PREFACE: Marco van Zyl takes a closer look at the tax consequences South African emigrants may face in five prospective destinations, and the impact each country’s regulations could have on the value of their investments. These countries have been selected as they are currently the most popular destinations for South Africans who are in the process of emigration or are seriously considering leaving the country.

While a snapshot of the key tax legislation that may impact your portfolio has been included for each country, this is by no means a conclusive list. If you are considering a move to one of these destinations or another country altogether, Marco stresses that it is in your best interests to connect with your Financial Advisor AND a Tax Consultant. Jointly, they will be able to ensure that you are fully aware of the implications of such a move on both your wealth creation and its preservation. If you do not have a Financial Advisor, we will be happy to help you as we have several specialised tax consultants that we work with on a regular basis and together, we will ensure that you have all the necessary information to make an informed financial decision should you choose to emigrate to another country.

You don’t need research to tell you that South Africa is once again experiencing the brain drain that occurred in the early 2000s. Everyone knows at least one, two and sometimes even more South Africans who have decided to make the move across the pond. From graduates to young families, even senior executives, it’s a fact that more and more people are voting with their feet and going to see for themselves if, in fact, the grass is greener on the other side.

As expected, this mass migration is not just exaggerated dinner table conversation. Research confirms there’s been a significant increase in emigration over the past five years and that making the move overseas has been especially high amongst high-net-worth and ultra-high-net-worth South African individuals (HNWIs). The list of motives why they are choosing to move is a long one but the key reasons are political instability, rolling blackouts, safety and security, corruption, and economic stagnation.

And with no evident solutions to any of these issues on the horizon, South Africa’s brain drain is certain to continue.

Are you considering the move?

If you are amongst those considering a move overseas, it’s important to understand the financial emigration requirements and risks and you can read more about this here. A topic that has received less attention though and that could be critical to your continued financial success is the tax consequences of the move on your investments.

Globally, many countries have widened their tax net and due to international treaties known as CRS (Common Reporting Standards¹) have increased the cooperation between tax agencies. So, while many clients are invested in offshore products administered from South Africa – as these are suitable for their personal circumstances – many of the beneficiaries of these clients are already living overseas or looking to study overseas. As a result, some locally administered products may not be in their best interests because they may result in double taxation or punitive tax treatment.

In fact, products domiciled in perceived tax havens may be blacklisted by some jurisdictions. For example, when clients hold offshore investments via unit trust platforms, these are subject to South African exit tax (CGT) when the emigrating clients change their tax status. This enables SARS to collect the tax due to them with the result that the individual enters their new tax jurisdiction on a nil investment base.

So, deciding to emigrate is one thing; deciding where to move to is quite another and many issues – including your financial plan - need to be carefully considered. Let’s take a look at five possible destinations that are proving to be popular with South African emigrants and some of the tax consequences that each country could have on the value of your investments.

United States of America

The US is rising in popularity as an immigration destination for South Africans in pursuit of a different lifestyle and better job opportunities and a growing number of South African communities are popping up in places like Florida, Georgia and southern California. Farmers are particularly drawn to the US because of the abundance of farmland available at reasonable prices.

From a financial perspective, US citizens, whether they live in the USA or not (even if they have never lived in the USA) are taxed on their worldwide income.

If physically present in the USA for 183 days per calendar year you are taxed on worldwide income.

Green card holders are treated as US citizens and taxed on worldwide income.

Trusts

The conduit principle does not apply to a South African-held trust when a distribution is made to a US citizen, which means that the trust will pay tax on the capital gains or interest. The USA resident may however also pay tax on the portion of the distribution that does not constitute original trust capital at their marginal tax rate (this varies from state to state).

If the settlor of the trust controls the trust, the USA resident could receive the distributions tax-free. However, if the trust is not controlled by the settlor (most trusts set up for RSA planners) the income is taxed from 40% up to 100% depending on how the income is assessed.

If the trust is not controlled, beneficiaries could be taxed on non-distributed income as well.

Estate & Gift Tax

• For non-citizens who hold assets in the USA, an Estate Tax of up to 40% is paid on the value of over $60 000 in assets domiciled in the USA.
• For USA citizens, Estate Tax is paid at 40% on the value of assets over $11 700 000.
• There is no rollover relief on Estate Tax.

And added to this, there is a double taxation agreement between the USA and South Africa.

Portugal

Portugal is becoming a popular destination for individuals and families seeking residence in the European Union and is attracting more and more South Africans. Portugal provides a stable political and social environment, clear and transparent tax rules, good infrastructure, a favourable climate and excellent quality of life.

You are deemed to be a tax resident in Portugal if you spend more than 183 days in the country within a 12 Month period or if Portugal is deemed to be your habitual residence. If you meet any of the residence criteria, you are obliged to submit a tax return and your worldwide income and capital gains become liable for tax.

Portugal has a special tax regime for Non-Habitual Residents (NHRs) which could result in reduced tax on Portuguese income and foreign source income could be exempt from tax for ten years.

