South Africa has a residency-based tax system, meaning tax residents and non-residents taxpayers are subject to different tax treatment. Consequently, foreign business ventures that previously fell outside the South African tax net may suddenly attract scrutiny from the South African Revenue Service (SARS) and give rise to a new set of tax obligations when an individual reverts to being a South African tax resident.
In practice, we increasingly see returning expatriates who are sole or majority shareholders in foreign companies, finding that recommencing South African tax residency exposes them to Controlled Foreign Company (CFC) rules. Likewise, expatriates who continue working for an employer abroad after returning home, may create Permanent Establishment (PE) risks, or Place of Effective Management (POEM) implications if they continue managing offshore companies from South Africa.
The result can be exposure to South African tax on worldwide income, the attribution of foreign company profits to South African shareholders, and in certain circumstances, double taxation. These risks should be carefully evaluated before returning to South Africa and managed through proactive professional tax advice.
The End of Non-Resident Tax Status Means a Return to Worldwide Taxation
This is especially applicable to expatriates working in jurisdictions such as the UAE, Qatar and Saudi Arabia who formally ceased their South African tax residency when they emigrated and have since benefited from being taxed only on South African-sourced income.
Many expatriates have formally ceased South African tax residency, either temporarily under a Double Taxation Agreement (DTA) or permanently through Financial Emigration. While the circumstances and requirements differ for each process, the outcome is that South Africa does not tax foreign-sourced income of non-resident taxpayers.
However, once an individual permanently returns to South Africa, SARS may regard them as having resumed South African tax residency, resulting in their worldwide income once again becoming subject to South African tax.
For business owners, this is where matters become way more complex.
Sole or Majority Shareholders Beware: CFC Rules May Apply
If you are as a sole or majority shareholder in a foreign company, recommencing South African tax residency can create additional tax exposure through the Controlled Foreign Company (CFC) regime.
The CFC rules, as set out in section 9D of the South African Income Tax Act, are designed as anti-avoidance measures to prevent South African residents from shifting taxable profits offshore through foreign corporate structures. The foreign company’s income may be attributed directly to the South African shareholder and be included in that individual’s taxable income, even where no funds are repatriated back to South Africa. This income is then taxed at the Personal Income Tax rate applicable.
CFC legislation is a highly technical area of tax law and returning expatriates owning offshore businesses should assess their structures carefully before recommencing South African tax residency.
Place of Effective Management: The Silent Tax Residency Trap
Another issue often overlooked is that businesses are not only defined by where they are incorporated, but also by where they are managed.
Many entrepreneurs return to South Africa while continuing to oversee operations abroad, but effectively management sits in South Africa.
SARS places significant emphasis on the Place of Effective Management (POEM) of a company and from a tax perspective, these facts matter enormously.
If SARS concludes that the strategic direction and decisions of an offshore company is being determined from South Africa, the company itself could potentially become tax resident in South Africa and its worldwide income taxed locally.
Returning Employees Face Another Risk: Permanent Establishment Exposure
The tax risks for returning South Africans are not limited to business owners.
Those who continue working remotely for foreign employers after returning home can inadvertently create a Permanent Establishment if it constitutes a physical presence as defined by law, and taxable local footprint for their overseas employer in South Africa. At the same time, the individual may unknowingly forfeit their non-resident status and the tax benefits coming with it.
Many expatriates assume they can simply continue performing the same role from South Africa while remaining employed by a foreign company.
Unfortunately, tax authorities often view matters differently.
Profits attributed to the person in South Africa, can result in South African taxes, including Corporate Income Tax. When this profit is also taxed in a jurisdiction outside South Africa, double taxation arises.
In certain circumstances, a company may be regarded as tax resident in more than one jurisdiction. Double Tax Agreements (DTAs) may then provide relief through mechanisms such as foreign tax credits or treaty-based allocation of taxing rights. This is also a specialised field and once again, requires cross-border tax expertise.
Do Not Let a Successful Exit Become an Expensive Return
Many business owners and entrepreneurs underestimate how quickly a straightforward relocation can become an international tax issue involving tax residency, CFC rules, Place of Effective Management considerations and Permanent Establishment risks.
The irony is that the more successful your offshore business has become, the greater the potential exposure if not navigated with care.
Before making the move home, business owners should assess how their return may affect both their personal tax position and the tax position of the companies they control.
