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International work and South African tax laws
Understand foreign income and tax implications both in SA and internationally.
The tax implications of earning income outside South Africa are becoming more of an issue for many of us. In an era when remote work and international investing are much more accessible via the internet, taxable international earnings can come from dividends, direct employment, rental income, interest or royalties.
‘How does the South African Revenue Service (SARS) tax this type of income?’ you may ask. ‘Is it simpler to have a forex account for earnings made outside the country?’
Ultimately, you need to know whether any income you receive from a foreign source is taxable in South Africa, which means you should declare it in your South African tax return. The short answer, as you may have guessed, is ‘Yes.’
How tax on international income is calculated
SARS calculates tax rebates on foreign tax according to the following formula as its taxation limit:
[total normal tax in South Africa] x [taxable foreign income]
[total taxable income]
If the total foreign tax paid exceeds the limitation amount, the excess amount may be carried to the following tax year.
It’s easier to keep track of your tax responsibilities with the help of a professional adviser
However, a loss incurred in carrying on a business outside South Africa may not be set off against income in South Africa. The amount of foreign tax payable must be converted to South African currency at the last day of the tax year by applying the average rate for that tax year. Foreign income is then converted to rands by applying the spot exchange rate at the date the income accrues.
In short, the South African tax system adheres to the Worldwide Income regulations on taxation, so if you’re a South African resident with tax responsibilities, you are taxed on all local and foreign income you receive, regardless of where it is paid and where the source of the income is. But there are some foreign tax exemptions. Let’s break it down:
Foreign employment income tax
Any income from any global source is taxable if you are registered as a South African taxpayer, but there are some exemptions – capped at an income of R1.25 million since March 2020. These exemptions apply mainly if you have a formal employment contract (either with a resident or non-resident employer), if you earn a certain type of remuneration, and if you spend at least 183 days (about 6 months) of a consecutive 12-month period outside SA doing this work, 60 days of which must be consecutive.
If you’re working for a foreign company outside South Africa for extended periods of time, it’s your responsibility to be aware of the tax implications, especially for exemptions. Contact your financial adviser for the correct information and advice, including which documentation is required by SARS for such foreign income tax exemptions.
Income from foreign dividends
South African residents who earn foreign dividends generally have to declare them and pay tax when submitting their South African tax return.
The tax on these dividends depends on the amount and type of shares held in the foreign company, but liability is limited to cases where the taxpayer holds less than 10% of the equity shares and voting rights in the foreign company. In such cases, the foreign dividend received will be taxed.
Where the taxpayer holds at least 10% or more of the equity shares and voting rights in the foreign company, then 100% of the foreign dividend will be exempt in the taxpayer’s hands.
Income from foreign interest
In such investment cases, you need to report the rand equivalent amount to SARS, on a spot exchange rate basis. Unlike local interest, there is no exempt portion – however, you can deduct any foreign tax you pay.
Income from foreign rental properties
Foreign rental income from property registered in the taxpayer’s name is taxable for all South African residents. Any expenses related to earning the rental income that normally come with owning and maintaining a property, such as bond costs, insurance and repairs, can be claimed as a deduction, so you can reduce your tax liability.
If the country in which the property is located has deducted or withheld taxes from your rental income, these can be deducted as a foreign tax credit, so you won’t have to pay tax twice.
Income from foreign trade while based in South Africa
If you earn business or freelance income from a foreign country while based in South Africa, you need to declare the rand value of only the profit from this in your tax return. This portion will be taxed just like a local business, so you can deduct all your trading-related expenses from your business income.
Income from foreign royalties
This last, fairly straightforward category includes South African taxpayers who receive royalty income from the use of trademarks, patents, mineral rights, or artistic or literary works from outside South Africa. In all such cases, you’ll be liable to pay foreign royalty income tax when submitting your South African tax return, but not South African taxes as well.
It’s easier to keep track of your tax responsibilities if you have several income streams in South Africa and abroad with the help of a professional adviser. Our international banking specialists can help.
