Tax Treatment of Foreign Income in South Africa: An Overview

South Africa’s tax system is based on a residency-based tax system. This means that South African residents are taxed on their worldwide income, while non-residents are only taxed on their South African sourced income.

However, there are specific rules and exemptions that apply to foreign income.

It is essential to understand these rules to ensure compliance with South African tax laws.

In this article, we will take a deep dive into the tax treatment of foreign income in South Africa, covering everything from what qualifies as foreign income, how it is taxed, and what the implications are for taxpayers.

What is foreign income?

Foreign income is income received from sources outside of South Africa. This can include income earned from employment, business, or investments in other countries.

Examples of foreign income include salary earned from a foreign employer, profits earned from a foreign business, and interest earned on investments held overseas.

Residency for tax purposes

Determining residency for tax purposes is a critical first step in understanding how foreign income is taxed in South Africa.

A person is considered a tax resident in South Africa if they meet one of the following criteria:

They are physically present in South Africa for more than 183 days in a tax year.
They have a “permanent place of residence” in South Africa.
They meet the requirements of the “ordinarily resident” test.

Taxation of foreign employment income

Foreign employment income is generally subject to tax in South Africa, regardless of where the services are performed.

However, there are exemptions and deductions available to reduce the tax liability.

For example, if a South African resident is employed by a foreign employer for more than 183 days in a year and meets certain conditions, they may qualify for a foreign employment income exemption.

Taxation of foreign business income

Foreign business income earned by South African residents is generally taxed in South Africa.

This can include income earned by a South African resident through a foreign branch or subsidiary. However, there are deductions available for expenses incurred in earning the foreign income, and foreign tax credits can be claimed to reduce the tax liability.

Taxation of foreign investment income

Foreign investment income, such as interest, dividends, and capital gains, is generally taxable in South Africa for residents.

However, there are various exemptions and deductions available, such as the foreign dividends exemption, which allows for certain foreign dividends to be received tax-free.

Foreign tax credits

To avoid double taxation on foreign income, South Africa has provisions for foreign tax credits.

This means that if a South African resident pays tax on foreign income in the foreign country, they can claim a credit for that tax against their South African tax liability.

Exemptions and deductions

There are various exemptions and deductions available to South African residents to reduce the tax liability on foreign income.

For example, the foreign income tax exemption allows for a portion of foreign income to be exempt from tax in South Africa, while deductions are available for expenses incurred in earning the foreign income.