Proposal to Amend Foreign Employment Income Tax Exemption

Currently, if a South African resident is employed and works abroad for more than 183 days of which 60 days are continuous within a 12 month period, the employment income earned is exempt from tax in South Africa. This is commonly called the section 10(1)(o) exemption. Following the Budget announced on 22 February, this is now under attack.
If a South African tax resident meets the section 10(1)(o) requirements and is employed in a no tax payable jurisdiction e.g. Dubai, then their foreign employment income will benefit from double non-taxation. National Treasury is of the view that this is excessively generous and has proposed that the exemption be adjusted so that employment income will only be exempt from tax in South Africa if it is subject to tax in the foreign country.
There are currently over 100,000 South Africans living and working in Dubai who could be affected by this latest proposal, but there could be relief via the tax treaty between South Africa and United Arab Emirates (“UAE”). The treaty came into effect on 23 November 2016.
Many South Africans leave to pursue work opportunities abroad, but they have the intention to return after a few years. As they have not formally emigrated, they will still be regarded as “ordinarily resident” for tax purposes and subject to tax on their worldwide income. However, the South African working abroad could be considered tax resident of UAE, subject to procedure. If this is the case, one needs to refer to the tax treaty to determine which State has taxing rights, as the South African will now be regarded at tax resident in both the UAE and South Africa.
As an individual can only be tax resident of one of the countries, the dual residency tiebreaker rules within the treaty are applied. The first test deems an individual to be tax resident only where they have a permanent home and if they have a permanent home in both countries, then where their centre of vital interest (economic and family interest) is situated.
Owing to the treaty, many South Africans working in Dubai may have ceased to be tax residents of South Africa, which protects them from the current proposal. However, by their ceasing to be South African tax residents, other tax consequences occur, such as a deemed disposal on all their worldwide assets, except fixed property held in South Africa. This is commonly known as “exit taxes”.
This area of tax is complex and it is very important that advice is sought. Each individual’s facts and circumstances are different and must be reviewed on a case by case basis.