Due to lockdown and global COVID-19 travel restrictions, some individuals are unable to freely move across borders, finding themselves living in a foreign country or their home country for longer than expected. However, in some instances this restriction has not limited their ability to carry out their office duties and provide professional or independent contractor services, made possible by the advancement and progressive use of technology. This modern embracement of virtual work could also afford many South African residents the opportunity to take up international employment, without having to physically migrate to another country.
While remote work becomes increasingly popular, it is important to consider the tax implications of performing work remotely and its impact on the tax residence of both individuals and companies. South Africa has a residence-based tax system meaning residents are taxed on their worldwide income, subject to certain exclusions, whereas non-residents are taxed on South African sourced income. In South Africa, individuals are considered to be tax resident by either being ordinarily resident, or by meeting the requirements of the physical presence test. An individual is considered to be ordinarily resident in South Africa, if that is where the individual will naturally and as a matter of course return after his or her wanderings. Other countries may have similar tax residence rules however this varies country by country.
The following are common examples of scenarios that require careful consideration and consultation with a tax expert.
Becoming tax resident in two countries
If you are ordinarily resident in South Africa, you would have to consider whether being physically present in another country could result in you also becoming tax resident in that country.
If you recently ceased to be a South African tax resident and you are regarded as a non-resident for tax purposes in South Africa after taking up tax residence elsewhere, you would have to consider whether being physically present in South Africa, could result in resuming your tax residence in South Africa. To meet the requirements of the physical presence test, you must not at any time during that tax year be ordinarily resident in South Africa and you must be physically present in South Africa for a period or periods exceeding-
- 91 days in total during the year of assessment under consideration;
- 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in total during those five preceding years of assessment.
Should you become tax resident in two countries, one would first look to a double tax treaty (DTT) in place to determine which country can claim you as tax resident. Where no DTT exists both countries may treat you as being tax resident, and in such instances, there is the risk of double tax. Tax relief from the claim of tax credits is not certain.
Ceasing to be South African tax resident by remaining outside of South Africa
If you are not ordinarily resident in South Africa, but were considered to be South African tax resident on the basis of having met the requirements of the physical presence test, you would cease to be a South African tax resident if you remain outside the country for a continuous period of at least 330 full days. On the date that you cease to be South African tax resident, you are deemed to have disposed of your worldwide assets at market value, resulting in possible capital gains tax implications.
Expatriate South African tax resident individuals
If you are a South African tax resident and expat individual who visited and remained in South Africa but continued to work remotely for your foreign employer, the following are key considerations:
- From the 2021 year of assessment, up to R1 250 000 of your foreign employment remuneration may be exempt from tax in terms of section 10(1)(o)(ii) of the South Africa Income Tax Act No.58 of 1962 (IT Act), provided certain requirements are met.
- You are required to have rendered your service to your employer outside of South Africa for a period exceeding 183 days for any 12 month period. However due to the lockdown, the number was reduced to 117 days for any 12 month period for the years of assessment ending 29 February 2020 and 28 February 2021. You must also have remained outside of South Africa for a continuous period exceeding 60 full days during that 12 month period.
- If the above requirements are not met, your full amount of foreign employment remuneration is subject to tax in South Africa. There may however be some relief in terms of a DTT.
South African tax resident individuals working in South Africa for a foreign employer
If you are a South African tax resident who is based in South Africa, and has taken up remote employment with a foreign employer, the following are key considerations:
- Your full foreign employment income is subject to tax in South Africa. It may also be subject to tax in the country where your employer is based. This is however subject to any DTT which may give sole taxing rights to one country.
- In the case where your employer is based in a country with no DTT and your remuneration is taxable in both countries, or if the DTT allows both countries to tax your foreign remuneration, then you will have to rely on South Africa giving you a tax credit for any foreign tax paid. Section 6quat of the IT Act only allows for a tax credit in cases where the foreign income is sourced in the foreign country and not in the case where the income is sourced in South Africa. In this case the only relief available in terms of local tax law, is a tax deduction for the foreign tax paid which results in an element of double tax. A tax deduction reduces your taxable income whereas a tax credit reduces your tax liability.
- Some DTTs however, do provide that South Africa must allow a credit for foreign tax paid against South African tax and therefore override section 6quat. It is important to note that some DTTs only allow a credit according to SA tax law, in which case section 6quat will still apply to limit the relief to a tax deduction resulting in an element of double tax.
- In the case where the DTT gives sole taxing rights of your foreign remuneration to South Africa but is taxed by your foreign employer anyway, South Africa will not allow a tax credit in this case because the foreign country was not allowed to tax it in the first place.
Changing the place of effective management and tax residence of a company
The definition of resident contained in our IT Act as it relates to a company, provides that any company incorporated in South Africa is resident or any company which was not incorporated in South Africa is resident if its place of effective management is in South Africa. Most DTTs have what is referred to as a tie-breaker rule, to ensure that an entity that is deemed to be tax resident in two countries, has its residence allocated to the country in which its place of effective management is situated.
You would need to consider whether your role and the decisions that you make for a company, are key management and commercial based decisions. Should you be making such decisions remotely and once-off due to the unusual circumstances caused by COVID-19, the impact if any would be minimal. However, if remote work becomes your new normal and such key management and commercial based decisions continue to be made remotely, this could result in your physical presence changing the tax residence of a company by your role and actions shifting its place of effective management to the country in which you are physically present. This does however require further application and a thorough assessment with the help of an expert before a conclusion is reached.
The above is not intended to replace expert tax advice. Assessing your tax residence and filing obligations can become an intricate process and depends on your situation.
Consultant: Tax & Advisory, Cape Town