Financial emigration is the formal process whereby a South African becomes classified as a non-resident of the country for tax and exchange control purposes. The process is conducted through the South African Revenue Service (SARS) and the South African Reserve Bank (SARB). Financial emigration concludes your financial affairs from a South African point of view and if done correctly, you will not be liable to pay any SA tax on your foreign remuneration.
Change in SA tax legislation – From 1 March 2020, SA tax residents working abroad could be required to pay tax of up to 45% on any foreign remuneration which exceeds R1m. Many South Africans expatriates see financial emigration as the only way to avoid this potential tax liability. This is however a misconception and financial emigration could be a costly exercise and unnecessary exercise for some.
Background to SA tax system – In 2001 SA changed from a source-based system of taxation to a residence basis of taxation. To be classified a resident depends on two principle tests, namely the ordinary residence and the physical presence test. An individual must ensure that neither of these tests applies in order to not fall within the definition of a resident.
Double tax agreements – Since tax systems differ from country to country, there is a chance that an individual could be taxed twice. This possibility of double taxation is, however, often alleviated by tax relief contained in various Double Taxation Agreements (DTAs). It is important to note that an individual will not fall within the definition of tax resident if they are deemed to be exclusively a tax resident of another country with which South Africa has a DTA.
Expert financial emigration end-to-end solution – As indicated above, financial emigration can be a complicated wide field that includes legal, accounting, tax and financial services. It is for this reason that the investment specialists at Vista Wealth Management (Vista) have teamed up with Advanced Professional Services (APS) who consists of experienced lawyers, accountants and tax specialists. We believe that together we can provide an expert financial emigration end-to-end solution.
The Vista/APS Financial Emigration service firstly includes assistance in determining if financial emigration is the correct solution:
- Determining your tax residency
- Tax treaties in place between SA and foreign country in question
- Exchange control residence versus tax residence
- Tax advice on financial emigration and if tax clearance certificate is required
- Foreign pension schemes could be tax efficient without requiring financial emigration
If financial emigration turns out to be the correct solution, the high level steps involved with the process will include:
- Completion of SARB’s MP336(b) application for foreign capital allowance
- Completion of Tax Clearance Certificate Application Form IT21(a)
- Managing tax clearance process with SARS
- Managing process of changing status to non-residence with SARB
- Opening of a non-resident bank account
- Assistance and advice on disinvestment in assets and investments
- Foreign currency conversion
- Assistance and advice with foreign investment opportunities
Advantages of financial emigration could include:
- Above changes in tax legislation will not impact you
- You have access to your Retirement Annuity and pension savings before the age of 55
- You’re protected from the current political uncertainty and potential Moody’s rating downgrade
- You’re protected from the local Rand currency fluctuations
- SA exchange control rules do not apply anymore
- Regulation 28 of the Pension Fund Act limiting your offshore exposure does not apply to anymore
Negatives with financial emigration could include:
- Your tax affairs with SARS must be in order, financial emigration will not fix your tax compliance issue in retrospect
- Expats who have outstanding tax returns in SA will have to get it up to date
- Changing your tax residence has a capital gains tax implication which is, at a maximum, levied at an effective rate of 18% on worldwide asset gains
- Should an expatriate return to SA within five years after financial emigration, SARS will deem it a failed emigration and all taxes for that period will be liable
- You cannot retire in South Africa
Unknowns about Financial emigration:
- You do not have to give up your SA citizenship and you can retain your passport
- You can hold and even acquire more assets in SA post financial emigration, but you can be taxed on income from South African assets.
- You can still earn passive income in SA from for example investments, services and rent
- You will be required to submit tax returns for SA sourced income
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