We often receive queries from non-resident clients who wish to invest in property in South Africa.
There are various considerations to bear in mind when purchasing property. This article briefly discusses what a non-resident should consider, before purchasing property in South Africa.
Should I purchase property in my personal capacity, a trust, or in the name of a company?
This will depend on your specific needs and requirements. In order to assess whether to purchase property in their personal capacity, or to utilise an entity to purchase the property, clients should be aware of the various tax implications, exchange control regulations and governance requirements in respect of each option. For example, under certain circumstances the failure to obtain exchange control, approval where approval is required, can result in the transaction being null and void.
When purchasing property, according to South African law, a spouse whose marriage is governed by foreign law can usually buy immovable property in his or her name only, without requiring the consent of the other spouse. However, should he or she in future decide to sell the immovable property, he or she will need his/her spouses assistance to do so. The spouse of the property owner would have to co-sign all transfer documents to give effect to the sale.
Problems in the transfer process sometime arise when clients, who were married at the time of purchasing the immovable property, are divorced by the time that they decide to sell the immovable property. It is essential to keep a copy of the relevant divorce order and consent paper (and a duly sworn translation thereof, where applicable) as the Deeds Registry will insist on receiving same, and accordingly the seller will not be able to sell without acceptable proof of the divorce.
Non-residents should bear in mind that all income from a South African source is taxable within South Africa (subject to a few exceptions). The sale proceeds of a property, as well as rental income, would be taxable in South Africa. In this regard, non-residents should take note that capital gains tax is not a separate tax, but the taxable gains (known as the “capital gains”) are included in the non-resident’s taxable income in South Africa.
In addition, non-residents are still liable for estate duty in South Africa on South African assets (subject to certain exceptions). It is recommended that when the client purchases a property, that he or she prepare a South African will which will provide for how their South African estate will devolve.
A non-resident should always consult a tax advisor to advise on various tax implications before moving to South Africa and/or purchasing immovable property in South Africa.
Purchasing via a trust
A foreign trust must be registered at the local office of the Master of the High Court, and be authorised to act in terms of the letters of authority issued by the Master. Unless the Master of the High Court in South Africa has issued letters of authority to the trustees, the foreign trust cannot enter into purchase agreements in South Africa relating to South African assets.
Accordingly, it follows that without letters of authority, any purchase of property is void from the start. Section 8 of the Trust Property Control Act provides that, where a person has been appointed outside of SA as a trustee, the Master may authorise such trustee, and the Act will apply to such foreign trustee in respect of property located in South Africa. Section 6(1) of the Act provides further that a person can only act in their capacity as a trustee if authorised by the Master. If the foreign trustee signs a deed of sale without having authorisation from the Master, such an agreement would be void. It should be noted that it is quite likely that in applying for letters of authority for a foreign trust, the Master may ask that a South African independent trustee be appointed and/or security to the satisfaction of the Master be lodged by the trustees.
Taking all of the above into account, it may be a better option to use another entity or to register a local trust according to the laws of South Africa. We suggest that when seeking to register a foreign trust in South Africa, non-resident clients seek legal advice before doing so. At the moment, the capital gains tax inclusion rate for trusts is very high at 80%.
Purchasing via a company or close corporation
A foreign company can be registered as an external company in South Africa, but registration with the Companies and Intellectual Property Commission can be challenging. It may be easier to register a local company in South Africa and shelf companies are frequently used. It should be noted that the capital gains tax inclusion rates for companies is currently 80%, and dividends tax is levied at 20%.
Funding the property purchase
We are often asked whether non-residents can apply for mortgage bond finance in South Africa. In most instances, non-residents can only qualify for a maximum of 50% of the purchase price, due to exchange control and local banking laws. Clients should also be aware that transferring funds in foreign currency to South Africa can take longer. It is even possible that a client could suffer foreign currency losses as a result of the transfer and it is therefore advisable to seek advice before transferring funds.
Always seek advice
It is advisable to seek advice before making any investment, to avoid red-tape or issues arising in future. Our Corporate & Commercial department specialises in non-resident advice and can assist you with your tax queries.
For more information regarding commercial and tax advice, please contact:
Henning Pieterse | Partner
Areas of Expertise: Corporate & Commercial Law
Erlise Loots | Partner
Areas of Expertise: Tax | Curatorships | Trusts | Estates | Exchange Control | Non-resident services and advice
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)