26 Oct 2020

Must Read: How the pending 2021 amendment will affect South African emigration and retirement funds.

Access to South African retirement funds will become a factor of tax residency instead of exchange control residency.

TAKEAWAY: A client planning to emigrate from South Africa should cash-out their current pension fund if they want to access the funds within three years of leaving the country; if your client has been living abroad for more than three years already, then they may be eligible to cash out their retirement funds now. Keep this in mind when the client wants to add their pension funds to the trust fund.

What is changing?

One of the benefits for a South African to emigrate for exchange control purposes (often referred to as ‘financial emigration’), is access to their retirement funds.

Although a person can access 100% of their current pension fund upon the termination of employment, any previous pension funds held in a pension preservation fund or retirement annuities, are inaccessible until retirement age, or until formal exchange control emigration.

The recent draft taxation laws amendment bill – which is still under review – proposes to do away with the exchange control emigration as a mechanism to get access to one’s retirement funds. Instead, the new requirement to access retirement funds will be that the person has ceased to be a South African tax resident, and has remained tax non-resident for at least three consecutive years.

What does this mean?

For many South Africans already living abroad, this will be a welcome relief, as they would likely already be tax non-resident in South Africa. As a result of the amendment, they would be able to access their retirement funds as soon as they have been tax non-resident for three consecutive years.

For any South Africans planning to leave South Africa within the next year, this might be unwelcome news as, after 1 March 2021 they would need to wait three years to access any pension preservation fund or retirement annuity. However, 100% of their current employer’s pension fund (as opposed to a pension preservation fund or retirement annuity), is available as a lump sum, and can be transferred abroad through the correct process.

The caveat? Tax. Even if tax non-resident in South Africa, a retirement lump sum withdrawal would be subject to tax in South Africa. In addition, a higher tax rate applies to withdrawals made before retirement age.

What do you need to know now?

This change is not yet final, but it is anticipated to be implemented in some form with effect from 1 March 2021.

In the meantime, any person contemplating emigrating from South Africa in the future, may want to consider transferring his current pension fund to the new employer’s pension fund when moving between jobs, instead of transferring the pension fund to a preservation fund, in order to access the pension fund in full when leaving employment to emigrate.

For more information on South African tax and exchange control residency, read our briefing note here. For assistance in helping your client plan his emigration, or transferring his retirement funds to the trust, contact us.

 

26 Oct 2020

The Big Debate: Are trusts required by SA law to pay interest on any outstanding loans to SA lenders?

We have seen much confusion on this important topic and here we hope to provide some simple answers to help you navigate this question.

TAKEAWAY: A popular way of financing a trust from South Africa is to sell assets to the trust and leave the consideration outstanding as a loan, or to loan funds to the trust. Previously, no tax was levied on interest-free loans made to trusts, but this has changed in recent years. Many now insist on charging interest, but this is not the only answer.

Is a trust required to pay interest on a loan owed to a South African person?

No. There is no requirement that a loan owed to a South African lender should be interest bearing. While a non-interest bearing loan was previously not subject to tax, the interest not charged is now subject to donations tax in the hands of the lender. Therefore, the law does not require interest to be charged, but levies a donation tax on the interest foregone.

The deemed donation is the difference between the interest charged and the official rate of interest (a defined rate in South Africa). It is important to note that, as the official rate of interest is prescribed by law, it is irrelevant in what currency the loan is made.


For example, assuming a  loan of £10 million, with zero interest, and an  official rate of interest of  4.5%, the total donation for the year will be:

  £10 000 000 x (4.5% – 0%) = £450 000

Donations tax is levied at 20% of the first R30m (about £1,5m) of donations per year, and 25% thereafter. Assuming that the lender made no other donations that year, the lender will pay donations tax of £90 000 for the year on the interest not charged.


What happens if interest is charged?

Where the South African lender charges interest on the loan, the interest payable by the trust, whether actually paid or not, is income accruing to the lender. This interest income is subject to income tax in South Africa.


