Offshore Investing Explained: Choosing Between Direct, Wrapped, and Indirect

Why Investing Offshore is Crucial for Wealth Preservation and Growth

South African investors face unique challenges when it comes to wealth preservation. The local economy is highly concentrated, with significant exposure to resource-based industries, a volatile currency, and regulatory constraints. Diversifying offshore is no longer just an option—it’s a necessity for high-net-worth individuals looking to protect their wealth, access global opportunities, and optimize tax efficiency.

However, not all offshore investments are created equal. Investors can invest directly offshore, invest via a wrapped structure (such as an offshore endowment), or opt for indirect exposure via local feeder funds. The choice of structure can dramatically impact tax efficiency, estate planning, and liquidity. This article explores the advantages of direct offshore investing with a wrapper compared to other offshore investment structures.

Why Invest Offshore?

1. Diversification & Reduced Currency RiskInvesting offshore allows you to spread your risk across multiple economies, sectors, and currencies. Given that the South African Rand (ZAR) has depreciated by an average of 5% annually, local investors experience an erosion of purchasing power over time. Investing in hard currencies like USD, GBP, or EUR offers better long-term stability.

2. Access to Global Growth OpportunitiesMany of the world’s top-performing companies are listed outside South Africa. The US, Europe, and Asia provide access to high-growth industries, such as technology, healthcare, and renewable energy, which are underrepresented in the South African market.

3. Mitigating Local Economic RisksSouth Africa's economic and political uncertainties make offshore investing essential. By diversifying globally, investors can reduce their dependence on a single economy and safeguard their wealth against local market downturns.

Choosing the Right Offshore Investment Structure

The structure you choose for offshore investing affects tax efficiency, estate planning, and liquidity. Below is a comparison of three main options: Direct Offshore Investing (No Wrapper), Direct Offshore via a Wrapped Structure, and Indirect Offshore Investing (Local Feeder Fund).

Comparison Table: Offshore Investment Structures

Factor	Direct Offshore (No Wrapper)	Direct Offshore via Wrapped Structure	Indirect Offshore (Local Feeder Fund)
Currency Exposure	Investment is in a foreign currency (USD, GBP, EUR), reducing ZAR risk.	Same as direct offshore, full foreign currency exposure.	Investment is made in ZAR and converted offshore by the fund manager.
Estate Planning	Subject to Situs Tax in jurisdictions like the US (40% tax over $60,000) and UK (40% over GBP 325,000). Requires probate in foreign jurisdictions.	No Situs Tax. Investment can be paid out to beneficiaries immediately, avoiding foreign probate. Normal Estate Duty will apply, but this is half of what the alternative direct offers.	Falls under SA estate law, so inheritance is simpler, but estate duty applies.
Tax Treatment	South African citizens are taxed on their worldwide income, meaning all gains from offshore investments must be declared locally. Tax reporting for direct offshore investments can become overly cumbersome, requiring detailed tracking of foreign transactions.	CGT is calculated in USD/EUR/GBP, meaning you only pay tax on actual growth in the investment’s base currency. Effective tax rate in a wrapper is 12% CGT (lower than 18% direct CGT in SA). Income is taxed at a flat rate of 30% in the fund, therefore making it attractive if investors have a higher marginal rate than 30%. Tax reporting is also done by the provider, which lifts the burden from the client.	Taxed as a SA-domiciled fund, with no offshore tax benefits. This means you will be liable for CGT on both the actual growth of your investment and any gains resulting from currency depreciation, even if the underlying investment itself has not significantly appreciated in its base currency.
Liquidity	Liquidity depends on jurisdiction and investment type (some funds require lock-in periods).	Offshore wrappers have a five-year restriction period, after which withdrawals are flexible. However, most providers split the investment into several (100 to 1000) underlying investment contracts to bypass the standard restrictions of an endowment. This setup allows investors to maintain liquidity despite the usual restrictions.	Dependent on the type of investment. Generally more liquid than direct offshore options, standard SA unit trust withdrawal timelines. The same restrictions will apply if an Endowment is used.
Cost Structure	May incur offshore bank fees, FX conversion fees, and admin costs, Investment Management Fees, Advice fees if applicable.	Administration Fees: 0.5%, decreasing with larger investments. Investment Management Fees: Typically 1% – 1.8% p.a. Advice Fees: 0% – 1% p.a. FX conversion fees All fees exclude VAT.	Administration Fees: 0.5%, decreasing with larger investments. Investment Management Fees: Typically 1% – 1.8% p.a. Advice Fees: 0% – 1% p.a.  Fees All fees exclude VAT.
Offshore Will Required	Yes, required to avoid probate delays and Situs Tax complications.	No, offshore wrapper bypasses foreign probate and estate tax issues.	No, falls under SA estate law.
Minimums	Depends on available investments offshore.	Ranges between US$25 000 and more, Adhock payments of US$5 000 and more.	The barrier of entry is significantly lower, with R1000 pm and or R5000 Adhock payments.

The Strategic Advantage of a Wrapped Offshore Investment

While all offshore options provide currency diversification and access to global markets, investing via a wrapped structure (such as an offshore endowment) offers distinct advantages:

1. Lower Capital Gains Tax

   • Offshore wrappers fix CGT at 12% for individuals, significantly lower than the 18% CGT applicable to direct offshore investments.

   • Gains are calculated in the base currency, meaning clients don’t pay excessive tax due to Rand depreciation.

2. Lower tax on investment

   • Income in an investment is taxed at a fixed rate of 30% making it attractive to anyone whose marginal tax rate is higher.

3. Estate Planning & Situs Tax Protection

   • Direct offshore investors risk losing up to 40% of their offshore assets to foreign estate duties (Situs Tax).

   • Offshore wrappers eliminate Situs Tax exposure, allowing seamless inheritance and avoiding foreign probate delays.

4. Optimized Liquidity & Control

   • Unlike direct offshore investments that require probate in foreign jurisdictions, wrapped structures ensure immediate beneficiary payouts.

   • Offshore wrappers have a five-year restriction period, allowing one withdrawal and one loan within this time. However, providers structure investments into multiple contracts (100-1000), enabling one withdrawal and one loan per contract, significantly improving liquidity.

5. Simplified Tax Reporting

   • With a wrapped offshore investment, the financial institution handles tax calculations and payments, reducing administrative burdens for investors.

Regulatory Considerations: Offshore Transfers & Exchange Control

South African investors transferring funds offshore must comply with SARB regulations:

• Single Discretionary Allowance (SDA): Allows individuals to transfer up to R1 million per year offshore without tax clearance.

• Foreign Investment Allowance (FIA): Allows individuals to transfer up to R10 million per year, subject to SARS tax clearance.

• Asset Swap Mechanism: Some institutions allow offshore investing via asset swaps, which do not require direct foreign currency transfers.

Understanding these rules is essential to ensuring compliance and maximizing offshore investment efficiency.

Conclusion: Offshore Investing is a Must for HNWIs

For high-net-worth investors, offshore investing is not just about seeking higher returns—it’s about risk management, tax efficiency, and long-term wealth preservation. While investing directly offshore offers diversification, doing so without a wrapper exposes investors to excessive tax burdens and estate planning risks. Offshore wrappers provide a strategic advantage, protecting investors from Situs Tax, probate delays, and excessive CGT calculations based on currency movements.

As South African investors continue to navigate local economic uncertainties and currency volatility, offshore investment remains the key to financial security and wealth growth.