South African digital nomads, like many people who adopt their lifestyle, frequently wonder, “Do I need to pay taxes back to my home country?”
As is the case with every question concerning new working trends like digital nomadism, there is no clear answer yet.
For digital nomads, the process of determining with which government and country you must comply with tax filing requirements is hard even under the best of circumstances.
To take full advantage of the many opportunities available to digital nomads, however, you should familiarize yourself with South African taxation in order to plan for your financial future before leaving the country.
In this article, we’ll try to clear up some of the confusion around taxation for South African digital nomads by highlighting what you need to know to fulfill your annual tax responsibilities in a timely and accurate manner.
However, this is not intended as formal tax advice, and some of the details may have changed since it was originally published.
Although we will try our best to relay all the relevant information as it has been communicated by the South African government as of the article’s publishing date, readers are encouraged to seek the advice of a qualified tax attorney or financial advisor for more information and clarification.
If you want to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (email@example.com) or use WhatsApp (+44-7393-450-837).
What is a digital nomad?
Someone who works online while living in a country other than their own is called a “digital nomad.”
They may come from all walks of life, but they tend to be younger and more tech-savvy than the average traditional workforce.
Unlike regular employees, digital nomads typically don’t have set work hours or days off. They can instead choose their own hours and location for work. Many people today live a nomadic lifestyle, going from country to country and working online as they go.
While “digital nomad” has been around since the late 1990s, it wasn’t until lately that the concept caught on with travelers.
For the purposes of clarity, what we will refer to as a digital nomad for the sake of this article is both a frequent traveler and a worker with a remote job.
The development of this way of life, popularized by internet celebrities and content creators, was stymied until numerous countries went into lockdown due to the pandemic. Around 15 million people are now considered to be digital nomads.
Freelancers and entrepreneurs in the digital nomad economy conduct their business and find clients online.
Because the cost of living in their adopted country is typically lower than in their home country, digital nomads are able to enjoy the perks of expat life while receiving the same salary they would receive at home.
There are several advantages to living as a digital nomad. One of the benefits of working remotely is having the flexibility to set your own hours, work from any location, and wear whatever you like.
You can work whenever and wherever suits you best, without having to worry about a commute or a dress requirement.
And as a result of digital nomads reinvesting their earnings in their home economies, several nations are becoming increasingly accepting of this lifestyle. Nomads who meet specific financial requirements can apply for special digital nomad visas, which function as residency permits.
Since digital nomads tend to book long-term accommodations, this bodes well for the tourism and hospitality industries, which took the biggest hit from the pandemic.
Being a digital nomad means, in essence, having no fixed residence. This is why it is so challenging to file your taxes as a South African digital nomad.
What should I know about digital nomad taxes?
As the digital revolution spreads like a virus, many workers fantasize about becoming “digital nomads,” free to travel the world in search of breathtaking real-world backdrops with which to divert their coworkers during video chats.
However, long-term digital nomads may put themselves and their companies in a tax predicament. Companies that permit their staff to work abroad may unwittingly establish a “taxable presence” in those nations.
The lessons of COVID-19 have shown us that working from a dedicated office space is no longer a need. The concept of a digital nomad is not new, but the allure of “working near the waves” as you travel from island to island is what has made it so popular, especially among professionals.
However, the tax implications of this modern approach to employment are hardly discussed.
But it is worth noting from an employer standpoint. An employer that implements a “work from anywhere policy” regarding their employees runs the danger of setting up shop in a foreign country, a situation that must be properly monitored and controlled.
Despite the advances in technology, fundamental tax concepts have not changed and must always be taken into account while dealing with international tax legislation.
This is not to imply that there is no room for digital nomads; on the contrary, the ability to work remotely is rapidly becoming a priority for any prospective employee.
Simply put, this means establishing a financial foothold in a foreign jurisdiction for tax purposes.
Whether or not an employer’s taxable presence is generated in another nation due to an employee’s presence there is just one of many factors to examine in the analysis and eventual answer to whether or not a tax presence is created.
If this is the case, the company is effectively opening a “branch” in the country in question and must pay corporate income tax on any profits attributable to that branch. Both the VAT test and the VAT test’s effects are possible.
In most countries, a person is considered to have established a taxable presence if they have spent more than 183 days in that country within a 12-month period.
The principle upon which double tax treaties are based is that if an individual is physically present in a country and performs services for that country, then the individual’s income is derived in that country.
In the absence of a double tax treaty, a person may be subject to taxation in both the country of origin and the country of residence, but may be eligible to receive a credit for taxes already paid. This may be an administrative nightmare that puts a damper on your beach time.
To avoid establishing a tax presence, a “digital nomad” would need to carefully manage their duties.
