The South African market comprises less than 1% of the global economy, prompting consideration of offshore investments to harness international growth and market stability.
This article delves into the intricacies of offshore investments, offering insights into what they entail, the two primary methods of investment, their pros and cons, and steps to initiate an offshore investment.
Understanding Offshore Investments
Offshore investments involve acquiring global assets beyond the local market, serving as a strategy to safeguard portfolios against local market downturns. Investors can opt for either direct or indirect investments.
Direct Investment
- Creating an Offshore Bank Account: Establishing an offshore account in another country, subject to exchange control processes.
- Investment Limits: Up to R1 million without tax clearance; can increase to R10 million annually with a SARS tax clearance certificate.
- Reserve Bank Registration: Offshore transactions must be registered through authorized South African banks.
Indirect Investment
- Rand-Denominated Transactions: Invest in SA unit trust funds that, in turn, invest in global markets.
- No Tax Clearance Requirement: Transactions are in rands, offering flexibility and lower fees.
- Simplified Access: Consider local exchange-traded funds (ETFs) for convenient offshore exposure.
Pros and Cons of Offshore Investing
Advantages:
- Exposure to international markets for potential outperformance.
- Diversification to mitigate local market risks.
- Access to global assets like tech stocks not available locally.
Disadvantages:
- No guarantee of outperforming the South African market.
- Higher associated costs and starting capital compared to local investments.
Steps for Starting an Offshore Investment: Direct Investment Route
- Apply for a Tax Clearance Certificate:
- Obtain Tax Clearance Certificate – Foreign Investment Allowance.
- Apply through SARS offices or online, allowing 21 days to 4 months for approval.
- Present the certificate to a foreign exchange dealer for offshore transactions.
- Open an Offshore Account:
- South African banks assist in the process, generally for South African residents.
- Deposit Money:
- Transactions and currency conversion facilitated by the chosen bank, with administrative fees.
- Choose Assets:
- Invest in registered funds recommended by the Financial Sector Conduct Authority (FSCA).
- Consider long-term investment plans when selecting currency and assets.
Tips on Offshore Investments
- Tax Considerations:
- Offshore taxes apply, and relief may be available in case of double taxation.
- Retirement annuity contributions may already expose investors to offshore investments.
- Strategic Planning:
- Develop a plan for utilizing funds in the offshore account to avoid stagnation.
- Consider individual shares of global stocks, factoring in the inflation rate.
Final Thoughts
Venturing into international markets through offshore investments demands careful consideration and strategic planning.
Whether through self-education or seeking guidance from financial advisors, investors can navigate the complexities of offshore investments.
Fund managers provide valuable tax information, particularly with direct offshore investments, where professional advice is strongly recommended.
Investing globally can be daunting, but informed decisions and professional assistance can unlock the vast potential of international markets for South African investors.