Assuming a loan of £10m and an interest rate equal to the repo rate + 1% (the same as the official rate of interest), the interest income for the year would be as follows:

         £10 000 000 x 4.5% = 450 000

Income tax in South Africa is charged on a sliding scale of 18% – 45%. Assuming that the lender is subject to the marginal tax rate of 45%, the lender will pay income tax of £202 500 on the loan interest for the year.


Is there one solution for all trusts?

No. Not charging interest and paying the donations tax can be a less expensive option for the lender. However, other anti-avoidance provisions may apply when not charging interest, which may complicate the tax return (and hike up the tax bill) of the lender. On the other side, the value of an interest-free loan is fixed so that the lender’s estate duty payable on the loan does not increase.

Charging interest may be a more expensive option per year, but is less complicated for the lender. However, assuming that the trust is not actually paying the interest and that the value of the loan is increasing every year, there may be a secondary cost in the estate duty for the lender which is often overlooked. After just ten years, that could translate to an additional cost of over £1m. If the trust assets are growing at a slower rate than the value of the loan, the trust should possibly be reconsidered.

In summary

Loans owing to a South African lender do not have to be interest bearing. Whether to charge interest or not, should be considered in light of the different circumstances of each trust. However, the costs involved – or the potential tax savings – with either option, does justify taking proper advice before making a decision.

Contact us should you wish to review the loan arrangements of the trusts you manage.

26 Oct 2020

Offshore trustees: How to add value to your South African client at little cost to your company

We are often asked by offshore trustees how they can expand their business in South Africa. The answer is quality service, especially around the following few important considerations which we touch on here.

Anticipating reporting needs

The South African tax year runs from 1 March to the last day of February of the following year. South African beneficiaries need to declare whether they have received a distribution from any trust, and a South African financier may need to declare certain income of the trust in their tax return, even if it did not accrue to them. Offshore trustees therefore, need to be sensitive to the reporting requirements of their South African beneficiaries and funders.

Offshore trustees may, for example, want to consider whether a reporting period of 1 March to the last day of February is not perhaps more appropriate than a January to December period, where the primary reporting obligations arise in South Africa.

Distributions

A South African beneficiary needs to declare any distribution received and disclose what portion of the funds received is paid from interest income, dividend income, capital gains (calculated based on South African rules), or original capital (the amount settled on the trust).

Making a distribution, and then leaving the beneficiary in a lurch as to the nature of the funds, may result in the total amount being taxed as interest income, even if the whole amount consists of original capital. This is important, as the marginal tax rate for interest income is about double that of dividends or capital gains tax, and no tax is payable at all on distributions paid from original capital.

We would recommend that any trustee be proactive and plan distributions together with the beneficiaries. Ideally, distributions should be planned at the start of each year and be made from income, leaving the original capital available for making unplanned or emergency distributions tax-free.

Original capital

As original capital can be distributed free of tax in South Africa, accurate records of the capital in the trust should be kept. When a distribution is made, the trustee should record the amount that is being paid from original capital. The trustee should have a clear record of the original capital of the trust (all settlements received), the distributions made from original capital, and the remaining balance of original capital.

In such a way, the trustee is helping to protect the trust funds distributed from unnecessary tax, as the South African tax authority will tax original capital as income – potentially at 45% – if it cannot be proved that the distribution was made from original capital.

TAKEAWAY: A trustee insensitive to the South African beneficiary’s reporting needs, can wipe away 45% of the value of the trust funds distributed by not keeping the necessary records. No amount of careful investing can make up for that. On the other hand, at minimal cost to the trustee, the value of the trust fund on distribution can be protected and maximised for the South African beneficiary by good record keeping.

Using income to settle the trust’s costs

Another way a trustee can easily increase the value of the trust fund for a South African beneficiary, is to pay the trust’s costs – including trustee fee – from income. In preparing the accounts for the trust, the trustee can show that the trust’s costs are settled first with interest income (current or accumulated), then from dividend income, then capital gains, and lastly from original capital. This ensures that the highest-taxed funds are used for costs, leaving the lowest taxed funds available for distribution to beneficiaries.

