Formal emigration versus relocation

There seems to be a lot of confusion for some clients looking to leave South Africa, about ‘Formal Emigration’ versus ‘Relocation’ or the so-called informal emigration. To make an informed decision about which will be more suitable in which circumstances, it is wise first to explore the difference between the two processes.

What is formal/financial emigration?

Formal emigration is also known as financial emigration and is the process to change formally your exchange control or banking status from resident to non-resident. Being a Reserve Bank (Sarb) process, it does not affect your South African citizenship or the use of your South African passport.

On the contrary, if you have lost your SA nationality or should you not have an SA green bar-coded ID, you will be forced to complete the formal emigration process. Failing to do so, will result in your funds being trapped in South Africa.

What is informal emigration?

Relocation or informal emigration is the process of moving to another country, without exporting your financial assets from your home country.

Statistics and experience from the consultants at Breytenbachs increasingly show that South Africans are viewing the world as a global village. Many South Africans leave to work overseas, and gain valuable work experience, but at the end of the day they intend to return to South Africa. It thus makes increasing sense to reconsider seriously whether formal emigration is the best route to take. Do not feel pressured to emigrate formally because you are pressured to do so by an adviser.

Implications of formal emigration

When you are about to make the decision about whether to formally emigrate versus just simply relocating, it might be worthwhile to consider the following implications of formal emigration:

• If you follow the route of Formal Emigration, the South African Revenue Services (Sars) will most probably view you as Non-Resident for tax purposes. Capital Gains Tax (CGT) will be triggered on all your assets, except for fixed property and personal assets  (your non-fixed assets) as you will be considered as having “disposed” of your assets at MARKET value, even if you have not disposed of them. Income tax will be triggered on your trading stock.
• When you formally emigrate, you will be allowed a Foreign Capital Allowance (FCA) of R10 million per adult per calendar year or R20 million per family unit per calendar year. In the year of actual departure, a travel allowance of up to R1 million per adult and R200 000 per child under the age of 18 years is allowed. The travel allowance may not be accorded more than 60 days before departure; and export of household and personal effects, motor vehicles, caravans, trailers, motorcycles, stamps, coins and minted gold bars (excluding coins that are legal tender in South Africa) within an overall insured value of R2 million. Any remaining assets in South Africa will be blocked. It can, however, be used locally for any purpose and more recently the Sarb will allow listed and unlisted equities to be transferred out of SA as part of your annual R10 million FCA.
• Any assets and the subsequent cash proceeds on disposal will fall in your blocked account and will be under the control of your bank’s non-resident centre. The SA bank account holding pre-emigration assets will be designated as a blocked account (a non-resident account subject to scrutiny and tax review). Any new funds brought into SA will fall into a non-resident account that is not blocked and not subject to such strict tax scrutiny as in the case of a blocked account. One can also ask for listed and unlisted shares, to be transferred from the blocked account to a normal non-resident account, once Sars has issued a letter of compliance to your bankers.

Implications of relocation

The following are implications of simply relocating to another country, without making it a formal process;

• When relocating on a temporary basis, you will remain an SA resident for tax and exchange control purposes. Your assets will thus not be subject to Capital Gains Tax (CGT). The exception of the tax residency rule is where the double tax treaty considers you tax resident of a treaty country.
• As an SA national residing outside SA (ie not while on holiday outside SA), you are entitled to receive loans from your SA resident family. Each SA resident over 18 years of age may send you funds as a loan or a donation, which will form part of the unutilised portion of their R1 million single discretionary allowance (SDA), not used or not to be used as part of their annual travel allowance. If your family member annually spends R250 000 during a foreign holiday, ask them to avail to the SDA balance (R750 000) and forward it to you as a loan. Once again, speak to us at BCBA to ensure there are no unintended donations tax consequences on legitimate loans or advances.
• Regarding Reserve Bank rules, you will only be allowed to take money offshore via an annual investment allowance of R10 Million. This is subject to obtaining a Foreign Investment tax clearance from Sars. Later on one can apply for an additional amount to the R10 million, especially if you wish to acquire a second property in your temporary home country or at an exotic island resort.
• Your bank account will not be designated as non-resident, and thus not blocked, which will in turn not render your assets to be under the control of the local bank manager.
• Certain SA nationals, such as pensioners may have their pension remitted abroad, without the need of a tax clearance from Sars.
• Your may not be able to cash out your retirement annuities. South Africa does not have a “QROPS” system, ie retirement funds can not be transferred abroad. Pension, provident and preservation fund members may encash the SA fund in total, pay the SA tax on the lump sum and transfer the net of tax proceeds to their bank accounts. For an SA retirement annuity, there is no such thing as an early cash-out option, unless one formally emigrates.

There are of course many other more personal reasons to choose between formal emigration and relocation, pertaining to the issue of dual citizenship, but for purposes of this article we will only focus on purely financial issues.

It is thus clear that Formal Emigration is mostly only advisable for persons who need to move large amounts of capital offshore permanently or if one wishes to cash in substantial retirement annuities.  As mentioned earlier, should you no longer have a valid SA ID, you may also be required to emigrate formally.

One advantage of formal emigration is the post-emigration inheritances being treated as freely remittable ie no tax clearance is required. Unfortunately, bankers and executors often wish to force legatees residing abroad, to formally emigrate because of this rule. What they tend to forget is that a formal emigration is subject to a tax process yet the option to remit the R10 million foreign investment allowance may be quicker and easier. This applies even if you have to re-activate your tax number. The caveat is that should you not have a valid SA ID, you can’t transact on the SA Bank platform, and you will be forced to emigrate formally and avail to the blocked account on the non-resident bank system.

We nevertheless advise all clients considering the two options to discuss the issue with one of our consultants, to get the best advice in their unique circumstances. We will be able to analyse your position and suggest the best solution.

Where clients so elect, we will complete the entire formal emigration process on their behalf. The process will be explained to you in detail and once again, we facilitate the free flow of funds. Your SA Rand will at all times remain under your control.

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