Investing offshore has long been a strategy of choice for high-net-worth individuals seeking to diversify their portfolios, capitalise on favourable tax treatments, and leverage unique estate planning options.
For South African investors, one such offshore investment vehicle, known as a ‘loop structure’, offers the opportunity to reinvest back into South African assets. Legalised in 2021, loop structures allow investors to tap into the benefits of offshore vehicles while retaining links to local assets – a significant development with far-reaching financial planning implications and benefits.
Coreen Van Der Merwe, Director at Sovereign Trust SA, says that investing in loop structures has multiple advantages. “Offshore structures enable access to international markets, and can yield enhanced asset protection and optimise tax obligations over the long-term. Sheltering a portion of an estate outside of South Africa can also present unique estate planning options and mitigate the tax burden on heirs, preserve wealth, and ensure smooth generational transitions.”
Loop structures specifically allow South Africans to streamline cross-border flows of income. South African businesses can transfer income streams abroad in the form of dividends. This sidesteps the constraints of personal investment allowances, which are capped at R11 million annually. By routing dividend payments to an offshore trust or company in a jurisdiction with a favourable double taxation agreement, local investors could reduce their dividend withholding tax rate from the domestic rate of 20% to as low as 5%.
Historically, South Africans wishing to invest offshore needed to create duplicate local and foreign structures, leading to increased costs and administrative complexities. Now, investors can hold their assets in a single offshore structure. This simplification minimises compliance obligations and cuts down on management expenses. Further, loop structures offer the benefit of maintaining direct links to South African assets while enjoying the protections and advantages of an offshore trust or company.
To benefit from the legal advantages of a loop structure, investors must follow specific reporting and compliance steps to satisfy the regulatory requirements of the SA Reserve Bank (SARB). For instance, if a foreign entity acquires shares in a South African company, the share certificates must be endorsed as ‘non-resident’ within 30 days. Failure to endorse shares correctly and in good time may result in a restriction to distribute dividends to offshore shareholders.
In addition, an annual audit report validating the arm’s-length nature of the transaction must be presented to an Authorised Dealer, and a comprehensive report detailing the transaction must be submitted to SARB’s Financial Surveillance Department. These reports ensure regulatory compliance and also protect investors against potential financial or tax-related complications down the line.
“Given the complexity and nuanced legal requirements surrounding loop structures, it is essential to work with investment professionals who specialise in cross-border vehicles. Experts can tailor these investments to suit individual financial goals, ensuring that investors capitalise on efficiencies and regulatory advantages to build wealth across generations,” says Van Der Merwe.
PERSONAL FINANCE