It is small considerations such as these which add immense value to the South African client and sets the offshore trustee apart from its competitors.

We are happy to provide complimentary training to teams working with South African clients or beneficiaries; please contact us if you are interested.

26 Oct 2020

Understanding international wealth diversification for SA clients in the right context

Guest article by Lindsay Bateman of Brooks Macdonald
28 September 2020

South African resident clients today can internationalise their wealth through specific exchange control concessions, meaning such individuals can apply for an annual allowance of ZAR10m per calendar year, a far greater and more flexible scenario than was the case some years back.  With the right advice and support from their trustee, or independent advisor, they can apply for a “tax clearance certificate”, production of which at their local bank will facilitate the external transfer of these funds to their trustee to position with their selected offshore asset manager, in their agreed and risk aligned international investment strategy. Such certificates are valid for a twelve-month period from date of issuance.

Today’s world is ever more challenging as the impact of Covid-19 continues to disrupt economies, lifestyles and earning power, and South Africa is by no means an exception. Because of this, the benefits of true international wealth diversification for South Africans is being increasingly recognised by clients and trustees alike.

South Africans investors seek out good quality, regulated and experienced advisors and trustees that understand both the South African and international implications of their intended investment path, and the use of tailored structures to hold fixed property, investment portfolios, intellectual rights and other assets remains a well-trodden path.

Trustees pay attention to several key factors when selecting a suitable investment strategy and provider, which include the following:

  • Investment provider: Are they reputable, established, independent, regulated in both their own jurisdiction and in South Africa? Are they of sufficient size in terms of assets managed and investment managers employed to provide substance and continuity, offer a range of suitable investment services, travel to SA regularly to meet clients and have deep knowledge & experience of both the SA and international investment and regulatory frameworks?
  • Counter-party risk: Is the trustee placing full reliance on the investment provider’s balance sheet, or does the investment firm “ring-fence” client assets and place them with a large highly rated global banking group as nominee?
  • Investment services: Are these accessible in terms of minimums, offer transparent and competitive all-in fee levels, provide a range of currency options (USD, GBP and Euro)? Do they offer a range of risk profiled investments from very cautious to growth orientated mandates, provide daily liquidity, and cater for any short-term unexpected redemptions without penalty or delays?
  • Relationship support: Is online access in place for both the trustees and if required, the underlying client? Will the investment manager meet the clients in SA alongside the trustees, or on request, to conduct regular portfolio reviews? How easy is it to contact the investment manager to get information provided, SA tax reporting as may be required, or other statements, valuations and performance reporting? Can this reporting be tailored to meet the specific needs of the trustees or clients? Is a dedicated team in place at the investment firm with clear experience and knowledge of the region, and a commitment to ongoing and regular travel?

South Africans are besieged with offers to “invest” internationally, with some exploiting the demand for such opportunities by offering highly attractive sounding returns and often exotic and complex investment strategies. Trustees can help protect clients from themselves in such cases, and through their role to protect and grow assets for the beneficiaries of the trust, ensure that the best possible investment manager, strategy, risk profile and ongoing investment returns are all in play. It is often only in the long term that clients realise and appreciate the powerful benefits that can be delivered through a quality trustee working hand in hand with an independent, regulated and experienced investment manager.

 

26 Oct 2020

Hatstone named as one of the world’s top private client firms

Hatstone Lawyers has been named by eprivateclient as one of the world’s top private client firms in its 2020 Top Offshore Law Firm rankings.

The rankings are based on a survey of over fifty leading private client firms.  They recognise the success of Hatstone’s fast-growing team of partners, lawyers and other professionals in the BVIJerseyLondon, Panama and South Africa, in providing outstanding legal, fund administration, trust and corporate services to private and corporate clients across the globe.

