Exchange control implications for emigrant beneficiaries of Inter Vivos Trusts

by | Apr 30, 2020 | Advisory Services

As more and more South African families find themselves scattered across the globe, it’s vital to have a handle on the myriad cross-border tax and exchange control implications that apply to inter vivos trusts when beneficiaries have emigrated for exchange control purposes.  Shaun Eastman fills in the gaps…

Before we dive into the technicalities, it’s important to run through a few definitions.

Inter vivos versus testamentary trusts

An Inter Vivos Trust (“between living persons”) is created during a person’s lifetime as opposed to a trust mortis causa (“in anticipation of death”) or a testamentary trust. The Trust operates like a conduit through which assets pass to the beneficiaries during the lifetime and/or after the death of the funder.

A testamentary trust is detailed in a person’s last will and testament and comes into existence upon their death. Because the establishment of a testamentary trust does not happen until death, it is by nature irrevocable once death occurs.


It’s important to be able to distinguish between Tax Residency and Exchange Control Residency. These two concepts are completely different and are dealt with by two separate institutions. The South African Revenue Service (SARS) deals with Tax Residency and The South African Reserve Bank (SARB – Financial Surveillance Department) deals with exchange control residency. If you don’t know the difference between the two, please read  Tax Residency and Exchange Control Residency – what’s the difference? before continuing with this article!

In South Africa, we have two tests to determine a person’s residency for tax purposes. The “Ordinarily Residence Test” (based on your intent) and the “Physical Presence Test” which is based on how many days you have spent in SA in each of the past six years. If you’d like to know more I suggest reading SARS’ Interpretation Notes 3 and 4 which deals in depth with these two tests.

Over and above these two tests, if a person is residing in another jurisdiction – let’s say Australia – and there are contradictions between Australia’s Tax Residency legislation and South Africa’s Tax Residency legislation, the Double Tax Agreement (DTA) between South Africa and Australia will be the determining factor in confirming a person’s tax residency. The DTAs have tiebreaker clauses to determine in which jurisdiction a person will be a Tax resident.

If you are a tax resident in another jurisdiction and have been granted permanent residency there, DO NOT assume that South Africa’s Exchange Control regulations will not apply to you!


It’s important to note that you can be an exchange control resident but not a tax resident – and vice versa. These three definitions are important when dealing with exchange control:

  1. A non-resident is a person who has never been resident in South Africa.
  2. An emigrant is someone who was formerly a resident in South Africa and has officially emigrated for exchange control purposes (Financial Emigration). Put bluntly, this is someone who has completed a MP 336(b) and formalised their emigration.
  3. A resident is someone resident in South Africa for exchange control purposes. You may not be physically living in South Africa any longer, but because you have never completed an MP 336(b) form and gone through the process of formalising your financial emigration, you will still be regarded as a resident for exchange control purposes. You will therefore be defined as a “resident temporarily abroad”.


The Financial Surveillance Department (FinSurv) recognises that inter vivos trusts are normally established for legitimate purposes, often for estate planning purposes. But it’s also possible that such trusts could be used to export capital from South Africa. In December 1985, the Exchange Control Department of SARB (now FinSurv) directed that all requests for the transfer of income and capital distributions due to beneficiaries permanently outside the Common Monetary Area (CMA – Namibia, Lesotho and Swaziland), must be referred for consideration.

FinSurv did this for two reasons – firstly to ensure that in terms of current policy a non-resident was entitled to such a distribution and secondly to prevent the export of capital disguised as income distributions through the trust.

The basic approach adopted by the FinSurv is to consider whether income and capital distributions from inter vivos trusts are eligible for transfer to non-residents or emigrant beneficiaries.

All assets of an emigrant must be blocked at the time of their emigration and must be brought under the physical control of the Authorised Dealer (i.e. the Bank that will attend to the emigration).

Once a person is regarded as an emigrant for exchange control purposes, all Bank accounts needs to be designated as “Emigrant Rand Accounts”. These accounts comprise of a “Capital account” and “Transferable Account”. Any income generated on the capital account needs to be transferred to the transferable account.  Emigrant Rand Accounts must be strictly controlled, and all debits and credits thereto must be monitored and individually authorised by FinSurv.


When determining the policy to be adopted with respect to a trust, the source of financing (i.e. identifying the economic funder of the trust) is very important. Trusts with emigrant beneficiaries which are funded from the assets of the emigrant are classified as Own-asset Trusts. Trusts with emigrant beneficiaries which are funded by third parties and not the emigrant – an example is where the emigrant’s parents funded the trust. These Trusts are classified as Third-Party Funded Trusts. Own-asset Trusts usually obtain more favourable treatment than Third-party funded trusts.

FinSurv seeks to determine the status of the funder for exchange control purposes. I.e. if he/she is a resident, non-resident or emigrant and if he/she is deceased.

Own-Asset Trusts

Where a trust was established by an emigrant prior to the date of emigration and was funded by the emigrant from his or her own assets (Own-Asset Trust) and not from other donations nor financing from a third party, FinSurv will consider allowing the income generated subsequent to emigration to be transferred to the emigrant. In these circumstances, FinSurv treats the assets and the income of the trust as if they belong to the emigrant and ignores the trust. It is therefore of upmost importance that the trust deed allows for this or is amended to allow for this prior to emigration. Capital Distributions will only be allowed for credit to an emigrant’s blocked capital account. Emigrants can on application request the transfer of these blocked funds.

Third-Party Funded Trusts

Where the economic funder is not the emigrant, the exchange control rules will differ depending on whether the beneficiary is an emigrant or a non-resident. It will also differ depending on when the inter vivos trust was established and the nature of the funding of the trust.

Third-Party Funded Trusts created after the emigration of the beneficiary will be dealt with on the following basis:

  • Income and Capital distributions would only be allowed for credit in a Regulation 4(2) blocked account. Interest on this account must be capitalised.

A Regulation 4(2) blocked account is a special account for funds which are blocked such as a capital distribution from a third party funded trust where the economic funder is still alive. These funds will be blocked until the demise of the economic funder.

The same rules will apply to Third-Party Funded Trusts created less than three years prior to the emigration of the beneficiary.

Third-Party Funded trusts created more than three years prior to emigration of the beneficiary will be dealt with on the following basis:

  • Income distributions would be allowed to be distributed should the funding of the trust have taken place at least three years before the date of emigration.
  • Capital distributions would only be allowed to be transferred to a regulation 4(2) blocked account where the funder is still alive.
  • Where the funder has died, capital distributions will be transferred to the emigrant’s blocked account.

In conclusion

As you have seen, the exchange control implications of emigrant beneficiaries require careful planning and consideration.  It is no walk-in-the-park exercise. There are numerous other factors and/or circumstances that should be looked at. Given the constraints of this article, it’s impossible to cover everything.

This is a subject which requires specialist advice to ensure that there are no surprises with your family’s inter vivos trust. With the trend in South Africa of children moving abroad and families emigrating, it’s of utmost importance that you make sure you understand the exchange control implications of your actions.

One final thought

The tax implications of such distributions should also be considered as the rules vary greatly from country to country. Stay away from assumptions and make sure you consult professional advisors who can assist you with all these implications. Moving to another country is already a massive adjustment for you and your family. It’s the least you can do to make sure your legacy planning is in order so you can sleep soundly at night.

Sentinel International’s team of experts is well-equipped to deal with all the anomalies (well before they arise).

Shaun Eastman