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Loan funding to offshore trusts: the interaction of applicable tax anti-avoidance measures
- 11 July 2018
- Individuals Tax
- Hannelie La Grange
Important:
This article is based on tax law for the tax year ending 28 February 2019.
Author: Hannelie La Grange (ENSafrica)
South African tax resident individuals may consider, whether for estate planning purposes or otherwise, to advance funds to offshore trusts for investment abroad. The South African tax implications arising from the terms of the loan funding arrangement with the offshore trust should, however, also be taken into account. Certain tax anti-avoidance measures are aimed at curbing the transfer of wealth to offshore trusts on loan account where such loans bear interest at below market related rates.
The aforesaid measures include the donor attribution rules in section 7, read with paragraph 72 of the Eighth Schedule to the Income Tax Act, 1962 (“ITA”), and the transfer pricing principles in section 31 in the case of an individual who is a connected person in relation to the offshore trust (ie, a beneficiary of such trust or a relative of such beneficiary). With effect from 1 March 2017, section 7C of the ITA further requires interest to be charged on loans to offshore trusts by South African connected persons at the official rate of interest (as defined).
The interaction between section 7C and the above mentioned long standing anti-avoidance measures is complex and has been the subject of much discussion in recent years.
This article first appeared on ensafrica.com.