Group Partner, Simon Vivian said: “We are delighted to be recognised by eprivateclient.  Our clients consistently tell us how much they value our global team’s pragmatic and timely advice to guide them through the complex legal and corporate challenges of managing transactions and assets across multiple jurisdictions.  We are a young and dynamic firm, but we have a wealth of experience across all areas of offshore practice and deep relationships with other leading firms around the world.  It is very pleasing to see this recognised as we continue to develop the compelling offering for our clients which eprivateclient has recognised.”

22 Sep 2020

Hatstone’s Jersey team advises on a Sharia’a compliant refinancing for BLME

Hatstone Lawyers in Jersey has advised the Bank of London and The Middle East plc (BLME) on the Jersey aspects of its successful Sharia’a compliant refinance of a £6 million London property for a high net-worth private client, alongside Druces’ London property and corporate teams, led by Partner, Gemma Wright, and Senior Associate, Claire Rigby.

Bella Ward, Group Partner, said:

“We are delighted to have advised BLME and worked again with the Druces’ team on this innovative transaction. It was a great opportunity to showcase the advantages of using Jersey property holdings structures in these types of financing and refinancing transactions.”

Gemma Wright, Partner, said:

 “We are pleased to have worked with BLME and Hatstone on this transaction.  Druces’ team brings wealth of experience in Sharia’a compliant work and, with the increased demand from Middle Eastern investors into London, and the UK generally, we look forward to working with BLME on future investments.”

 

Bella Ward

Simon Vivian

Group Partner Group Partner
P: +44 (0) 1534 761180 P: +44 (0) 1534 761186
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07 Aug 2020

Hatstone appoints Robert Rakison as Senior International Counsel

Hatstone is delighted to announce that it has appointed Robert Rakison as Senior International Counsel, with effect from 1 August 2020.
 
Robert’s primary affiliation will be our Jersey office, though he will continue to work from London.
 
Senior Group Partner, Simon Vivian, and Robert Rakison have known each other for many years – Simon became a partner of Robert’s former firm, Rakisons, in London in 1993.
 
Hatstone is a leading multi-jurisdictional group providing legal, investment fund administration and corporate services with offices in BVI, Jersey, London, Malta, Panama and South Africa.
 
Hatstone is the representative firm of the LNI in Jersey, South Africa and Panama. Robert Rakison is on LNI’s Steering Committee.
 
We look forward to working with Robert Rakison and his extensive international client base.

25 Mar 2020

Panama introduces a Beneficial Owner Register and extends the Tax Amnesty

Law No. 129, which deals with the establishment and regulation of a beneficial owner register, was approved in Panama on 17 March 2020 and became law on 20 March 2020.

In summary, the new Law requires a resident agent to file certain information in relation to the ultimate beneficial owner (the “UBO”) at the Superintendence of Non-Financial Institutions (the “Superintendence”) on all Panama legal entities (such as companies and foundations) for whom it acts as resident agent.

As is internationally understood, a UBO is regarded as the natural person or persons who directly or indirectly own or control a legal entity.

What shall be reported?

The following information is reportable in relation to the UBO:

a)     Full name;
b)     ID number, such as passport or any other personal identification number;
c)     Date of birth;
d)     Nationality;
e)     Address; and
f)      Date on which the natural person became a UBO of the legal entity.

When shall reporting be made?

For new legal entities the resident agent should register the UBO information within 30 days of incorporation. For existing legal entities, the resident agent shall have 6 months.

If the UBO of any legal entity shall change then the resident agent has 30 days to report such change.

Shall the information be publicly available?

No, the Law provides that the information filed by the resident agent will not be made public and can only be accessed by the resident agent of the legal entity and two designated persons of the Superintendence. Should anyone gain unauthorized access to the register then they can be fined $200,000.

What is the sanctions for non-compliance?

Should the required information not be provided to the Superintendence then, the Superintendence may order the Panamanian Public Registry (the “PR”) to suspend the legal entity. A legal entity will be dissolved at the PR after 2 years of failing to file the UBO information.

