South Africa: Taxation of Expatriates

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Since 2001, residents (called 'ordinarily resident') are taxed on their world-wide income, but non-resident persons continue to be taxed only on their South African source income.

'Ordinary residence' is not defined in the law, but has been described as involving some continuity of residence, or as being the place where a person's belongings are stored, and to which he means to return.

Expatriates on assignment are normally classified as 'temporarily resident', which is equivalent to non-resident from a tax perspective, although there might come a point at which this could be challenged if roots start to go down too deeply. For instance, after three years immigrants are brought within South African exchange control laws, although they can leave with their assets intact for another two years after that.

Foreign nationals entering South Africa need to make a declaration of their foreign assets, and undertake that these will not be made available to residents of South Africa during their stay.

There is no requirement for temporary residents to remit earnings from foreign assets to South Africa, and they may make 'reasonable' transfers home from monies earned in South Africa.

On departure, an expatriate may take away his savings, but needs to confirm that he has not emigrated from South Africa before.

South African-source (taxed) income includes earnings from employment, remuneration for services rendered in South Africa, rent from property assets located in South Africa, and interest from loans applied or used in South Africa. Dividends however are not taxed in the hands of a South African natural person.

Anti-avoidance legislation is quite well-developed in South Africa, and an ordinarily-resident individual will find it quite hard to develop foreign companies or trusts to defer tax; however, this will not affect expatriates as long as they retain temporary resident status.

The consequences of becoming resident are very negative for an expatriate, especially since the introduction of capital gains tax in 2001. Any growth in capital assets will be taxed over the period in which an expat is regarded as resident in the country, even if the assets are located overseas and they remain unsold.

On becoming tax resident, the expatriate is given a tax base for capital gains tax equal to the market value of his assets. This exempts the accrued gain up to that point, but when he ceases to be a resident when his tour of duty is complete, he is treated as having sold his assets at their market value.

NB: South African tax rules are considerably more complicated than the above simplified summary, and professional advice on the situation of any particular individual is a necessity.

It is clear from the above that an expatriate working in or from South Africa is in a good position to acquire and maintain offshore assets, as long as temporary residence status is maintained, and as long as income from them is not remitted to South Africa.

Depending on the personal situation of a given individual (or his employer), it may be worth investigating a base in Mauritius from which services can be supplied to South Africa in a tax-efficient way.

In March, 2005, the South African Revenue Service (SARS) published a guide to taxation for foreign residents of South Africa, in order to help clarify the tax position of expatriate workers following the switch from a source-based tax system to a residence-based regime in 2002.

Under the ‘physical presence' test used to determine liability for South African taxes, those who are resident in the country for more than 549 days in a three-year (subsequently increased, see below) period will be taxed on their worldwide income. They will also be liable for tax in South Africa if resident in the country for more than 91 days in each of the three years.

In addition, the guidance points out that income derived by a foreigner as director's fees from a South African company will be taxed, and all foreigners earning more than R35,000 (if under 65 years) or R60,000 (if 65 years and older) a year must submit an income tax return to SARS.

Foreign residents may be able to obtain a tax credit on the tax paid to SARS, depending on whether South Africa has a tax agreement in place with the taxpayer's home country.

However, relocation expenses paid by the individual's employer will be exempt from South African tax.

Furthermore, foreign employees can claim tax deductions on their South African tax liability for pension and retirement fund contributions, medical contributions, legal expenses, insurance policy premiums, and bad debts relating to employment.

Under plans drawn up by the South African government in September, 2005, foreign workers are entitled to stay in the country longer before their overseas earnings become subject to tax in South Africa.

According to this legislation, foreign workers will only be taxed by the South African Revenue Service (SARS) on their overseas income after a period of five years working in the country, up from the previous limit of three years. This new rule was detailed in SARS's tax guide for foreign workers for the 2006/7 tax year.

“The legislation is a welcome move as it is an incentive to keep expatriates in SA for a longer period without taxing them,” said Luanne Grant, executive director of the American Chamber of Commerce, according to Business Day.

“The new proposals are in line with international jurisdictions such as Canada and Australia,” she added.

Foreign entertainers and sports people however can expect to be taxed on income earned in South Africa at 15% under a new withholding tax system announced by SARS in January, 2006 (which came into force in August of that year).

Blaming low levels of compliance, SARS is requiring all firms which organise entertainment and sporting events to withhold 15% of payments made to entertainers and sportspersons and pass on the withheld sum to the taxman.

Firms will have 14 days in which to notify the tax authority that a deal has been signed, and will become liable for any tax that they fail to withhold or pass on.

However, in recognition of the fact that foreign entertainers and sports people are likely to be be taxed on income earned in South Africa in their country of residence, SARS will give them a certificate in order to claim tax relief from their home tax authority.

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