South Africa has a residence-based tax system. This means that an individual’s designation as ‘resident’ or ‘non-resident’ determines how the South African Revenue Service (SARS) will tax them on their income and their assets. Let’s take a look at what this means for foreigners (non-residents) who earn an income or own property in South Africa.
Two quick facts about South Africa’s residence-based tax system
- Residents will be taxed on their worldwide income in South Africa (regardless of where it’s earned) bar a few exceptions.
- Non-residents are only taxed on their income that has a South African source, and on certain capital gains.
Income that is sourced in South Africa, according to the Income Tax Act
Accordingly, it is not citizenship that determines how and where you are taxed, but rather tax residency, and the location source of the income or asset. Section 9 of the Income Tax Act lays out certain scenarios in which the source of income can be considered as located in South Africa. These are:
Dividends: The residency of the company indicates the source of dividend income.
- Interest: The source of income is indicated by the residence of the debtor who is paying/incurring the interest, and the location of where the associated loan funds are used.
- Royalties: The source is based on the residence of the party paying the royalties unless the royalties come from a permanent establishment located outside of South Africa. Income collected from royalties is deemed to be from a South African source if it relates to the use of intellectual property rights located in South Africa.
- Payment in connection with imparting commercial, industrial, scientific, or technical knowledge: Will be deemed to be from a South African source if received by a South African resident and if the information is to be applied in South Africa.
- Income from public sector employment: If a person holds a public office in terms of an Act of Parliament, such income is considered to be of a South African source. This is also the case for any remuneration received from any government position.
- Income from annuities and pensions: The source of any lump sum pension or annuity paid out depends on the location in which the services were carried out to earn these amounts. If the individual carried out their services in more than one country, the income must be split out between countries.
- Income from disposal of asset: Money generated from the disposal of any right in immovable property will be sourced in South Africa if located in South Africa.
There are some sources of income that are not covered by the Income Tax Act, which requires the application of common law principles
- Income from employment and services carried out: Income source will be determined by the physical location of the individual when they rendered their services.
- Ancillary services: Where a person carries out employment services in more than one international location, income will be apportioned between locations and each country has a taxing right on a portion of such income. The nature of the services will also influence the source of the income.
- Partnership income: Remuneration from a partnership agreement is sourced wherever the relevant partner carries out their services.
- Rental income from immovable property: The location of the immovable property determines the income source.
What about income earned by a non-resident working remotely? How is that taxed?
If the income is sourced in South Africa, i.e services rendered in South Africa, it is taxable in South Africa, regardless of whether the individual is a tax resident or non-resident.
- In such a scenario where a non-resident (foreigner) is rendering services remotely to a South African company, this creates the opportunity for double taxation. In other words, non-residents can be taxed both by SARS and the country in which they are deemed tax residents.
- Relief from double taxation is provided for in Section 6quat of the Income Tax Act, although a full tax reduction is rare.
- It is advisable in this case, for the employer to amend the source code to reflect the tax status and liability of the employee tax payer as non-taxable foreign income.
- However, income cannot be treated as non-taxable on the basis that the source of the income is not in that country. The principles of tax residency and income source rules need to be applied to each case to determine an appropriate outcome.
As such, salary income earned in South Africa by a non-resident is generally subject to normal tax in South Africa, unless there is a Double Tax Agreement between South Africa and the foreign country in which the individual resides. However, non-resident individuals employed by a South African company may be able to claim a refund of PAYE (Pay As You Earn) tax paid where their South African employer does not currently apply the Double Tax Agreement on services delivered from abroad.
An employer can use their discretion in terms of paragraph 10 of the Fourth Schedule of the Income Tax Act, apply to SARS for a directive on behalf of such an individual so as to take into account the potential foreign credit when calculating the employees’ tax (PAYE) liability on a monthly basis. Even if a directive is issued that allows the employer to take into account a potential foreign tax credit on the payroll for PAYE purposes, the employee must still submit an income tax return in order to actually claim the foreign tax credit under section 6quat.
What is Section 6quat?
Section 6quat is a provision in the South African tax law, which allows a non-resident to claim a tax credit against South African taxes on foreign-earned income, for any foreign taxes paid on the same income.
When is withholding tax applicable to non-residents and capital gains tax?
The buyer of immovable property (sold for more than R2 million) must withhold the amounts set out below from the purchase price payable where the seller is a non-resident. This is a form of capital gains tax that must be paid to SARS on the disposal of immovable property. Where the seller is a natural person, this amount is 7.5% of the purchase price. However, as a non-resident, the seller may qualify to make a request from SARS that the tax be withheld at a lower rate, or even zeroed. Find out more about this process on the SARS website.
FinGlobal: cross-border tax experts
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