Because they won’t be undertaking any substantive work in that country and won’t be in a position to negotiate or commit their firm to any contract, the risks for low-level employees with basic or administrative responsibilities are often modest.
In this scenario, the word “administrative functions” may need to be reevaluated by the company.
The border begins to blur and a substantial risk develops for senior personnel or administrative staff with contract bargaining rights. The risk of creating a permanent establishment for the employer is greatly increased if the employee has the ability to negotiate or enter into contracts or has a major effect in any of these areas.
Workers that fit this description should be allowed time off instead of being given the option to work from home in front of a virtual ocean. After all, it’s probably best for their sanity if they don’t have to work while on vacation in a far-flung locale.
Do South African digital nomads need to pay taxes back to South Africa?
In essence, yes. Citizens of South Africa who are working and living abroad may be subject to the South Africa Expat Tax. This essentially means that they must pay taxes in both South Africa and their host country on any money they earn abroad.
Many South Africans living and working overseas feel they are being unfairly targeted by the law since its inception, but as of now, this is the reality.
If you are a South African expat or are thinking about leaving the country as a South African digital nomad, you should research the new expat tax and its potential effects on your finances.
Any South African working abroad should be aware of and take steps to mitigate the effects of the tax legislation since it begins for the fiscal years 2022 and 2023.
Below we have provided a comprehensive overview and detailed update on South African Tax and tax on foreign job income, particularly for expats, as the 2022/2023 SARS tax eFiling season is now open and well underway.
The Taxation Laws Amendment Bill of 2017 includes the adopted change to the Income Tax Act. Despite this, many South Africans living abroad continue to hold the mistaken belief that they are immune to the law since it has not been properly altered.
The new tax regime is now law and will have an impact on all South Africans living and working overseas who are also South African tax residents.
The long-held position of many former South African residents—”I will just submit a nil tax return”—is no longer viable. South African expats have not felt the full force of the new law until the 2022/2023 tax year, which has just begun.
Any salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument, or allowance received by or accruing to any employee during any year of assessment in respect of services rendered outside the Republic that does not exceed one million, two hundred and fifty thousand Rand shall be exempt from normal tax under the new legislation.
The amendment mandates that South African tax residents working abroad who earn more than R1.25 million in employment income must pay South African tax at a rate of up to 45%.
The R1.25 million thresholds may appear high, but they do not take into account expats’ allowances, commissions, bonuses, gratuities, or fringe perks. In essence, it is your total worldwide foreign profits, not just your declared basic income or basic package.
South Africans are frequently offered relocation packages that include accommodation, security, and transportation to and from their overseas employment sites. Especially in high-cost locations, where many expats choose to live, these perks can quickly push a person’s net worth above the R1.25m level.
There are essentially two schools of thinking when it comes to expatriate alternatives (not counting the “head in the sand” strategy). These alternatives depend on the goals of the departing South African.
The South African diaspora is currently plagued by widespread misconceptions. The problem is perpetuated by service providers who use scare tactics and prioritize their own interests and bottom lines over those of the expat community as a whole. Here are the two false promises:
Migrating capital through financial emigration
To begin, there is no such thing as a universal solution. There are prerequisites to completing the procedure of Financial Emigration (“FE”).
Financial emigration was the process of becoming a non-resident in South Africa for the purposes of tax and exchange control.
The procedure was designed to guarantee that a non-resident complied with all exchange control laws for non-residents and was a non-resident for tax purposes under South Africa’s Income Tax Act No.58 of 1962.
It used to be widely believed that engaging in Financial Emigration automatically resulted in a loss of tax residency. This was not the case, as the decision to no longer be regarded a tax resident in South Africa through Financial Emigration was an affirmative one.
The process involved obtaining a tax clearance certificate from SARS, a letter of good standing from the SARB, and changing the South African account to a blocked account. This procedure was extremely time-consuming, intricate, and expensive.
When it comes to breaking your tax residency status, SARS no longer recognizes Financial Emigration as of 1 March 2021.
As a result, the strategy of “Financial Emigration” to avoid paying taxes on money earned abroad is useless. Financial institutions continue to incorrectly advise foreigners that this is the best option, which is unfortunate.
Double taxation agreements
Certain persons will benefit more than others from the use of a Double Taxation Agreement (“DTA”).
It should be kept in mind that yearly DTA relief applications are necessary. This does not ensure that the taxpayer will be able to keep all of their international income free of South African taxation. Even if you are granted a DTA residency certificate, you must still submit a return to SARS.
One must ensure that the DTA’s contents are appropriate and that the DTA has been set up correctly because DTA agreements vary between South Africa and the country in which one resides.
Only foreign nationals living and working in a country that has signed a DTA with South Africa would be eligible for these benefits.
