Foreign employees working in South Africa

Many foreign employees working in South Africa face a common problem in that local employers and tax practitioners (often the South African Revenue Services as well) want to treat you like normal South Africans. This is not correct and in your best interest. Depending on your circumstances, different rules apply to you and these rules will always be to your benefit.

Planning for expatriate employees to South Africa is of the utmost importance. It will pay you to go to lengths to ensure that you are not tax resident in South Africa. Should you have no choice but to become tax resident, it will still be a good idea to know in advance when you will become tax resident and thereby making use of certain planning before you become resident.

The work permit class and application should also be carefully considered as this may have an impact on your tax status or, even more concerning for most, impact on your exchange control residency.

The most important tax case in South African history for foreign employees

After the recent SARS court case, dealing with the taxable income of foreigners working in South Africa, it is hard to argue that no-one is working harder than SARS to create tax loopholes for expatriate employees.

On 9 March 2018, the Tax Court, Western Cape Division, delivered judgment in the matter of Mr X v the Commissioner for the South African Revenue Service. This dispute turned on the source of Mr X’s employment income, which he contended was where he physically rendered his employment services. SARS argued that it was located where Mr X had concluded his employment agreement and sought to tax him on his entire employment income on this basis.

In a bewildering judgment, the court went against the well-established legal principle embodied by Mr X’s argument and ruled that the source of employment income is where the employment agreement is implemented. Therefore, Mr X’s entire employment income was regarded as being fully taxable. This decision, however, has a delightful upshot for inbound expatriates with foreign employers, which is that they will be fully exempt from tax on income earned from services rendered in South Africa.

Considering that Tax Court judgments are of persuasive value only, and do not constitute precedent, expatriates are advised to proceed with caution until SARS clarifies its position. 

Read the full details of the case here.

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It should be noted that Tax Court does not have any inherent power and its decisions only have persuasive value and does not bind the Commissioner or taxpayers in other matters (section 173 of the Constitution). Foreign employees should thus proceed with caution on how they enter into employment agreements and adopt a well-considered tax strategy before jumping to complete tax-free conclusions.

Tax Consulting South Africa is one of the largest providers of inbound expatriate tax- planning, compliance and returns in South Africa. As a dedicated tax practice, we have over 50 professionals at your command, including tax attorneys (thus we offer legal privileged services, not obtainable with normal accountants or tax specialists), chartered accountants, tax professionals and immigration specialists with extensive experience in dealing with expatriates and the complexities of tax and immigration law.

Our service involves the assessment of contract structure and tax optimisation, correct determination of tax residency and work permit category, disclosure of SA sourced income and prudent financial planning and tax strategy in line with expatriate best practice.

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