The United Kingdom

It is common for wealthy South African families to hold assets via both domestic South African trusts and offshore structures. All such structures should be reviewed prior to the individual or family’s arrival in the UK to understand how these structures, and their trustees, settlors and beneficiaries, will be taxed from a UK tax perspective.

Any gains realised before you become a UK tax resident should not be chargeable to UK tax, even if you later remit the proceeds to the UK. This assumes you have not been a UK resident before and are not caught by our temporary non-residence rules. You may, therefore, wish to consider whether you want to dispose of any assets prior to moving so that the gain escapes UK tax. The UK does not 'rebase' your assets when you become a tax resident, so if you own an asset when you become a resident and later dispose of the asset, you will (subject to the remittance basis) be subject to UK capital gains tax on the full amount of the gain, and not just any increase in value which occurs once you are a UK resident. 

The actual disposal can also be helpful for South African tax purposes. If you cease to be a tax resident in South Africa, you will be deemed to have disposed of your assets for South African tax purposes and you will be subject to a capital gains tax 'exit charge'. Where assets are not disposed of, this is a 'dry tax charge. An actual disposal can, therefore, help to fund this tax charge.

Other points that you need to take into consideration are:

UK Residents

• Estate Duty (Inheritance Tax) is 40%
• If you are not living in the UK, you will only be taxed on your UK income
• If you are domiciled in the UK, you will be taxed on your worldwide income

UK Non-Residents – but assets invested in the UK

• Estate Duty (Inheritance Tax) of 40% is paid on the value of over GBP340 000 in assets domiciled in the UK

The conduit principle does not apply to a South African trust when a distribution is made to a UK resident, which means that the trust will pay tax on the capital gains or interest. The UK resident, however, will also pay tax on the portion of the distribution that does not constitute original trust capital at their marginal tax rate.

If the settlor of an offshore trust (from a UK perspective) is a UK resident they will pay tax on any income earned on UK-domiciled assets that are held in the trust regardless of whether this was distributed.

There is a double taxation agreement between England and South Africa.

Australia

Australia’s high standard of living, prosperous economy, diverse population, excellent healthcare and education systems continue to make it one of the most popular countries for South Africans looking to settle abroad.

While there are many reasons that South Africans enjoy Australia, here is a quick overview of the pertinent financial and taxation regulations:

• Significant tax consequences if you are a beneficiary of an offshore trust.
• Australian residents are taxed on their worldwide income.
• Temporary Australian residents are only taxed on their Australian income.
• Should you be resident in Australia but exercise control of a non-Australian company, that company will fall within the Australian tax net.
• Should any trustee of a trust be a resident in Australia this trust is considered an Australian trust for tax purposes.
• Residents may be taxed on non-distributed income from foreign entities such as offshore trusts and companies.
• Should residents receive a gift that originated from a foreign trust and the tax authorities believe this is a scheme to circumvent the tax that should have been paid, they may apply tax to this.

The conduit principle does not apply to South African trusts when a distribution is made to an Australian resident, which means that the trust will pay tax on the capital gains or interest. The Australian resident, however, will also pay tax on the portion of the distribution that does not constitute original trust capital at their marginal tax rate.

There is a double taxation agreement between Australia and South Africa.

Mauritius

South Africans also pack their bags for Mauritius but not just for the island nation’s natural beauty and splendour. Greater financial and tax security appears to be the weightier factor for their decision to live permanently in Mauritius.

To summarise some of the key features:

• When you buy residency via a residency scheme, this does not mean that you are no longer a South African tax resident. It is important to calculate your Exit Tax when you cease to be an RSA tax resident as the day you leave you will be deemed to have disposed of all your assets, regardless of whether you have or haven’t, and will have to pay Capital Gains Tax on the day you leave.
• Fixed personal PAYE of 15%.
• Solidarity Levy of 25% on income above 3 million Rupees (+-R1.3m)
• Anyone working in Mauritius is obligated to contribute 3% of income to a Government Pension Scheme and while Expats must pay this, they do not qualify to benefit from the scheme. It is, therefore, a tax they have to pay.

Estate Planning

Mauritius has forced heirship, which dictates who will inherit a portion of your estate – and a portion of your estate is a reserved portion. As an example, this portion (50% of your Estate if you have one child, 66% if two children and 75% if three or more children) is divided between the children and the surviving spouse, if not provided for in the reserved portion.

Some positive tax implications include:

• No donations tax
• No dividends tax
• No capital gains tax
• No Estate duty

There is a double taxation agreement between Mauritius and South Africa.

Conclusion

It is important to highlight the potential tax and investment complications facing South Africans who are looking to emigrate, and it is highly advisable to seek out professional advice concerning exit tax as well as to fully investigate and understand the tax implications of your new country of residence. It is also expedient to begin this exercise well in advance as the associated financial implications could require an extensive reorganisation of your financial affairs and investment assets.

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Sources:  https://www.sars.gov.za/businesses-and-employers/third-party-data-submission-platform/automatic-exchange-of-information/how-does-crs-reporting-work/