Legal and regulatory technical developments

Offshore loans and a taxpayer’s ongoing compliance obligations

South Africans continue to diversify their wealth by taking funds offshore, often to tax neutral jurisdictions. Jersey remains a top location due to the comprehensive regulatory environment and the significant number of South African financial institutions with offices there. While there are significant benefits to investing in an offshore jurisdiction, individuals must remain cognisant of the reporting requirements in the country in which they are tax resident.

In terms of South African transfer pricing provisions, where a loan is made by a South African tax resident individual to an offshore connected person (such as a family trust) interest must be charged on the loan at a market rate to avoid the deeming of income and donations. Individuals are therefore often advised to charge interest at the market rate. However, reporting the interest accrued on the loan in tax returns is not the only ongoing tax compliance requirement arising from the loan. The interest rate charged on the offshore loan must also be reviewed regularly to ensure that the rates remain at market value and that the loan continues to satisfy the arm’s length requirement. As central banks have indicated that they are beginning a series of interest rate hikes, individuals should consider whether investment returns will be sufficient to cover an increased tax liability arising from an offshore loan.

This is one of many factors that must be considered relating to offshore structures in South Africa. Given each person’s unique circumstances, we encourage individuals to seek professional advice to ensure that they are fully compliant.

While there are significant benefits to investing in an offshore jurisdiction, individuals must remain cognisant of the reporting requirements in the country in which they are tax resident.