Tax considerations for expatriate employees rendering services from South Africa

Tax considerations relevant to an inbound expatriate employee rendering services from South Africa

It is important to understand the tax consequences relevant to an inbound expatriate employee rendering services from South Africa (“SA”), whether through an employment assignment undertaken in SA, or by mutual agreement with a foreign employer for personal reasons. This understanding is essential for ensuring compliance with tax regulations and enabling the implementation of effective tax planning.

This article provides an overview of the various aspects of the South African tax system that may impact foreign employers and expatriate employees, as it relates to services rendered in SA; including tax residency considerations, employees’ tax and income tax considerations, and corporate tax matters.

High-level tax considerations for an expatriate employee rendering services from South Africa

Tax residency status

An individual’s liability for South African income tax is determined with reference to their residence status. Accordingly, an individual may either be a resident or a non-resident for South African income tax purposes. This distinction is important to note as residents are subject to tax on their worldwide income and gains (subject to certain exclusions), while non-residents are taxed on their South African sourced income only. Therefore, an expatriate employee must seek to confirm their residence status immediately upon arrival in SA, as this will have a bearing on how their employment earnings will be taxed.  

Income tax

Remuneration, relating to time spent working in SA, may be taxable in the hands of the expatriate employee. In SA, the marginal tax rates are progressive, ranging from 18% to 45%, depending on the level of taxable income. If the expatriate employee is confirmed to be a non-resident, then relief from the taxation of the South African sourced employment income may be sought in terms of a Double Taxation Agreement (“DTA”) between SA and another jurisdiction, subject to the fulfilment of certain requirements. 
The expatriate employee may also be required to register as a South African taxpayer and file income tax returns. The registration and filings will be based on the requirements as prescribed by the South African Revenue Service (“SARS”).

Retirement fund contributions

SA has no compulsory or national retirement fund scheme. Generally speaking, employees may become members of an employer retirement fund scheme, should the employer participate in such fund. For an expatriate employee, it is important to note that contributions made to either a local or foreign retirement fund will be subject to very specific tax treatment and deductibility provisions in SA.

High-level tax considerations for a foreign employer having an expatriate employee rendering services from South Africa

Permanent establishment

The concept of a permanent establishment (PE) is a fundamental aspect of international tax law, as it establishes the right to tax the business profits of non-resident entities in the country where business activities are carried out. There are several factors that must be considered when evaluating an entity’s PE exposure. More specifically, the risk of establishing a PE in SA is significantly increased when a foreign employer has an expatriate employee providing services from SA, for the benefit of that foreign employer. This is due to the fact that the employment activities of the expatriate employee may be perceived as establishing a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Place of effective management

The resident definition, in respect of a person, other than a natural person, includes an entity incorporated, established or formed in SA, or which has its place of effective management (“POEM”) in SA. Accordingly, a company’s POEM is the place where key management and commercial decisions, that are necessary for the conduct of the business as a whole, are in substance made. 
It is worth noting that the level of seniority and the functions performed by the expatriate employee may have a bearing on the foreign employer’s POEM status, thus giving rise to potential income tax consequences, for the foreign employer, in SA.

Employees’ tax withholding obligations

Every non-resident employer who conducts business through a PE in SA, including a representative employer, must withhold employees’ tax from an amount that the employer pays to the expatriate employee by way of remuneration unless SARS has granted authority to the contrary. Under certain circumstances, the fulfillment of this obligation may involve the establishment of a local shadow payroll. Failure to properly assess and comply with this obligation may result in harsh penalties being imposed by SARS.

Social security contributions

SA does not have a formal social security system in place. However, an employer is required to contribute towards the Skills Development Levy (“SDL”), the Unemployment Insurance Fund (“UIF”), and the Compensation for Occupational Injuries and Diseases Act Fund (“COIDA”).

SDL is levied at a rate of 1% of the total remuneration paid or payable by the employer. Similarly, all employers and employees are required to contribute to the UIF, each at a rate of 1% of the remuneration paid by the employer to the employee (i.e., 2% total contribution). The quantum of COIDA contributions, however, is determined with reference to the employer’s return of earnings and differs from industry to industry.

It is advisable to seek guidance from a tax professional, given the technical aspects that need to be meticulously evaluated, for both the foreign employer and the expatriate employee, when providing services from SA. This will assist in accurately assessing potential tax exposures and determining effective strategies for mitigation and management.

Lameez Wagner

Manager: Tax Advisory, Johannesburg