Offshore investing from a South African perspective has become increasingly popular in recent years, driven by various factors such as economic uncertainty, political instability, and the desire to diversify investment portfolios. Offshore investing allows investors to access international opportunities and potentially mitigate risks associated with a single economy, and an erratic one at that, in South Africa.
One of the primary advantages of offshore investing for South Africans is diversification. By allocating a portion of your investment capital to offshore assets, an individual can reduce their exposure to the risks and fluctuations of the local market. South Africa's economy is often influenced by factors such as commodity prices, political developments, rising inflation challenges, economic instability and currency fluctuations. By investing offshore, South Africans can access a broader range of asset classes, industries, and geographic regions, potentially reducing overall portfolio risk.
Additionally, offshore investing provides South Africans with exposure to unique global trends and opportunities. It allows them to invest in sectors and companies that may not be available or well-represented in the local market. For instance, technology companies in Silicon Valley, pharmaceutical companies in Europe, or even emerging markets in Asia.
Another significant advantage is the ability to hedge against currency risk. By investing in foreign currencies, South Africans can protect themselves from potential devaluations or fluctuations in the local currency, which has become a common occurrence in SA of late.
However, offshore investing is not without its challenges. South African investors need to be aware of legal and regulatory requirements and costs associated with investing offshore. Tax regulations play a crucial role and can significantly impact overall returns. Here are some key considerations for South Africans engaging in offshore investing:
Exchange Control Regulations: South Africa has exchange control regulations that limit the amount of money individuals can invest offshore. These regulations aim to control the outflow of capital from the country. Investors need to comply with these regulations and obtain the necessary approvals from the South African Reserve Bank (SARB) for transferring funds offshore. In addition to the R1 million available per adult in terms of the single discretionary allowance, South African residents may also transfer abroad up to R10 million per calendar year. In order to utilise the foreign investment allowance, you will be required to obtain a tax clearance certificate beforehand, for exchange control purposes.
Tax Residency: South Africa taxes its residents on their worldwide income. Therefore, South African tax residents are required to declare and pay tax on any income generated from offshore investments.
Double Taxation Agreements (DTAs): South Africa has entered into various DTAs with other countries to prevent double taxation on income earned in both jurisdictions. These agreements typically provide mechanisms to reduce or eliminate the double taxation of offshore investment income. A list of the countries with DTAs can be found at this link.
Offshore Structures: Some South African investors may choose to hold their offshore investments through entities like trusts, companies, or investment vehicles, like structured products or an offshore endowment. These structures have specific tax implications and benefits which require careful consideration. Structured products may provide a level of protection in uncertain times, with a capital guarantee. Offshore endowments have their own nuances, such as reduced tax rates and succession planning options (e.g. unlimited contractual owners/lives insured).
It is important for the local South African investor to seek advice from qualified tax professionals who are knowledgeable about both South African and international tax laws.
The next consideration is what asset classes to invest in - the debate of South Africa vs the world.
For a South African, offshore asset classes offer greater diversification, exposure to global opportunities and the potential to benefit from different economic and market conditions. South African asset classes, on the other hand, offer a closer connection to the local economy, allowing investors to capitalise on domestic market conditions and factors specific to South Africa. They may also provide a better understanding of local regulations and market dynamics. Some might argue these are less appealing currently, given the current economic challenges SA faces – debt levels, unemployment, load shedding etc. However, as a South African investor, these factors need not hinder your investment objectives of accessing the market as there are many options available.
There is much to consider from an offshore investing perspective, but for the amateur investor seeking access to offshore stocks who does not want to deal with structures, tax residency and exchange control requirements, there are less complicated options available. Offshore opportunities can be accessed via unit trust funds, investable in Rands. To place the offshore investing landscape in perspective, there are in total more than 10 000 listed companies in the offshore market (namely the United States, United Kingdom and Europe) - a potentially daunting notion. However, investors are able to select one of the many asset management firms in South Africa, for instance 36ONE, who have the research capabilities, accessibility and expertise to explore and execute on those opportunities, on their behalf.
In recent years, local regulations have also become more favourable for SA investors wanting offshore exposure via a unit trust, as the SARB imposed offshore limit has been increased to 45% (from 30%). This remains at the discretion of the underlying fund manager as to whether they utilise the full allocation.
In any instance, investors need to carefully assess their investment goals, risk tolerance and diversification needs when considering the allocation between South African and offshore asset classes. A well-balanced portfolio may include a mix of both, to take advantage of the benefits offered by each market while managing the associated risks.