SA Trusts: Permitted Externalisation of Funds to Offshore Trusts
Michelle Hawkins - Senior Tax Specialist & Antonia Nicoloudakis - Head of International Tax | PKF Octagon
Until recently SA Trusts were not permitted to transfer assets directly to a non-resident Trust. In 2023, the South African Revenue Service (“SARS”) offered a mechanism to allow for funds to be distributed by SA Trusts to non-resident Trusts, provided all regulatory approvals are obtained from both SARS and South African Revenue Bank (“SARB”).
These amendments which came into effect as from 1 March 2024, narrowed the conduit principle, in that only distributions to South African tax resident beneficiaries qualified for the flow-through treatment. Distributions to non-resident beneficiaries, including foreign Trusts, are now taxed in the hands of the South African Trust before distribution, at the income tax rate of 45% and capital gains are taxed at the effective tax rate of 36%.
To make an offshore distribution under the new dispensation, the South African Trust must apply to SARS for a Manual Letter of Compliance, which triggers a full audit of the Trust’s affairs. SARS will verify the legitimacy of the Trust deed and beneficiary structure and whether all South African tax liabilities have been or will be settled. Once SARS is satisfied it will issue a tax compliance pin whereafter the Trust must apply to SARB for exchange control approval to remit funds offshore.
There is however a concern over the potential oversimplification of the new dispensation for foreign Trusts and the implications of sections 56(1)(l), 7(5), and related provisions of the Income Tax Act.
Section 56(1)(l) exempts from donations tax any disposal made in pursuance of a Trust. This has traditionally been interpreted to include distributions from a Trust to its beneficiaries, meaning such distributions are not subject to donations tax. However, this exemption does not override the attribution rules in section 7, which can still apply depending on the nature of the Trust and the source of the income. Section 7 contains anti-avoidance provisions that attribute income back to the donor or funder of a Trust, particularly in cases involving:
- Low-interest or interest-free loans (Section 7C)
- Direct donations or asset transfers (Section 7(5), 7(8), etc.)
If a South African resident donates or settles assets into a non-resident Trust, and that Trust earns income from that donated amount, section 7(5) may deem that income derived from such donation to be taxable in the hands of the South African donor—even if the income is not distributed. It is probable that the distribution from the South African Trust to the foreign beneficiary will have the same consequences.
This undermines the typical non-resident Trust structure where income is only taxed upon distribution.
If the new dispensation is presented without addressing the attribution rules, audit requirements, and SARS’ enforcement stance, it could:
- Mislead stakeholders into believing distributions are tax-neutral
- Result in non-compliance or under-disclosure
- Expose the Trust and its stakeholders to penalties, interest, or double taxation
Accordingly, it is therefore advisable that any communication or planning around foreign Trusts should:
- Explicitly address the interaction between Sections 56 and 7 of the Income Tax Act;
- Clarify that donations tax exemption does not mean exemption from income attribution;
- Highlight the audit and compliance process required for offshore distributions; and
- Include a risk assessment for structures involving non-resident Trusts and non-resident beneficiaries.
Once the risks are mitigated, and before the process is initiated, the following conditions must be met for distributions to the non-resident Trust, namely:
- The non-resident Trust must be a named beneficiary in the SA Trust’s Trust Deed;
- The SA Trust must be tax compliant and resident in South Africa; and
- All taxes relating to the distribution must be settled in full with SARS.
Once these conditions are met, the following processes need to be followed to transfer funds from a SA Trust to a non-resident Trust:
Process to Transfer Funds Abroad
1. Initial Verification Process
Approval must first be obtained from SARS by securing a Manual Compliance Letter. This is done by emailing SARS at MLCA@sars.gov.za with the following information:
- Trust Deed Requirement:
The SA Trust deed must provide that the distribution is permitted, and the non-resident Trust must be named beneficiary of the SA Trust. - Tax Compliance Requirement:
The assets that will be distributed (and any disposals triggered) must be correctly subject to tax in South Africa. In additional sufficient funds must be retained by the Trust to pay all applicable taxes due in relation to such distribution or disposal triggered.
Once the manual compliance letter has been obtained, further approvals must be obtained from both SARS and the SARB which process is as follows:
2. SARS Tax Clearance:
The application for a foreign distribution must be made to SARS to obtain a SARS Tax Clearance: A “Letter of Compliance” (this is typically issued within 21 working days on condition that the flow of funds is not complex). It is important to note that if the tax is not in good standing, no tax clearance will be issued.
3. SARB Application
Once the Tax Clearance is received, submit an application to the SARB via an Authorised Dealer (appointed banks or financial institutions), including all supporting documentation and a motivation letter. SARB will then review ownership structures, tax compliance, and the Trust deeds for compliance before considering whether to approve the application or not.
4. Transfer of Funds
If the application has been approved by the SARB (typically within 6–8 weeks), the funds may be transferred to the non-resident Trust in compliance with exchange control regulations.
Note: SARS or SARB approval is not guaranteed and is only valid for 12 months from date of approval. SARS and SARB may request additional information at their discretion.