How to Invest Offshore From South Africa

Investing offshore offers South African residents opportunities for portfolio diversification and access to global markets. This approach can help manage risks associated with a single economy and currency, potentially enhancing long-term growth prospects. Navigating the process of international investment from South Africa requires understanding specific regulatory frameworks and tax obligations. This article provides practical insights into the mechanisms involved in moving funds and managing offshore investments.

South African Exchange Control Regulations

The South African Reserve Bank (SARB), through its Financial Surveillance Department, oversees capital movement. These exchange control regulations are key for South African residents considering offshore investments, aiming to manage foreign currency reserves and maintain economic stability.

South African residents have two main annual allowances for transferring funds abroad. The Single Discretionary Allowance (SDA) permits individuals over 18 to transfer up to R1 million per calendar year. This allowance is versatile, usable for travel, gifts, and small offshore investments, without requiring a Tax Clearance Certificate from the South African Revenue Service (SARS).

The Foreign Investment Allowance (FIA) allows individuals to transfer up to R10 million per calendar year for investment purposes. This R10 million is in addition to the R1 million SDA, allowing a total of R11 million to be moved offshore annually. Utilizing the FIA requires a Foreign Tax Clearance Certificate (FTCC) from SARS, confirming tax compliance.

The FTCC application is submitted via SARS eFiling. SARS requires information and documentation, including proof of tax compliance, source of funds, and intended offshore investment details. Authorized Dealers, primarily commercial banks, facilitate these transfers, ensuring compliance. These allowances reset each calendar year on January 1st, offering recurring opportunities.

Offshore Investment Avenues

South African residents have several options for investing funds internationally, categorized as direct and indirect offshore investments. Each approach offers different levels of accessibility, minimum investment requirements, and diversification potential.

Direct offshore investments involve opening accounts directly with international brokers, banks, or investment platforms. Individuals can invest in a wide range of global assets like foreign-listed equities, international bonds, and offshore bank accounts. This approach allows greater control and access to a broader spectrum of global markets and companies. Direct investments fully utilize exchange control allowances, as funds are converted into foreign currency and transferred out of South Africa.

Indirect offshore investments are facilitated through local South African financial institutions. These options allow individuals to gain foreign exposure without directly transferring foreign currency themselves. Examples include rand-denominated offshore unit trusts, feeder funds investing in foreign portfolios, and locally listed Exchange Traded Funds (ETFs) that track global indices. These methods offer simpler setup processes, often with lower minimum investment amounts, and provide diversification benefits. While some indirect products may not require a direct foreign currency transfer, the underlying investments are offshore, providing international market exposure.

Taxation of Offshore Investments

South African residents are subject to a worldwide tax system, where income and gains from offshore investments are taxable in South Africa, regardless of source or receipt. All offshore income and capital gains must be accurately declared to SARS on annual income tax returns.

Capital Gains Tax (CGT) applies when offshore assets are sold at a profit. For individuals, a portion of the net capital gain is included in taxable income, with an inclusion rate set at 40%. An annual capital gains exclusion means the first R40,000 of net capital gains in a tax year is not subject to CGT. The effective maximum CGT rate for individuals is 18%, calculated as 40% of the top marginal income tax rate.

Various types of income from offshore investments are subject to income tax. Interest income from offshore bank accounts or bonds must be reported, with no exempt portion for foreign interest. Dividend income from foreign shares or unit trusts is also taxable; a portion may be exempt under certain conditions. Foreign rental income from offshore property is fully taxable in South Africa, with allowable deductions for expenses like bond interest, rates, and repairs.

Double Taxation Agreements (DTAs) are international treaties preventing taxpayers from being taxed twice on the same income. South Africa has DTAs with numerous countries, providing relief through mechanisms like tax credits. These agreements determine primary taxing rights and how tax paid in one country can be offset against liabilities in the other. Offshore assets of a South African resident are subject to South African estate duty, applied to the worldwide dutiable property of the deceased.

Funding Your Offshore Investments

Funding offshore investments involves instructing an Authorized Dealer and setting up the investment account. This process ensures compliance while facilitating the movement of funds.

Initiating the transfer of funds offshore begins with your chosen Authorized Dealer, typically a commercial bank. You will instruct your bank to facilitate the foreign exchange transaction, often involving a foreign exchange form and documentation. For amounts exceeding the SDA, your FTCC reference number will be required. The bank will also require documentation to verify the source of funds, ensuring adherence to anti-money laundering regulations.

After funds are transferred, the next step is opening the offshore investment account. This involves Know Your Customer (KYC) and Financial Intelligence Centre Act (FICA) requirements, whether with an international broker or a local institution. You will typically provide documents like proof of identity, residential address, and tax identification numbers. The provider will guide you on linking your South African bank account for future transfers or receiving proceeds. Once established and funded, you can begin investing according to your chosen strategy.