Namibia is synonymous with deserts, bratwurst and shipwrecks, but more recently Namibia also seems to have become a very popular destination for trusts established by South African (SA) resident settlors with SA resident beneficiaries.
This is not surprising, given that Namibia currently does not levy any capital gains taxes and a Namibian trust is therefore not subject to capital gains taxes in Namibia, as would be the case for SA tax resident trusts. Announcements were, however, made in the 2014 Namibian Budget that the introduction of capital gains taxes may be considered as a future revenue raising mechanism.
Namibian trusts are defined as ‘persons’ and are treated as natural persons for purposes of Namibian income tax legislation. Namibian trusts therefore pay income tax in Namibia on a marginal sliding scale, with these rates varying from 18% to 37%.
In this article we will endeavour to highlight some of the complexities that may arise for SA tax residents who are considering to establish Namibian trusts.
Although Namibia is a separate sovereign country, it – like SA, Lesotho and Swaziland – also has exchange controls, which are fundamentally similar to those of SA. Furthermore, the currencies of these countries are on par and ‘pegged’ to the SA rand. As a consequence and in broad terms, a free flow of funds is allowed between these countries and the entire region is referred to as the Common Monetary Area (CMA).
Given the above, it is therefore totally legal for a SA exchange control resident to transfer funds from SA to Namibia and acquire assets there. Such assets or funds may also be placed in a Namibian trust. A Namibian exchange control resident, including a Namibian trust, may, however, not transfer such trust assets outside of the CMA due to the applicable exchange control limitations or without the necessary exchange control approval. A Namibian trust is therefore in principle, and from an exchange control perspective, restricted to the same limitations as a SA trust. A Namibian trust may therefore not export any capital outside the CMA, nor hold any foreign non-CMA assets.
Although Namibia and SA fall within the CMA, both jurisdictions have their own separate taxation systems and are totally separate tax jurisdictions. A Namibian trust is therefore essentially an offshore trust for SA income tax purposes if the trust is effectively managed and controlled in Namibia. Under such circumstances the trust’s income and/or gains are subject to the same SA income tax provisions as are applicable for e.g. Mauritius, Jersey, Guernsey or ‘Switzerland’ trusts.
SA Income Tax rules relating to the residency of Trusts
In broad terms a trust is a SA tax resident if:
- It is established in terms of SA legislation, or
- Its place of effective management (‘POEM’) is situated in SA.
Therefore, if an offshore trust, e.g. one established in Namibia or in any one of the other jurisdictions mentioned above, is effectively managed and controlled from SA, then that trust will be subject to SA Income Tax like any other SA domestic trust. This can happen quite easily if,inter alia, all or the majority of trustees are South African tax residents. One must bear in mind that even if all the trustees are non SA residents, but the founder or a trustee or beneficiary effectively ‘controls’ the trust, then the following quote from the latest SARS Interpretation Note IN 6 dealing with POEM says it all:
‘The place of effective management test is one of substance over form. It therefore requires a determination of those persons in a company [or trust] who actually ‘call the shots’ and exercise ‘realistic positive management’. [own insertion]
The result, notwithstanding that the trust is a Namibian trust, will be that the Namibian trust will become a SA taxpayer and will be taxable in SA at a rate of 41% on income and effectively 32.8% on any capital gain, irrespective of the source of the income or gain.
This sounds absurd, I hear you say, as this can result in both South Africa and Namibia wanting to tax, for example, the same trust income.
Fortunately South Africa and Namibia have concluded a double tax agreement (DTA) preventing double taxation from arising in such instances. This, on its own, is an extremely complex topic and goes beyond the scope of this article, but it suffices to say that the DTA may provide marginal relief in some instances where the POEM of the trust is in fact situated in SA, but this relief will not extend to capital gains taxes, and all gains generally arising in Namibian trusts will unfortunately remain subject to SA Capital Gains Taxes as a result of the application of Article 13 of the DTA.
What if the Namibian trust’s POEM is in fact exclusively situated in Namibia?
If the ‘shots’ are called from Namibia (which typically entails that the trustees calling the shots are resident in Namibia), then the trust would indeed not be classified as a SA tax resident, but it would then qualify as an offshore trust for SA tax purposes.
This too has its disadvantages, given that the anti-avoidance rules (typically section 7(8) and para 72 of the 8th schedule of the SA Income Tax Act (‘ITA’)) relating to offshore trusts dictate that where a SA tax resident has donated or loaned assets on an interest free basis to a Namibian trust, then the income and/or gains arising in the trust, in the case of a donation, are taxable in full in the hands of the SA resident donor and in the case of such a loan, the taxability of such trust income or gains are limited to the value of the interest that would have been chargeable had the loan been entered into at market related rates.
There is a further complexity in that an interest-free loan made to a Namibian trust is treated exactly the same as if made to any other foreign trust, and therefore additional complexities may arise as a result of the SA transfer pricing rules. These rules are also very complex but broadly dictate that SARS must deem an interest-free loan to be at market related rates and will then seek to tax the deemed interest in the hands of the SA lender. The deemed interest on the interest-free loan will, however, not be deductible from other Namibian trust income, which would ordinarily be the case if the loan carried an actual market related interest.
To prevent these uncertainties and potential double taxation from arising it would therefore be prudent to fund the Namibian trust rather by way of an actual market related interest bearing loan. Given that the loan must be ZAR or Namibian dollar denominated, a market related interest rate would probably be in the region of 11.5% (SA/Namibian prime rate plus 1%) and this interest (whether paid or not) will be fully taxable in SA at the lender’s marginal rate of tax.
As a consequence, a donation or loan (whether interest-free or bearing interest at a market related rate) to a Namibian trust, which is exclusively tax resident in Namibia, may not be all that attractive after all and by trying to save on SA capital gains tax, the founder may potentially have incurred more taxes than he bargained for.
Potential SA tax resident settlors are therefore strongly advised to seek independent and specialist legal advice before establishing Namibian trusts, as for the unwary these trusts may also find a last resting place on Namibia’s Skeleton Coast!
*Anton Maskowitz has been a member of Sanlam Private Wealth’s fiduciary and tax team since September 2011 and specialises in international tax, estate planning and legal matters. He previously held the position as Director of FirstRand Trustees Limited (now known as FNB International Trustees Limited) and was a key member of RMB Private Bank’s International Advisory Service's team within the FirstRand's wealth segment.