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Before “expat tax” was written into our tax law with the Taxation Law Amendment Act of 2020, Double Taxation Agreements weren’t much of a big deal because South African tax residents living and working abroad could claim exemption from paying tax on foreign income, provided they met certain time-out-of-country requirements. This is no longer the case and South Africans living and working abroad are now expected to pay tax on their foreign earnings, where it exceeds R1.25 million per annum. Given that most South Africans are already paying tax on their earnings in their host country, it is an unwelcome financial burden to have to still pay tax on those same earnings back in South Africa. Now that the circumstances have changed, Double Taxation Agreements have come under the spotlight as an avenue through which South Africans can seek tax relief.

While Double Tax Agreements are indeed useful instruments to avoid being unfairly taxed, there are a number of misconceptions about what they are and how they apply. Let’s take a minute to unpack Double Tax Agreements in South Africa and clear up any misunderstanding. 

Tax agreements between countries

First things first. What is a Double Tax Agreement?

  • Double Taxation Agreements (DTAs) are agreements between countries that clarify which tax authority holds what taxing rights against taxpayers.
  • A tax treaty is signed between two or more countries to help taxpayers avoid unfairly paying double taxes on the same income.
  • It becomes applicable in cases where an individual is a resident of one nation, but earns income in another.

Misconception #1: Getting taxing rights confused with residency

It’s a mistake to think that just because there’s a DTA between South Africa and another country, that income earned in that foreign country is not taxable in South Africa because the host country has exclusive taxing rights. Rather, most DTAs assign exclusive taxing rights to the country of residence and except where the employment is exercised in a host country, both countries will have a right to tax the income in question.

  • The effect of a DTA on a South African tax resident is that ultimately, your income remains subject to tax in South Africa.
  • Where there is a dual taxing right held by the host country, the taxpayer can seek relief by claiming tax credits in South Africa.
  • Further relief is provided in the DTA’s residency article, which if applied properly, can supersede the provisions of the Income Tax Act that regard an individual as a tax resident by virtue of meeting tax residency tests contained in South African tax law.
  • This means that even if a person does meet tax residency requirements, they can be treated as a non tax resident for a tax period by application of a Double Tax Agreement[1] .

Misconception #2: Double Taxation Agreement relief applies automatically. No worries.

This is not the case. In fact, it’s probably the most risky misconception out there. Thinking that just because there’s a DTA and your host country means that you automatically apply for DTA relief is a mistake. Thinking that this relief applies to your tax situation automatically without any intervention on your part is an even bigger mistake. Let’s say it again:  you are not automatically tax-exempt just because there is a Double Tax Agreement in place between the two countries. There are various factors that must be objectively proven and considered because you are required by law to file a tax return through which you are expected to claim exemption under tax treaty relief.

  • A DTA provides a defence against the unfair practice of double taxation. It sets out various requirements that a taxpayer must meet in order to determine where that taxpayer falls as a tax resident.
  • In order to use a DTA to protect your foreign income, you must first determine which country will actually have the right to tax your income first.
  •  This is achieved by applying the tie-breaker test which takes into consideration various factors such as: whether you hold a  tax residency certificate, where your permanent home is located and where your interests lie, etc. 
  • Each taxpayer’s facts are assessed on a case-by-case basis to figure out whether the underlying requirements of the DTA’s provisions have been satisfied.
  • Making any assumptions here is risky business when it comes to the residency article particularly, as underlying requirements are usually fact-driven and objectively assessed.

Misconception #3:  If there’s Double Taxation Agreement, you don’t need to file returns in South Africa

A Double Tax Treaty does not remove your legal obligation to file your tax return in South Africa if you intend on relying on the provisions of the DTA in question. This is because a DTA is a form of tax relief that must be claimed, and SARS doesn’t allow taxpayers to escape their clutches that easily. It is necessary for you, as a South African tax resident abroad, to file a tax return in South Africa. SARS uses this as an opportunity to double-check that you satisfy the requirements of the exemption.

Please note: DTA relief is something that must be applied for, and assessed on an annual basis. This is not a case of “I qualified for DTA tax relief once, therefore I qualify indefinitely until my circumstances change.” As long as you have a tax obligation to South Africa, you will need to file your return and request permission to be granted relief (usually tax credit) in terms of a DTA.

Misconception #4: A residency certificate is your ticket to DTA tax exemption for life. 

A residency certificate states that a taxpayer is considered a tax resident in the host country. Some have interpreted this to mean that such a certificate means they are no longer tax resident in South Africa or that they are automatically considered exclusively as a tax resident of the host country. This interpretation is incorrect.

While the residency certificate asserts that the taxpayer is a resident for tax purposes according to the host country’s tax law, this is not enough to trump the fact that a taxpayer is still considered resident under the Income Tax Act.

At most, this means the taxpayer has dual-residency status which can only be resolved by application of the tie-breaker test under the residency article of the DTA. In other words, the residency test is just one factor in many that must be considered. It is possible that an individual can hold a residency certificate from the host country without qualifying for DTA relief.

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