as it would
be if it were earned in South Africa. You are liable for the payment of
tax on your foreign earnings even if its not repatriated but left an accumulated
This applies to any investments held in your name and you simply need
to declare the income on your annual IT.12 Income Tax Return.
(Pre 2000 Amendments)
Once your trust is established in a tax haven such as Jersey, the trust
is normally exempt from all forms of taxation in that tax haven provided
none of the beneficiaries are a resident of the country. However, the
Receiver of Revenue in South Africa would seek to tax South African residents
on the income in certain circumstances.
In brief, the following rules apply to overseas trusts in which a South
African resident controls more than 50% of the trusts assets, (i.e. are
controlling trustees) or are majority vested beneficiaries :-
If the trust has been
accumulating income over many years as capital, instead of paying
it out, when the money is finally distributed you will be taxed on
the amount of capital paid to you to the extent that it has arisen
from investment income earned in past years.
If you are a vested
beneficiary of a trust then your portion of the investment income
that the trust earns will be taxed in your hands.
If any of the trust
income has arisen as a result of a donation or interest free loan
then that portion of the trust income which has arisen because of
the donation or interest-free loan will be taxed in the hands of the
South African resident who made the donation or interest free loan.
Please bear in mind that
the above situation only applies in instances where the foreign trust
is controlled by a South African (i.e. Resident trustee) or in which South
Africans are majority vested beneficiaries.
These taxation provisions could be avoided by ensuring that your trust
deed is correctly structured and would result in the trust being able
to accumulate income over the years and pay it out to you tax free because
the income is not deemed to be from a South African source.
As can be seen from the above, there are significant tax planning opportunities
with the correct drafting, strucEagle Tradersg and utilisation of an offshore
trust. It is imperative, however, that the trust is correctly drafted,
funded and registered in a suitable country.
South Africans can now invest R750 000 per person, in any type
of investment anywhere overseas. However, the investment has to be in
the name of a natural person. In other words, one cannot invest the R750
000 in the name of a local family trust, which results in no estate planning
or asset protection opportunities. In addition, one requires a Tax Clearance
Certificate from the South African Revenue Services.
Revenue will then ensure that your tax affairs are in order and that you
do, indeed, have sufficient wealth to make the anticipated investment.
Individuals traveling overseas are entitled to R130 000 per annum for
overseas trips, whether on business or holiday.
The settling in allowance for people emigrating out of South Africa has
been increased from R200 000 to R1 000 000.
The Reserve Bank now permits the payment of up to R50 000 per transaction
for financial services payments from time to time.
Jersey is the largest of the Channel Islands, an island with an area of
45 square miles, and a population of 85,000 situated 15 miles to the west
coast of France, in the Bay of Mont St. Michel.
The island is self-governing with its own legislative assembly known as
the "States of Jersey" which comprises democratically elected
members who are independents and who vote independently, and who have
complete autonomy in domestic and fiscal matters. This system has provided
the island for centuries with political continuity and stability.
The Jersey economy relies on three main areas of activity, agriculture,
tourism and finance. The newest sector is finance, and Jersey now has
an international reputation as a finance centre with many international
banks and firms of accountants established in the island.
The island is easily accessible with frequent connecting flights between
Jersey and most major cities in the United Kingdom and many major cities
in Europe. Additionally, the island has an efficient telecommunication
system providing international telephone and facsimile links.
Any company, partnership or individual that is deemed to be resident in
jersey will be chargeable to income tax at 20 % upon its net income. However,
there are no capital taxes imposed on resident or non-resident persons,
there being no inheritance tax or capital gains tax, and there are special
provisions for persons deemed to be non-residents of the island. In particular,
these provisions permit the management and administration of companies
to be undertaken from Jersey provided that the company is not ultimately
owned by Jersey residents and the company is deemed to be a non-resident
of the island.
A trust is normally a private agreement made between the settlor who provides
the original assets for the trust and the trustees who are empowered with
the management of the assets belonging to the trust. A trust is a separate
legal entity and may be either discretionary or specific. The Trust Law
(Jersey 1984), has consolidated the legal understanding of the trust within
The essential benefit of a trust is that the settlor ceases to become
the legal owner of the assets passed into the trust although he may still
exercise influence over the use of the assets. Consequently, tax liabilities
that may arise in certain countries as a result of owning assets may be
reduced or avoided as the assets held by the trust will fall outside the
bounds of taxation in these countries.
Additionally, a Jersey trust will not be liable to Jersey taxation provided
it can be demonstrated that :-
None of the beneficiaries
is resident in the island.
The trust has no income
arising from sources within Jersey other than bank interest.
These provisions mean
that a Jersey trust can accumulate income from differing sources tax
In addition to the
above advantages, the other principal attractions of a trust are :-
The engrossment of
a trust is a private matter between the settlor and the trustees and
there is no requirement to formally register its existence.
Trusts are very flexible
and trust laws are not as developed as company laws in many countries.
They may be able to
provide protection against exchange controls.
Security of personal assets
- by divesting ownership of the assets in the trust the settlor may be
able to secure assets from the claims of others.
Provision of benefit to others - by divesting ownership of the assets
in the trust, the settlor may be able to provide for others in the event
of his death in the manner that he wishes.
The above provides only a very broad outline and the prospective client
should consider closely with his professional advisor and ourselves the
concepts of a trust before entering into any arrangement.
There are three types of Jersey Companies - Resident companies;
Exempt companies; and International Business companies.
A company will be deemed to be resident if it is managed and
controlled within Jersey or is registered in Jersey and is beneficially
owned by Jersey residents.
All companies that are resident for income tax purposes are liable to
pay income tax at the standard rate of 20 % on their profits.
A company will be deemed to be non-resident in Jersey if it satisfies
the following criteria :-
owners of the company must be non-resident in Jersey.
Application for exempt
status, together with payment of the exempt company tax is made within
the time limit laid down.
The company must not
trade in Jersey.
Disclosure of beneficial
ownership has been made to the Jersey Financial Services Department
to that department's satisfaction.
Companies deemed to
be exempt for income tax pay Exempt Tax at a rate of £ 600 per annum
regardless of the profits made by the company. The attraction of exempt
companies being that they may be administered and managed from within
the island without further taxation being levied upon them by the
This is a new status for Jersey companies introduced on 1st January
The Jersey International Business company is resident in Jersey for taxation
purposes. However, upon demonstrating that beneficial ownership of the
company is vested in non-residents of Jersey, the company will be granted
favourable tax rates ranging from 2 % to ½ % depending upon its level
of profits. On any activities deemed to have taken place in Jersey, tax
will be levied at 30 %.
All the above are available for discussion with the Jersey Tax Authorities
upon inception of the company. This gives the company the advantages of
being resident in Jersey for taxation whilst at the same time being able
to benefit from favourable rates of taxation.
The primary objective of off shore tax planning can be defined as the
sheltering of income and gains which would otherwise arise to resident
tax payers without them requiring to become non-resident. This is achieved
by the use of companies which may be based in a number of low tax jurisdictions
and non-resident discretionary trusts.
Offshore tax planning
and the establishment of offshore tax structures is a specialised area
and it is fair to say that each individual case must be considered on
its own facts. Consequently, the information in this article is not intended
to provide the reader with any recommended solutions, but rather to provide
information on vehicles used in offshore structures, and to give some
information on Jersey which provides a stable and convenient centre for
the establishment and subsequent management of offshore structures.
much legislation aimed against offshore structures and any offshore structure
should only be established in conjunction with professional advice. It
is not an area in which the layman should venture without adequate professional