The market trend of wealthy / affluent individuals departing South Africa, through financial emigration or opting to either invest offshore has become increasingly common. This usually takes planning, and structuring of affairs and asset management, which is done by means of an emigration roadmap, prepped well in advance, to be used on a rainy day.
In some instances, where the correct and proactive planning has taken place, capital migration may already be underway, to create a Plan B, via emigration through investment.
Why look at a Plan B?
From a South African standpoint, the recent discussions of an increased focus on High Net Worth Individual (“HNWI”) compliance, in conjunction with talks on the possible implementation of a wealth tax, may very well further exacerbate this situation.
Approximately 4,500 South Africans, including the affluent and wealthy, have opted to leave the county, over the last decade, in search of greener pastures, better service delivery, and possible tax relief, under a move favourable regime. Statistically speaking, this brings to the fore a direct correlation with not just increased capital migration, but also the “brain drain” taking place in Africa as a whole – not just wealth, but critical, wealth generating, skills, are migrating outward, with a knock-on, adverse impact on local African economies.
Furthermore, a number of South Africans are currently uncertain of the country’s financial future, and considering their options; however, without the correct advisory, and partner in this journey, there are pitfalls which these individuals may fall victim to.
Different types of Plan B’s
This is however not the “be all and end all” of the capital migration concept, as it is also a mechanism favoured by the wealthy, to facilitate a number of investment programmes, known as “residency by investment”. This ultimately is the culmination of the emigration roadmap, being the Plan B.
There is of course the more standard, financial emigration option, entailing the cessation of tax residency here in South Africa, while taking up same in another jurisdiction. The pitfall here is that this does come with specific tax consequences pertaining to assets held by the taxpayer, not only in South Africa, but globally, in-line with South Africa’s residency-based tax system.
As a third option there is the intra-company transfer, which the South African Institute of Taxation CEO, Keith Engel, noted he has seen being used consistently in his many years of experience:
“I have seen steady outflow of people in the tax community that have left. These people typically go straight out for an opportunity. This is more your ‘worker-segment’, with a good example being financial professionals that are part of your big 4 firms that transfer abroad.”
Although the above may be favourable in some instances, these options are not always available, not to every South African looking to head abroad. It is for this reason, in conjunction with the appeal of dual citizenship, that those who can afford it, opt for a Plan B safety net. The Plan B option does not however change your residency while you remain in South Africa, therefore individuals following this route, will remain liable for tax in South Africa.
What works in practice
From an operational perspective and in practice, capital assets together with liquid capital are migrated offshore, either transactionally or via investment opportunities. These items must still meet the jurisdiction dependant sub-minimum thresholds, which if met, can then be viewed as a means to qualify for a secondary residency.
Once the qualifying criteria has been met, this investment is seen as an injection into the target country’s economy / infrastructure, which is what permits the investor residency in the chosen jurisdiction, by virtue of this capital injection.
Whichever option is chosen, it remains essential to have a well-planned roadmap that takes into consideration all planning aspects, as it can be costly where you get it wrong. The level of complexity involved calls for a strong cross-border network of providers to assist holistically.
Written by Jashwin Baijoo, Legal Manager, Africa Tax and Compliance at Tax Consulting SA