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Alert: South Africa amends law regulating exemption of foreign earned income

June 6, 2019 Article 1 min read
Denise Greenway Kasia Borowicz
South Africa has amended the current law regulating the exemption for foreign earned income as applicable to South African tax residents. This change will impact South Africa employers, foreign employers, and South Africa residents.
An office meeting.

South Africa has amended the current law regulating the exemption for foreign-earned income as applicable to South Africa tax residents. Currently, as described in Section 10(1)(o)(ii) of the Income Tax Act, tax residents meeting the eligibility requirements may exclude all foreign-earned income from South Africa taxation. An amendment to the code, effective March 1, 2020, introduced a limited exemption of 1 million South African rand (ZAR) (around $63K) annually. Income in excess of 1M ZAR will be subject to South Africa taxation but may be mitigated by foreign tax credits (FTC), when applicable. The eligibility requirements remained the same: 183 days in 12-month period and more than 60 consecutive days of services outside South Africa.

The rules for claiming FTC include:

  • No reduction to withholdings in anticipation of FTC — cash flow issues
  • FTC limited to the lesser of foreign tax or South Africa tax
  • Proof of foreign tax paid or payable

It’s important to note that this amendment will affect employers, foreign employers, and residents.

South Africa employers:

  • Required to implement withholdings on income in excess of 1M ZAR
  • Currently, no reduction to withholding in anticipation of foreign tax credit. Follow new developments as this may change.
  • Evaluate additional cost of global mobility programs with outbound South Africa residents to locations with lower tax rate or no income tax.

Foreign employers:

  • Facilitate the proof of tax payment/tax payable to inbound South Africa residents
  • No requirement for income tax withholdings/remittance

South Africa residents:

  • Additional tax may be due in South Africa if foreign-earned income in excess of 1M ZAR and foreign income tax rate is lower than South Africa income tax rate.
  • Additional administrative task related to obtaining proof of foreign tax paid/payable required in order to claim FTC.
  • Consider the impact of breaking tax residency in South Africa on the global tax rate over the assignment period.
    • Residency may be broken
      • By becoming exclusively a tax resident in another country with which South Africa has a DTA
      • By breaking “ordinarily residence,” as South Africa is no longer seen as their permanent home
  • Exit tax of 40 percent on gain on deemed disposition of assets may be due when relinquishing residency (Evaluate this decision carefully.)

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