ADVISER INSIGHT | 23 APR, 2025
Situs tax: A hidden risk for offshore investors
In the US it usually takes two years to sort out a client’s situs tax, whereas a South African estate could be finalised in nine to 12 months.
While offshore investments may offer diversification and growth, they may also involve complex tax implications for clients – including situs tax, which can delay estate finalisation.
So said Hugo Bezuidenhout, head of retail investment distribution enablement at Momentum Investments, in a recent webinar.
Situs tax is imposed by foreign jurisdictions, based on where an asset is located, rather than the investor’s country of residence.
According to Amanda Moolman, legal adviser at Momentum Distribution Services, the US, for example, imposes situs tax on non-residents with immovable property in that country, certain personal use items, shares of US corporates and unit trusts issued by a domestic corporation.
Certain deposits in US bank accounts, proceeds of life policies on the life of a non-resident who isn’t a US citizen, as well as offshore collective investment schemes, are excluded from situs tax.
Executors of a non-resident alien’s estate must file a US estate tax return if situs assets are worth more than $60,000 (R1.1m) at the client’s date of death, explained Moolman, adding that tax is levied on a sliding scale of 18-40%.
She said that if the situs tax is unpaid, the Internal Revenue Service (IRS) can place a lien on the assets, and beneficiaries become liable. A lien is a legal right to someone’s property until a debt is repaid, or an obligation met.
This is subject to double death duties agreements (DDAs) with South Africa, however.
South Africa and the US have a DDA in place that determines that the country where the asset is situated has the right to tax (not the country where the person is resident), Moolman said. The DDA provides that the tax credits will be given in South Africa to the lesser of the South African tax paid.
‘The IRS may collect any unpaid estate tax from any person receiving a distribution of property,’ Moolman said. ‘The heir or beneficiary will therefore only receive the after-tax amount.’
Before releasing funds from an investment in the US to sell shares or transfer ownership, the US may require that taxes owed – for example, your dividends withholding tax or estate taxes – be settled, Moolman explained.
As such, the impact of a client’s offshore investment on their estate liquidity must be considered.
The red tape
Jeffrey Wiseman, head of Momentum Trust, shared several complications that may arise in winding up an estate with situs tax implications.
For one, it’s not easy to pry information on deceased clients’ investments from foreign financial institutions when the family isn’t aware of the details.
‘They will normally ask for specific details of the investment or the investment account that we want information about before providing us with information,’ Wiseman said.
‘So, typically if a person doesn’t keep clear records or if family members are unaware of those details, it can be quite tricky for executors to find details of the investments and where they are situated.’
Law firms in the foreign country are typically used to assist SA executors with the Situs tax process and must be paid.
In the US, Wiseman said, it usually takes two years to sort out a client’s situs tax, whereas a South African estate could be finalised in nine to 12 months.
He explained that US financial institutions won’t release funds that are subject to potential situs tax until provided with proof that situs tax was paid. ‘So, if, for example, you have liquidity needs in the estate, those assets are essentially tied up until you can provide proof that the situs tax has been paid,’ he said.
This delay means that the South African estate cannot be finalised either, as the South African Revenue Service (Sars) requires proof of foreign tax paid before calculating estate duty.
This has implications for the client’s heirs.
Hannes Esterhuyse, regional manager at Momentum Wealth International, emphasised that situs tax is a risk financial advisers must plan for and inform clients about.
As such, advisers should establish whether their clients are tax resident in only one or multiple jurisdictions. If the latter, Esterhuyse said that professional service providers should be roped in to identify possible tax liabilities.
Next, advisers should establish whether clients hold assets that can be susceptible to situs tax. If they have such assets, they need to establish if there are any fiscal or structural reasons why situs tax should not be applicable – for example, the value might fall below the minimum threshold for death duties or estate tax, or the asset might be in an investment wrapper.
Esterhuyse said that advisers also need to bear in mind the duty of care in terms of the Financial Advisory and Intermediary Services (Fais) code of conduct to inform clients of risks like situs tax.
Article is provided by courtesy of Citywire South Africa
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