South Africa has a residence-based tax system, which means residents are, subject to certain exclusions, taxed on their worldwide income, irrespective of where their income was earned. By contrast, non-residents are taxed on their income from a South African source. Since tax systems differ from country to country, there is a chance that a particular amount could be taxed twice. This possibility of double taxation is, however, often alleviated by tax relief contained in various Double Taxation Agreements (DTAs). These DTAs are international agreements contracted between countries to deal with potential competing taxing rights against the income of the same taxpayer. Under the provisions of the DTA, the non-resident’s remuneration earned in South Africa may not be subject to normal tax in South Africa where specific requirements are met.
Who is regarded as a non-resident?
Let’s start by defining what we mean by “resident”. Understanding that, you will know whether you meet the criteria or not and thus whether you can be regarded as a resident or a non-resident. Under South African law there are different types of residents, for example a resident defined by the Income Tax Act, 1962 in terms of the so-called “physical presence test” and an ordinarily resident defined in terms of South African common law. Any individual who is ordinarily resident (common law concept) in South Africa during the year of assessment or, failing which, meets all three requirements of the physical presence test, will be regarded as a resident for tax purposes. An individual will be considered to be ordinarily resident in South Africa, if South Africa is the country to which that individual will naturally and as a matter of course return after his or her wanderings. It could be described as that individual’s usual or principal residence, or his or her real home. If an individual is not ordinarily resident in South Africa, he or she may still meet the requirements of the physical presence test and will be deemed to be a resident for tax purposes. To meet the requirements of the physical presence test, that individual must be physically present in South Africa for a period or periods exceeding –
- 91 days in total during the year of assessment under consideration;
- 91 days in total during each of the five years of assessment preceding the year of assessment under consideration; and
- 915 days in total during those five preceding years of assessment.
An individual who fails to meet any one of these three requirements will not satisfy the physical presence test. In addition, any individual who meets the physical presence test, but is outside South Africa for a continuous period of at least 330 full days, will not be regarded as a resident from the day on which that individual ceased to be physically present. If the individual is neither ordinarily resident, nor meets the requirements of the physical presence test, that individual will be regarded as a non-resident for tax purposes. This means that individual will be subject to tax only on income that has its source in South Africa, for example, interest earned from a South African Bank; rental income earned from a property in South Africa; and services rendered in South Africa.
Types of income
Salary income earned in South Africa by a non-resident will be subject to normal tax in South Africa, unless DTA entered into between South Africa and the foreign country in which he or she resides, stipulates otherwise.
The starting point for a non-resident who renders services in South Africa is that the employment income is subject to normal tax in South Africa. If however a DTA is in existence and all three of the following requirements are met the income will not be subject to normal tax in South Africa:
- He or she is present in South Africa for a period or periods in aggregate not exceeding 183 days in any 12-month period (not necessarily a year of assessment).
- His or her remuneration is paid by, or on behalf of an employer who is not a resident of South Africa.
- His or her remuneration is not borne by a “permanent establishment” that the foreign employer has in South Africa. A “permanent establishment” is a complex concept, especially determining the establishment of one but in essence means a fixed place of business through which the business of the employer is wholly or partly conducted.
Pension and annuities
An amount received by a non-resident that constitutes a lump sum, pension or annuity from a pension fund, pension preservation, provident fund or provident preservation fund and the services in respect of which that amount is received or accrued were rendered in South Africa is subject to normal tax in South Africa. If the amount received or accrued relates to services rendered inside and outside South Africa, only the portion of the amount relating to services rendered in South Africa is subject to tax in South Africa.
An annuity received from a retirement annuity fund where the contract was entered into in South Africa has its source within South Africa. Such annuities are subject to normal tax in South Africa, however, the provisions of a double tax agreement may affect the taxability of the annuity in South Africa.
Interest received by or accrued to a non-resident from a source within South Africa is exempt from normal tax in South Africa unless the non-resident –
- was physically present in South Africa for a period or periods exceeding 183 days in aggregate during a 12-month period preceding the date on which the interest is received by or accrues to that person; or
- the debt from which the interest arises is effectively connected to a permanent establishment of that person in South Africa.
Interest received by a non-resident that is exempt from normal tax will however be subject to a withholding tax of 15%, provided the non-resident –
- was physically present in South Africa for a period or periods not exceeding 183 days in aggregate during a 12-month period preceding the date on which the interest is paid, or
- the debt from which the interest arises is effectively connected to a permanent establishment of that person in South Africa and that person is registered as a taxpayer in South Africa.
If a non-resident is present in SA for a period exceeding 183 in aggregate, the interest received by or accrued by such non-resident from a source within South Africa is subject to normal tax in South Africa. In the latter case, an exemption is available:
- in the case of a natural person of 65 years of age, the amount of R34 500; or
- in any other case, the amount of R23 800.
Dividends tax is payable at a rate of 20% with effect from 22 February 2017 on dividends paid by companies that are residents (other than headquarter companies). Dividends tax is also payable on a foreign dividend to the extent that the foreign dividend does not constitute the distribution of an asset in specie and it is paid by foreign companies in respect of listed shares. This rate is, however, subject to a reduction in terms of the various DTAs. Although dividends tax is part of the Act, it is a separate tax from normal tax. Generally speaking, a dividend will be subject to dividends tax or normal tax, not both. Dividends from a South African source received by or accrued to holders of shares are exempt from normal tax; however, there are some exceptions to this rule. A dividend is exempt from dividends tax if the beneficial owner is a person that is not a resident and the dividend is paid by a foreign company in respect of a listed share. The non-resident beneficial owner must submit the relevant declaration forms available on the SARS website to the company or regulated intermediary for dividends tax not to be withheld from the dividend. For more information on dividends tax, refer to the Comprehensive Guide to Dividends Tax.
