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What Tax Law Changes Mean for South African Expats

South African residents have a long history of emigrating around the world – with an estimated 4.3 million SA citizens moving to other countries over the last 20 years or so.

Between an estimated 40,000 and 100,000 SA residents resided in the UAE during 2008, a number that has consistently grown to the point where the South African newspaper Independent Online has officially dubbed the UAE “South Africa’s 10th Province”.

A large majority of the SA expats in the UAE move to find a better life abroad, gain international experience and according to InterNations Expat Inside 2018 research, over half (55%) are likely to stay abroad forever. 

However, a change in the SA tax laws is causing South African expats to examine their work-life situation, especially those working in ‘tax-free’ countries such as the UAE.

What the tax law changes mean for South African expats

An amendment to the South Africa Income Tax Act No. 58 of 1962 has been fully enacted and, as a legal amendment, will officially affect all SA expats.

The amendment states that any South African tax residents abroad will be required to pay a tax of up to 45% on any income earned abroad that exceeds the threshold of R1,000,000. While this seems like a large threshold, unfortunately for expats, employment income in this case also takes into account benefits that wouldn’t usually be considered earnings.

This could include security, housing and flights that are recognised as part and parcel of the expat life, which quickly eat into the overall R1,000,000 threshold.

This new law is due to come into effect on 1 March 2020, giving expats time to get all of their affairs in order before the changes come into place.

Many expats choose ‘tax-free’ countries such as the UAE to work on a medium to long-term basis to avoid paying income tax to the SARS on any foreign earnings. Currently, any SA resident working in a foreign country for more than 183 days a year is exempt from paying income tax on their foreign employment income – an exemption designed for employees of private-sector companies.

With this in mind, if a resident works in a foreign country for more than 183 days and has no tax payable in the foreign country, any foreign employment income that is earned will benefit from ‘double non-taxation’.

The proposed change would make it so that any foreign employment income would only be exempt from SA taxes if it is subject to tax in the foreign country.

This means many South African expats, especially those working in the UAE, would be considered SA residents even if they spend over the required amount of time outside of the country. As a result, thousands could be hit by this new tax change.

But what about the Double Taxation Agreement?

The current Double Taxation Agreement (DTA) states that income from employment in the UAE is only taxable in the UAE unless it’s:

  • Employment performed in SA
  • Employment performed in the UAE for less than 183 days over a year period
  • Employment paid by or performed for a company that is not based in the UAE

It’s important to remember that, despite the common misconception by many SA expats, the Income Tax Act and thus this amendment holds priority over any DTA and will not allow South Africans working abroad to continue not paying the relevant SA taxes.

So what are my options?

There is a formal way to avoid being caught by this tax rule, however, it’s a fairly complicated procedure.

This method is described as ‘financial emigration’ and involves applying to the South African Reserve Bank (SARB) to have your resident status changed to ‘non-resident’. Your tax affairs will need to be put in order and you will need the required paperwork for your application but it’s a legitimate way to avoid paying any SA tax on earnings in tax-free countries such as the UAE.

You needn’t worry about any SA citizenship issues down the line either. Your citizenship status and resident status are independent of one another.

The only major challenge you’ll find is properly completing and sending documentation if you’re not actually living in South Africa.

It is important to remember that you’re not allowed to live in South Africa for more than the number of days set out in the time-based residence test to maintain the non-resident status.

For expats that are looking at this method, it’s also important to consider what Parliament noted regarding last-minute changes. With the cut-off point set at 1 March 2020, if someone has been an expat for a long period of time and emigrates just before the date above, they should expect their actions to be viewed with suspicion. If you’re looking at financial emigration, protect yourself sooner rather than later.

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