PROBLEMAS DERIVADOS DE LA CONTAMINACIÓN DE LAS AGUAS

If a South African resident founder creates an offshore trust by lending funds from an approved foreign investment366 _{to such offshore trust, the transfer pricing provisions of s}

31 of the Income Tax Act will apply as the resident beneficiary and the foreign trust are connected persons as defined367 _{which will result in such a loan falling within the}

definition of an ‘affected transaction’ per s 31(1).

Even though it may be practical to have such loan account to a foreign trust remain free of interest for administrative purposes in the trust, an arm’s length deemed interest income on such loan account will have to be declared in the South African beneficiary’s annual tax returns in order to adhere to the transfer pricing principles set out in s 31 and if transfer pricing adjustments are to be avoided368_.

366 _{The foreign capital investment amount available to South African private individuals is currently} R10 million per calendar year and must be done after obtaining the necessary Reserve Bank approval through an Authorised Dealer for such foreign investment. See chapter F.6.1.1 of the SARB’s Exchange control manual (Financial Surveillance Department of SARB 2015:O1) 367 _{Per para (a)(ii) of the definition of “connected person” in s 1 of the Income Tax Act} 368 _{For residents who are natural persons, the difference in such residents’ taxable income as a} result of not applying an arm’s length interest on such loans to foreign trusts will be deemed to be a donation made by such persons which will be subject to donations tax of 20% after the annual exemption has been taken into account (s 31(3) of the Income Tax Act).

The basis of the calculation of an arm’s length deemed interest income is, however, open to much debate as no clear guidelines currently exist in this regard369_{. The relevant interest}

rate applied will also depend on, inter alia, the currency in which such loan is held370_.

Interest in a foreign currency will then be translated to either the spot rate or the average exchange rate of said currency371 _{to calculate the rand amount of interest income to be}

included in the individual taxpayer’s tax return.

Taxation of foreign trust income and distributions from foreign trusts

Income and capital distributions from a foreign trust will be governed by s 25B(2A) and para 80 of the Eighth Schedule respectively372_{. The income and gains retained in a foreign}

trust will not be taxable in South Africa unless distributed to South African beneficiaries, in which case such income will be taxable in the hands of the resident beneficiaries. If, however, a founder opted to donate foreign investment amounts to a trust rather than lending such money to the trust, donations tax would be levied at the date of transfer and the attribution rules contained in s 7(8) will furthermore apply resulting in all income earned in the trust on such donated amounts being taxable in the hands of the founder in every year of assessment following such donation.

Treatment of foreign trust loan accounts on death of beneficiary

A foreign trust loan account will similarly be an asset in the estate of the founder or beneficiary at his or her death on which estate duty will be levied. In order to avoid the administration of creating a foreign-based will and appointing a foreign executor to deal with such loan account (as such loan account will constitute an asset in the foreign jurisdiction of the trust), a donation of the loan account to the foreign trust could be made via a donatio mortis causa. As before, South African estate duty will still be due on a foreign loan account donated in this manner but there will be no need to create or register a foreign will with regard to this asset in such cases and no foreign executor’s fees will be payable either.

369 _{Even though the provision of an interest-free loan is not seen as a donation as such, it has been} argued that the interest foregone constitutes a continuing, common law donation for donation tax purposes and that s 7 and paras 68 to 73 of the Eighth Schedule may therefore apply the amount that would have accrued to beneficiaries as a result of such interest amounts foregone (De Koker & Williams 2015:para 12.27; Foster et al. 2015:9). If these attribution rules are utilised to determine the additional amounts to be included in a taxpayer’s income, s 31 may still apply if the taxable income so included is deemed insufficient.

370 _{Taxpayers may therefore select a loan currency to which a low inter-bank rate applies which, if} adjusted to an arm’s length interest rate, may still be lower than that which applies to a loan denominated in, for instance, South African rand.

371 _{Section 25D(1) read together with s 24D(3) of the Income Tax Act} 372 _{See detailed discussions with regard to these in chapters 4.6.3 and 4.6.5.}

4.7.7 Suggested changes to legislation that may affect the way assets and income in trusts are