Imagine working your dream job abroad, exploring new cultures, and earning a competitive salary. Sounds idyllic, right? But for South Africans working outside the country, a question often arises: will I be taxed twice? This is where the South African Revenue Service (SARS) foreign employment income exemption comes in, offering a potential sigh of relief for South Africans abroad. We’ve put together this guide that will unpack the intricacies of South Africa’s expat tax exemption, making it easy for you to understand who qualifies, what income is covered, and how to navigate its benefits.
What is the foreign employment income exemption in South Africa?
Section 10(1)(o)(ii) of the Income Tax Act grants an exemption for remuneration earned for services rendered outside South Africa, under specific conditions.
- Before March 1, 2020: All remuneration earned outside South Africa and meeting the requirements was exempt.
- From March 1, 2020: The exemption is limited to R1.25 million. Any income exceeding this amount is subject to normal tax in South Africa. Relief from double taxation is available through section 6quat credit (with limitations) or tax treaties (if applicable).
Read more: What happens when I do not declare foreign income if I have yet to cease SA tax residency?
Who qualifies for the foreign employment income tax exemption?
To qualify to utilise this foreign employment income tax exemption, you must be:
- A tax resident of South Africa: This means you are either ordinarily resident (usually live in South Africa) or meet the physical presence test (spend more than 183 days in South Africa in a year).
- An employee: Only income earned through employment qualifies.
- Working outside South Africa: You must render services outside South Africa for specific periods (see below).
- Not excluded: Public office holders, government employees, and self-employed individuals do not qualify.
Read more: Five frequently asked questions about the foreign income exemption.
What type of income qualifies for the foreign income tax exemption in South Africa?
The exemption applies to various types of employment income, including:
- Salary
- Taxable benefits
- Leave pay
- Wages
- Overtime pay
- Bonus
- Gratuity
- Commission
- Fee
- Emolument
- Allowance (travel allowances, advances, reimbursements)
- Amounts from broad-based employee share plans
- Amounts received for share vesting
Read more: What is the foreign income tax exemption in South Africa and how do you claim it?
Let’s talk about the qualifying periods (“days test”):
To qualify to utilise this tax exemption, you must spend:
183 full days (in aggregate) over 12 months outside South Africa
A continuous period of 60 full days within those 12 months
Read more: Living abroad? How the 183 days tax rule applies to you as a South African earning a foreign income.
Who is excluded from using the foreign employment income tax exemption?
The exemption does not apply to:
- Public office holders
- Government employees
- Self-employed individuals
What if I earn more than R1.25 million?
The expat tax exemption only applies to the first R1.25 million. Any income exceeding this amount is subject to normal tax according to your marginal tax rate.
Read more: How much foreign income is tax free in South Africa?
Travel allowances and the foreign employment income exemption
The travel allowance can be included in the R1.25 million exemption, but if it exceeds this amount, the portion exceeding R1.25 million will be taxed. This applies even if the entire remuneration (including the travel allowance) stays within the R1.25 million limit.
Apportionment of income
If you work both inside and outside South Africa, your income needs to be apportioned. Only the income earned for workdays outside South Africa qualifies for the exemption, up to the R1.25 million limit.
Does the R1.25 million limit apply to each year?
Yes, even if you work for part of a year outside South Africa, the R1.25 million limit applies as long as you meet the “days test”.
South Africa: Double Tax Agreements
Earning more than R1.25 million and working in a country without a tax treaty with South Africa or where the treaty doesn’t offer sole taxing rights, can lead to double taxation. Relief may be available through the section 6quat credit or tax treaties.
Tax treaty and the first R1.25 million: The tax treaty will not apply to the first R1.25 million as it is already exempt from normal tax in South Africa.
Tax treaty and income exceeding R1.25 million: The tax treaty may apply to the portion of your income exceeding R1.25 million if it avoids double taxation. Here’s how it works:
- Sole taxing right: If the treaty grants sole taxing rights to one country (either South Africa or your foreign country) for the income exceeding R1.25 million, that country will have the exclusive right to tax that income.
- Tax credit method: If the treaty provides for a tax credit method, the foreign country where you pay taxes will grant you a credit against your South African tax liability for the taxes paid in that country. This helps prevent double taxation.
Here are some additional points to consider on the foreign employment income tax exemption:
- Section 6quat credit: Even if a tax treaty applies to the portion exceeding R1.25 million, you might still be able to claim a section 6quat credit for foreign taxes paid under certain circumstances.
- Filing requirements: You will need to file tax returns in both countries.
- Professional advice: Consulting a tax professional specialising in both South African and the foreign country’s tax laws is advisable to ensure you comply with all tax obligations and maximise your tax benefits.
FinGlobal: cross-border tax specialists for South Africans abroad
Struggling to manage your tax compliance in two different jurisdictions now that you’re working overseas? That’s where FinGlobal can help! We specialise in cross-border expat tax compliance, and we’re ready to step in and manage all your tax requirements – from making sure your bases are covered from tax clearance to handling your South African tax refunds, as well as taking care of your tax emigration when the time comes.
To get started, simply share your contact details with us below, and we’ll reach out to explore how we can help streamline your tax matters.