South Africans are a special breed of humans. With our tough, resilient spirit, we are uniquely equipped for entrepreneurship. It is sheer determination, grit and zero fear for hard work that has seen the rise of the startup culture mentality in the private sector, with South Africans going it alone and building flourishing businesses from the ground up.
However, it is also this tough, resilient spirit that can be the cause for South African entrepreneurs to get an itch to explore new markets. To discover the potential in new frontiers, personally and commercially, many entrepreneurs are looking at international expansion and emigration. As exciting as it may seem to move overseas to take advantage of a new market, there are a number of important things for entrepreneurs to consider before taking the plunge and jetting off from South African soil.
You can never be too prepared, doing your homework will go a long way.
As in business, any decision has to be considered from all angles. If you’re toying with the idea of international expansion, it’s worthwhile finding a professional that can give you a comprehensive, honest insight into local requirements for your intended destination market, which includes examining tax planning opportunities. If you’re skipping the country to cash in on a new market, you’ll likely need to set up a corporate entity overseas, in line with their specific requirements. You can do this either in the country you’ll be moving to, or in a shared jurisdiction within the marketplace.
This is not a decision you want to rush into lightly, and you should do your investigation thoroughly in order to choose the best commercial entity model in order to mitigate financial risk and take advantage of any corporate or tax benefits.
One of the most critical things to consider here is:
Who will hold directorship over the newly formed company abroad? As an entrepreneur, your first instinct will be to claim that directorship as yours – and rightfully so – but instinct isn’t always best. If you hold onto your South African tax residency, this could bring your overseas company into the South African tax pool, thanks to the Place of Effective Management rule.
It might be worthwhile to consider delaying immediate assumption of directorship by bringing on a corporate services provider to set up and manage the business entity until you’ve shed your South African tax residency, after which you can assume directorship.
How do you exit the South African tax system?
South Africa has a residence-based tax system. This means that people who are “ordinarily resident” in South Africa – for tax purposes – will be taxed on their worldwide income back in South Africa, bar a few minor exclusions. On the other hand, non-residents are only taxed on their income that derives from a South African source.
Residency for tax purposes is defined by the Income Tax Act, but it is not the same as being classified as a resident for emigration purposes. Confused? You can read about the difference between tax emigration and financial emigration.
The South African Revenue Service will consider you a South African tax resident if you meet one of two tests.
You aren’t declared to be a resident of another country exclusively, for tax purposes, thanks to the workings of a Double Tax Agreement.
Therefore it makes sense that in order to exit the South African tax system, you will need to change your tax residency status from resident to non-resident.
- To be classified for tax purposes as a non-resident in South Africa, you must make sure you don’t meet the requirements for residence.
- Then you’ll make a declaration to SARS along with your tax return, and have your case considered on the base of its merits.
Will financial emigration from South Africa change your tax residence status?
The short answer is: no. Financial emigration is the process that seeks to change your residency status from resident to non-resident purely for exchange control purposes and will have no bearing on your tax resident status.
Sidenote: Read more about exiting the South African tax system, here.
Some other questions for entrepreneurs to ask themselves:
- How will you continue to provide for your retirement? Will you carry on contributing to your retirement annuity, or will you cash in your savings and move them abroad?
- How will you handle your financial affairs back in South Africa? If you’re leaving behind your South African branch to start anew abroad, who is going to handle everything back home?
- Are you likely to be the beneficiary of a will and receive an inheritance in South Africa in the future? If so, remittance is much easier after financial emigration.
FinGlobal: Your global financial partner
We understand your entrepreneurial spirit, because our business was built on the same hard work, sweat and determination. If you’re looking for a financial services provider that has the global expertise to help you make informed decisions about your business and your finances, we’ve got all the right people and all the right credentials. Whether it’s for tax clearance, financial emigration, foreign exchange or exchange control advice, we’re waiting to answer all your questions and provide the guidance you need to start the next chapter of your future, so contact us today.
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