In the case of a non-resident, “know-how” payments received by or accrued to such person for the use, or right of use of intellectual property or the grant of the permission to use such property in South Africa, are subject to a final withholding tax of 15% (or a rate determined in the relevant DTA for the avoidance of tax). A non-resident will be exempt from the withholding tax on royalties if:
- that person is physically present in South Africa for a period exceeding 183 days in aggregate during the 12-month period preceding the date on which the royalty is paid;
- the property in respect of which the royalty is paid is effectively connected to a permanent establishment in South Africa,
- the royalty is paid by a head quarter company in respect of the granting of the use or right of use of or permission to use intellectual property as defined and subject to certain exclusions.
In the event that the royalties received by a non-resident is exempt from the withholding tax, it will be subject to normal tax in South Africa.
The source of rental income is generally regarded to be where the property is used on a day-to-day basis. Rental income which arises in South Africa, received by or accrued to a non-resident will be subject to normal tax in South Africa. Expenses such as rates and taxes, bond interest, insurance, repairs may be claimed as deductions against such rental income, subject to certain conditions.
Tax on foreign entertainers and sportspersons
Any resident who is liable to pay any amount to a foreign entertainer or sportsperson for his or her performance in South Africa, must deduct or withhold from that payment an amount of tax, known as “tax on foreign entertainers and sportspersons”, at a rate of 15% on all payments made to such foreign entertainer or sportsperson. The resident who deducted or withheld the tax must pay it over to SARS on behalf of the foreign entertainer or sportsperson before the end of the month following the month in which the tax was deducted or withheld. Failure to deduct or withhold the tax and to pay the tax over to SARS will render the resident personally liable for the tax.
In the event that it is not possible to account for the withholding tax (for example, the person who is liable for the payment to the foreign entertainer or sportsperson is not a resident), the foreign entertainer or sportsperson will be held personally liable for the 15% tax that must be paid over to SARS within 30 days after the amount is received by or accrued to the foreign entertainer or sportsperson.
The 15% withholding tax on foreign entertainers and sportspersons is a final tax on such payments received by or accrued to the foreign entertainer or sportsperson. It therefore follows that if any other income is received by or accrued to the foreign entertainer or sportsperson from a source within South Africa, only such other income is subject to income tax in South Africa. Amounts received by or accrued to foreign entertainers or sportspersons, which are subject to this 15% withholding tax does not have to be included in calculating their tax liability.
Any person who is primarily responsible for founding, organising or facilitating a specified activity in South Africa and who will be rewarded directly or indirectly for that function of founding, organising or facilitating, must notify SARS of the performance within 14 days of concluding the agreement and provide SARS with the details relating to the performance as may be required by SARS.
The 15% withholding tax on a foreign entertainer or sportsperson is not applicable to a foreign entertainer or sportsperson who is employed by a South African employer, and who is physically present in South Africa for more than 183 days in aggregate in a 12-month period that begins or ends in a year of assessment in which the specified activity is exercised. In these circumstances the foreign entertainer and sportsperson has to pay income tax on the same basis as a resident, that is, at the prescribed rate of income tax, which may require the submission of an income tax return. In these circumstances no withholding tax needs to be deducted. Such payments, made by the South African employer to the foreign entertainer or sportsperson (employee), are regarded as remuneration, which is subject to income tax in South Africa by way of employees’ tax deducted by the South African employer.
Capital Gains Tax (CGT)
Non-residents are only subject to CGT on the following categories of assets:
- Immovable property or any interest or right of whatever nature of the non-resident individual to or in immovable property situated in South Africa. Examples include a flat, house, farm, or vacant land.
- Equity shares in a company when 80% or more of the market value of those equity shares, is attributable directly or indirectly to immovable property in South Africa.
- A vested interest in a trust if 80% or more of the market value of that vested interest is directly or indirectly attributable to immovable property in South Africa.
- The assets of any permanent establishment of a non-resident in South Africa.
Estate duty is charged upon the dutiable amount of the worldwide estate of every person who dies on or after 1 April 1955. The estate is however limited in the case of a non-resident (a natural person not ordinarily resident in South Africa) by the exclusion of foreign assets of persons not ordinarily resident in South Africa. The residence status of a deceased estate follows the residence status of the deceased person at the time of his or her death. Property which is excluded from the estate of a deceased person who was not ordinarily resident in South Africa at the date of his or her death are as follow—
- Any right in immovable property situated outside South Africa;
- Any right in movable property physically situated outside South Africa;
- Any debt not recoverable or right of action not enforceable in a South African Court;
- Any goodwill, licence, patent, design, trade mark, copyright or other similar right not registered or enforceable in South Africa or attached to any trade, business or profession in South Africa;
- Any stocks or shares held by the deceased in a body corporate which is not a company;
- Any stocks or shares held by the deceased in a company, provided any transfer whereby any change of ownership in such stocks or shares is recorded is not required to be registered in South Africa;
- Any rights to income produced by or proceeds derived from any property referred to in the last four mentioned bullets above.
For more information on the tax treatment of non-residents in South Africa, refer to the guides listed below.