Understanding SITUS Tax

Report: Understanding SITUS Tax, DTAs, and Estate Duty Treaties for South African Tax Residents Holding Foreign Assets

For South African tax residents with global investment portfolios, understanding the implications of SITUS-based taxation is essential to effective estate planning. While South Africa levies estate duty on worldwide assets of its tax residents, this does not shield those individuals from foreign estate or inheritance taxes. The exposure depends not on residency, but on the SITUS of the assets.

SITUS, in legal and tax terms, refers to the jurisdiction in which an asset is deemed to be located for the purpose of taxation. Different countries apply their own rules to determine the SITUS of various asset classes. Upon death, the jurisdiction where the asset is considered to be situated may impose estate or inheritance tax—even if the deceased was not resident or domiciled there.

This has particularly serious consequences for South African residents who hold foreign immovable property, such as real estate abroad, or movable property, such as shares in foreign companies, foreign unit trusts, and exchange-traded funds.

Immovable property, like residential or commercial real estate situated outside South Africa, is typically taxed in the jurisdiction in which the property is physically located. For example, a holiday villa in France or a buy-to-let apartment in London will, upon the owner’s death, fall under that country’s estate or inheritance tax regime. France, the United Kingdom, Spain, and several other countries impose inheritance or succession taxes on foreign-owned immovable property located within their borders. These taxes apply regardless of where the deceased resided or was domiciled at the time of death. As such, South African residents owning foreign real estate may be exposed to local estate taxes in addition to South African estate duty.

Movable property, such as foreign shares and investment instruments, is also subject to SITUS tax where it is deemed to be located. Generally, the SITUS of shares is the country where the issuing company is incorporated or where the share register is held. A South African resident holding shares in a UK or US company, for instance, is holding assets with UK or US SITUS. These countries may impose inheritance or estate tax on those assets. In the United States, non-residents are subject to estate tax on US SITUS assets above a mere USD 60,000 in value, with rates reaching up to 40%. In the UK, inheritance tax at 40% may be levied on UK SITUS assets exceeding the applicable nil-rate band.

An important distinction must be made between Double Tax Agreements (DTAs) and Estate Duty Treaties. DTAs are agreements between countries aimed at avoiding double taxation of income and, in some cases, capital gains during a person’s lifetime. They deal with how taxing rights are allocated between the source and residence country for income streams like salaries, interest, dividends, and royalties. DTAs do not apply to taxes arising upon death, such as estate duty or inheritance tax.

To obtain relief from double taxation on death, a country must have a dedicated Estate Duty Treaty in place with the foreign jurisdiction. These treaties allocate taxing rights specifically in relation to estate duty or inheritance tax. They may prevent the same asset from being taxed twice—once in the country of SITUS and again in South Africa—by allowing for exemptions or tax credits. However, such treaties are rare.

As of the present date, South Africa has only five Estate Duty Treaties, specifically with the United Kingdom, United States, Botswana, Lesotho, and Zimbabwe. In the absence of such a treaty, a South African resident’s estate could be fully liable to estate tax in the foreign country where the asset is situated, as well as to South African estate duty on the same asset. This scenario results in actual double taxation, with very limited statutory relief available in South African domestic law.

Thus, whether the asset is a holiday home in Portugal or shares in a US-listed company, the critical factor is the location of the asset for tax purposes, not the tax residency of the owner. Both categories—immovable and movable foreign assets—are vulnerable to SITUS-based estate tax rules, and the presence of a general DTA provides no protection from these taxes unless a specific Estate Duty Treaty exists.

In conclusion, South African tax residents holding foreign assets—whether movable or immovable—must recognise their exposure to foreign estate or inheritance taxes due to the SITUS of those assets. The limited number of Estate Duty Treaties currently in force means that most foreign-held assets are at risk of double taxation upon death. Comprehensive estate planning, including legal and tax structuring, is essential to mitigating this exposure and preserving wealth across generations.