Tax consequences of being a digital nomad or working remotely for South African companies
With many South Africans either becoming digital nomads or working for South African companies while living abroad, there are key tax implications that must be considered.
Over the past couple of years, remote working has become increasingly prevalent as many employees have shifted from working in their employer’s office to working from home, at least part of the time.
There is also evidence of a trend towards South African companies employing staff to work in other countries for a number of reasons. This may be because the South African employer has actively recruited employees who live abroad or, as is becoming increasingly popular, it may be because South African employees are relocating permanently to another country while still working for a South African employer.
Each of these scenarios can involve different tax consequences depending on the facts, but there are certain key issues that arise when employees of a South African employer company work remotely abroad.
Corporate income tax considerations
Where an employee of a South African company works abroad, a key consideration from a corporate income tax perspective is whether the activities of that employee in the foreign country could create a taxable presence for the employer company in that foreign country.
This would most likely be the case if:
- The employer company is regarded as carrying on a trade or business in the foreign country through a permanent establishment situated in that country (in which case the profits of the South African employer that are attributable to that permanent establishment may be taxed there); or
- The employer company may be regarded as a tax resident in that country, usually due to its place of effective management shifting to that jurisdiction (in which case it may be fully taxable there).
Determining whether such a taxable presence may arise for the South African employer company would typically depend on the role and activities of the employee, the domestic law of the country concerned as well as the provisions of any double tax treaty concluded between South Africa and the foreign country, if applicable.
Employees’ tax withholding obligations
An important practical issue for both the South African employer company and the employee is whether, and in which jurisdiction/s, employees’ tax withholding obligations may arise.
In terms of South African tax legislation, unless an employer has obtained a hardship directive from the South African Revenue Service (SARS) to deduct a lower amount of employees’ tax, they must deduct South African employees’ tax at the applicable marginal rate from the full amount of remuneration paid to employees. Employees must submit South African income tax returns.
The relevant foreign country position must also be considered. This often depends on the location and duration for which services are rendered by the employee, as well as the provisions of any double tax treaty concluded between South Africa and the foreign country, if applicable.
Where the relevant foreign country also requires withholding of employees’ tax (usually accompanied by a local filing obligation for both the employer and employee), this would result in a dual withholding obligation for the employer.
The employee may be entitled to:
- A refund in respect of amounts that are not taxable in South Africa (typically where the employee has rendered services abroad and is either a non-resident or qualifies for relief under an applicable agreement for the avoidance of double taxation concluded between South Africa and the relevant jurisdiction);
- A foreign earnings’ exemption in respect of remuneration for services rendered abroad, provided they spend the requisite amount of time abroad; and/or
- A credit for foreign taxes paid on earnings that are also taxable in South Africa.
However, unless the employer has applied for and obtained a hardship directive from SARS (see above), this can only be claimed when the employee submits their annual South African income tax return.
This may result in a temporary cash-flow issue for the employee and it is therefore preferable to apply for a hardship directive, where possible.
SA tax residence for employees relocating abroad
In respect of South Africans relocating abroad, it will be necessary to determine whether they will cease to be South African tax residents as a result of their relocation and, if so, when this will occur.
This is a factual enquiry based on various factors and will depend on the individual’s personal circumstances.
If it is determined that the employee will cease to be tax resident in South Africa, there are various deemed disposal and timing rules that apply. Any resultant tax liability would need to be determined and settled by way of a provisional tax payment.
The employee must also make certain disclosures in their annual income tax return and file such returns timeously.
Home office expenses
Employees working from home who are taxable in South Africa may qualify for a tax deduction in respect of certain expenses they incur in relation to their home office, as long as they meet certain requirements.
To qualify for the tax deduction, among other things, the home office must be specifically equipped for work purposes. In addition, the employee must work more than 50% of the time in the home office (unless they earn mainly commission or other variable income), and the home office must be regularly and exclusively used for work purposes.
The expenses that are deductible include a portion of the costs relating to the home office premises and depreciation on capital assets. Certain other costs, such as internet expenses, may not be claimed.
The onus rests on taxpayers to prove that they are entitled to any tax deductions that they may claim. Adequate supporting documentation is required to prove that the relevant requirements in this regard have been met. SARS has indicated that many home office deduction claims have been disallowed because of inadequate supporting documentation.
Employees also should bear in mind that working from home and claiming a deduction for home office expenses may affect the extent to which they are entitled to rely on the so-called “primary residence exclusion” from capital gains tax when they eventually sell their home.
The above are some of the key tax issues that must be carefully thought through when considering remote working arrangements. In addition to these and other (employer and employee) tax considerations, there are various employment laws, exchange control and other regulatory issues that may arise, both locally and in the relevant offshore jurisdiction. Most of these issues are fact-specific and require bespoke legal analysis.
As the frequency of remote working outside South Africa increases, South African employers will need to bear these complexities in mind when assessing and implementing remote working arrangements. DM
Jenny Klein is principal associate in the tax department at ENSafrica. Megan Stuart-Steer is senior associate in the tax department at ENSafrica.
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