Flying towards a tax saving: Double tax agreement, or financial emigration?

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Having visited over 12 international locations in 2022, and engaging with South African expatriates, we can attest to a recent report issued by the United Nations, which found that around 900 000 South Africans are already living and working overseas – and indeed, this may well be an understatement.

The common misconception amongst expatriates, however, is that getting on a plane and leaving South Africa will trigger SARS to automatically regard them as non-resident taxpayers.

This is certainly not the case, as the correct process must be followed to cease one’s South African tax residency status.  If not, SARS may audit the misinformed expatriate who is subject to tax on their worldwide income.

Fortunately, the expatriates who do choose to proactively (and legally) prevent SARS from taxing their hard-earned foreign income, will achieve this by utilising either the provisions of a Double Tax Agreement (DTA) or by undergoing the Financial Emigration (FE) process to cease their tax residency in South Africa.

The point of departure:

An expatriate who departs from South Africa, whether temporarily or permanently, must understand that the current system of taxation in South Africa is residency-based.  This means that, if one meets the requirements to be considered a ‘resident’ for tax purposes, they remain subject to tax in South Africa on all worldwide income.

It does not matter if you are abroad for a long period of time, and the mere fact that one pays tax abroad does not absolve them of declaring their foreign income to SARS.

The residency tests in South Africa are two-fold.  The first test applied considers one’s intention to permanently live (or return) to South Africa moving forward.  The second test is applied only if the first is not applicable (as per SARS’ records), and takes into account the time spent in South Africa versus abroad.

SARS will not infer from the ether whether a taxpayer will or will not return to South Africa.  Therefore, it remains the obligation of the taxpayer to declare and prove this to SARS, and obtain SARS’ confirmation that they are henceforth non-resident for tax purposes—i.e. it is SARS that must confirm that the taxpayer is not subject to tax on foreign-sourced income.

It goes without saying that any expatriate earning in excess of R1.25 million per year can prevent the levying of tax by SARS on their foreign income by satisfying the requirements of either an applicable DTA (which does not occur automatically) or by undergoing the FE process to permanently cease their South African tax residency.

Eligibility requirements for DTA:

To determine whether an expatriate is eligible to become a non-resident in terms of a DTA, they should first confirm whether there is a DTA in place between the host country and South Africa.

If so, the following requirements may be considered:

Whether they are also regarded to be a tax resident in the host country;

Whether it is their intention to permanently return to (and remain in) South Africa at some point in the foreseeable future; and

Based on that intention, whether their factual circumstances would be supportive of the so-called ‘tie-breaker test’ in the applicable DTA.

It follows that an expatriate who answers ‘yes’ to all of the above criteria may be able to hold off SARS from taxing their foreign income. Such expatriates should however bear in mind that this is an annual consideration that is required to prove that they are only DTA tax residents in their respective host country.

Eligibility requirements for FE:

As an alternative to the DTA process, expatriates whose intention is to remain abroad permanently will instead qualify for the FE process.  This should be considered by South Africans who have departed forever, and foreign nationals who have spent a significant period of time living in South Africa (albeit temporarily).

In contrast to the DTA process, the FE process is a once-off and will enable expatriates to permanently break their status as South African tax residents.  This will also enable them to encash their retirement fund interests in South Africa, sans apportionment for an annuity, after three years following their residency cessation date.

Knowing your final destination:

Regardless of whether one is flying high or low, or outright trying to hide from SARS’ expanding purview, expatriates are encouraged to be proactive and inform SARS of their tax position.

A competent tax advisor will not tell a taxpayer to omit their foreign income from their returns or to not submit returns, without proper legal rationale underpinning this advice.

Competent tax advice will aid a taxpayer to avoid double taxation by SARS and a foreign tax authority.  This is the case whether or not foreign income is declared with an applicable exemption properly claimed, or by the taxpayer declaring (and proving) their non-residency with SARS, as well as obtaining certification from SARS to this effect.

WRITTEN BY Delano Abdoll AND Richan Schwellnus

Delano Abdoll is an attorney at Tax Consulting SA.

Richan Schwellnus is a tax associate at Tax Consulting SA.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).

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