Should the resident agent be unable to update the UBO information due to refusal of the UBO to provide it then, the resident agent should resign as resident agent of the legal entity.

Panama extends the Tax Amnesty period

Panama recently approved an extension to the Tax Amnesty period.  The original regulation adopted through Law 99 2019, provided an amnesty on interest and penalties in relation to outstanding annual taxes for companies and foundations and was due to expire on the 29 February 2020. This is now extended for four months until 30 June 2020. Under the terms of the extension, interest and penalties in relation to outstanding annual taxes are discounted by 85%.

This is very helpful if you wish to get your companies and foundations back in good standing at a much reduced cost.

Should you have any queries in relation to the new Beneficial Owner Register and the Tax Amnesty extension then please do not hesitate to contact Lidia Ramos or Alvaro Almengor.

22 Jan 2020

Panama to introduce a beneficial owner register

Bill No. 169 (the “Bill”), which deals with the establishment and regulation of a beneficial owner register, has been approved by the Panamanian National Assembly. The Bill will become law once executed by the Panamanian President and published in the Panamanian Official Gazette.

The Bill requires resident agents to file relevant information, such as details of the ultimate beneficial owner (the “UBO”), at the Superintendence of Non-Financial Institutions (the “Superintendence”) on all Panamanian legal entities.

UBO definition

For the purposes of the Bill, UBO is defined as: “A natural person, who directly or indirectly owns controls, and/or has a significant influence over the account relationship, contractual relationship and/or the business or the natural person benefitting from a transaction, or who ultimately controls the legal entity’s decisions”.

Ownership, control or influence 

The Bill also provides the following points when considering ownership, control or influence over a legal entity:

1)    Shareholding Participation: the natural person who ultimate owns or controls, whether directly or indirectly, 25% or more of the shares or voting rights in a legal entity, except if the shares are listed on a recognized stock exchange.

2)    Control:

a)    The partner or partners who control the partnership;

b)    The trustee, the settlor, the beneficiary, the protector or other person who controls the trust;

c)     In case of a legal entity which is in liquidation, bankrupted or under administrative receivership, the natural person who is appointed as liquidator or administrative receiver; and

d)    In case of a shareholder in a corporate entity who would otherwise be the UBO but is deceased, the natural person acting as executor or personal representative of the deceased’s estate.

3)    Management: the natural person who ultimately exercises control over the management of the legal entity.

Reportable information

The following information is reportable:

1)    Legal entity information: a) Full name; b) Folio Number; c) Incorporation date; d)    Address; and e) Activity.

2)    UBO information: a) Full Name; b) ID Number, passport or any other personal identification number; c) Date of birth; d) Nationality; e) Address; and f) Date on which the natural person became a UBO of the legal entity.

Restricted access

The Bill provides that the information filed by the resident agent will not be made public and can only be accessed by the resident agent of the legal entity and two designated persons of the Superintendence. Should anyone gain unauthorized access to the register then they can be fined $500,000.

Sanctions

The Bill establishes that the Superintendence can order the Panamanian Public Registry (the “PR”) to place an annotation of suspension of the corporate rights against the records of the legal entity for not being registered or failing to update the Superintendence in respect of any changes to the UBO. Suspension of corporate rights means the legal entity will no longer be able to register any act, documents and/or agreement at the PR or apply for any certificates. The legal entity can be dissolved by the PR after 2 years of failing to file the UBO information.

Should the resident agent be unable to update the UBO information, for example due to the refusal of the UBO to provide the required information, then the resident agent should resign.

Effective date

The Bill will be effective from the day after its publication in the Panamanian Official Gazette. Once the law is effective the resident agent should register the UBO information within 30 days of incorporation. For existing legal entities the resident agent shall have 6 months from the effective date.

Should you have any questions, please do not hesitate to contact Lizst Real or Alvaro Almengor.