South Africa: Taxation of South African residents working for foreign companies

Peter Dachs, ENS - Taxand

South African companies are increasingly looking to global expansion to build their capabilities and expand their operations into foreign jurisdictions.

Where South African residents serve on the boards of foreign companies and render services to foreign entities, they often do so in terms of split employment contracts in respect of their services rendered within and outside of South Africa. In addition to the remuneration for these services, they may also receive directors' fees for services rendered to the boards.

South Africa taxes the world-wide income of its residents. The remuneration derived by a South African resident for services rendered in a foreign jurisdiction would be subject to South African income tax, unless he or she would qualify for the so-called "foreign earnings exemption" contained in section 10(1)(o)(ii) of the Income Tax Act.

This provision exempts from tax in South Africa any form of remuneration received by or accrued to any employee in respect of services rendered outside South Africa for or on behalf of any employer (that is a South African employer or a foreign employer), provided that the employee rendered services outside South Africa

• For a period or periods exceeding 183 full days in aggregate during any period of 12 months; and
• For a continuous period exceeding 60 full days during that period of 12 months.

A South African resident who qualifies for the foreign earnings exemption will therefore be exempt from tax in South Africa in respect of any remuneration received for services rendered in the foreign jurisdiction.

The executives mentioned above often do not qualify for the foreign earnings exemption because they do not meet the days' requirements. An executive who does not qualify for the foreign earnings exemption and is not able to rely on the provisions of a double taxation treaty for relief from foreign taxes, may claim a foreign tax credit for any foreign taxes paid in respect of this remuneration. The foreign tax credit will be limited to the South African tax attributable to the foreign income.

Peter Dachs (pdachs@ens.co.za)
ENS – Taxand
Tel: +27 21 410 2500
Website: www.ens.co.za

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