Bookshop > This page

Article title: A Guide to Offshore Trusts and International Financial Planning
Author: R.B. Whitfield C.F.A. (S.A.) FILPA ADV Dip. TAX  
Source: Institute of Commercial and Financial Accountants of Southern Africa

Characteristics 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.

The Settlor 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 trust.
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.
The Protector
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 control;

  • income tax saving;

  • asset protection;

  • estate duty and capital gains tax saving;

  • the ease of international transactions;

  • acquisition and disposal of investments;

  • the holding of international investments tax efficiently and confidentially;

  • a vehicle to acquire life cover;

  • extreme flexibility and the ability to move residency of the trust;

  • hedge against Rand devaluation and political uncertainty;

  • fund to finance children's education;

  • fund to build up and hold overseas retirement funds.

The residency 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 :-

  • economic stability

  • financial   stability

  • confidentiality

  • the language and business medium of the country

  • the culture of the people being dealt with

  • time zones

  • whether it is going to form part of the EEC

  • the legal system, and

  •  whether the country has a financial watchdog or not.

Jersey as a Tax Haven 
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 and political.

  • It is a tax haven;

  • It has confidentiality;

  • The time zones coincide with ours;

  • 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 watchdog;

  • 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 investment.
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.

Income taxation implications 
(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.

Exchange control regulations 
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.

Important aspects on Jersey 
The Island 

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.

Jersey Trusts 
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 island.
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 free.

  • 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.

Jersey Companies 
There are three types of Jersey Companies - Resident companies; Exempt companies; and International Business companies.

Resident 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.

Exempt Companies 
A company will be deemed to be non-resident in Jersey if it satisfies the following criteria :- 

  •  The beneficial 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 Jersey Authorities.

International Business Companies 
This is a new status for Jersey companies introduced on 1st January 1993.
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 % 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.

In Conclusion 
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.

There is 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 guidance.