A South African expat may not be completely free from paying taxes or filing a tax return even if a DTA exists between his or her home country and the host country.
Each piece of evidence and situation calls for its own analysis. It’s also not quite clear what it takes to qualify as a tax resident with SARS vs what it takes to receive a residency certificate in the host country.
Even if you have a residency certificate, you may still be considered a tax resident of South Africa.
Before discussing the pros and cons of each option, it’s important to emphasize that no matter what they choose, South Africans living overseas should familiarize themselves with the tax legislation that now and potentially impacts them.
South Africa and the other country or territory involved in the DTA must have agreed and signed the international treaty. Only if a DTA has been established between your country and South Africa can you take use of its benefits.
Importantly, in order to use the DTA to exempt their foreign earned income from South African taxation, one must first satisfy all of the requirements of the DTA. Declaring foreign income in South Africa and applying for exemption is a yearly process.
If this happens, SARS would likely initiate a verification or audit during which the taxpayer will be required to provide evidence of non-residency consistent with Article 4 of the DTA.
Obtaining a tax residency certificate from the foreign jurisdiction is not required by SARS, but it is recommended.
Such a certificate will often say that the individual is a tax resident of the foreign jurisdiction for purposes of the DTA. When required, this certificate would be submitted to SARS. In addition, a considered disposal must be completed in such situations.
Should you apply for a DTA?
Applying for a DTA eliminates the need to go through South Africa’s cumbersome and time-consuming permanent process.
This means that an expat or a digital nomad is free to act on whenever they desire, so long as they check that their actions are consistent with the DTA’s standards for tax-free treatment of their foreign income in South Africa.
It’s not particularly difficult to go through this procedure, but the paperwork involved can be a pain. This procedure must be repeated annually as well.
As a less permanent alternative, DTAs allow South Africans working abroad to avoid paying taxes on their overseas earnings without having to undo any paperwork they already filled out before leaving the country.
The fact that DTAs are agreements between governments raises some serious ethical questions. The DTA could lose its force if relations between the countries deteriorate or if certain norms or clauses are changed.
Since applying a DTA to your circumstances is an annual process, you will need to convince SARS every year that you are not a tax resident of South Africa for the upcoming assessment year in accordance with the applicable DTA.
This is a drawback because keeping track of your tax residency status year after year and proving it to SARS can become an administrative nightmare.
In addition, a tax residency certificate from the country where you are paying taxes must typically be presented to SARS to confirm you meet the criteria of a DTA. This may appear straightforward, but in practice, it’s not.
There can be quite severe regulations to receive such a certificate in a country, and the process can take up to two days of your time in the UAE, for example, or you can find a service provider that will do this for you.
What’s more worrisome is that not all nations have a standard way to issue or even issue such a certificate.
This certificate is required annually in some countries for a substantial fee charged by service providers. As a result, there may be much greater long-term consequences than those associated with Financial Emigration.
In order to be designated a tax resident of a nation other than South Africa, one must meet the standards outlined in a DTA. Therefore, you should pay close attention to these standards and maintain compliance on an annual basis.
SARS’s new rules for expat retirement and pension funds
In the past, South Africans needed to be 55 or older to access their retirement annuities or pension savings, and they also needed a tax clearance certificate from SARS and approval from the SA Reserve Bank in order to do so.
The SARB process of financial emigration will be phased down beginning March 1, 2021, according to a statement released by the National Treasury.
These changes prompted a review of whether or not individuals could withdraw their retirement income upon emigration, and Treasury has reaffirmed that, beginning on 1 March 2021, retirement savings for South African expats will be locked up for three years.
After three years from the date on which the change in your tax resident status became official, it was declared in the 2021 budget address that retirement funds might be taken, prior to retirement.
After 1 March 2021 (when the proposed changes take effect), anyone who wants to withdraw money from South Africa will need to prove they have not been a resident for the last three years according to one of the two South African residency tests.
To avoid a three-year lock-in period, expats who wanted to sever their financial relations with SARS would have had to do so before March 1, 2021.
Ordinary Residency Test
Ordinary residence is a question of fact that must be addressed on a case-by-case basis in accordance with established rules of case law in order to determine whether or not a natural person is a resident of a certain country.
There can be no hard and fast regulations. The following shall be considered while determining whether or not a natural person is a permanent resident of the Republic:
- A desire to make the Republic of their home
- a person’s permanent and primary place of abode
- The place where a natural person typically resides, as well as that individual’s typical routine and current way of existence
- Location of business and private pursuits of an individual and his or her loved ones
- Economic and Employment Factors
- The individual’s immigration and citizenship status, as well as the terms and duration of any work permits held, both in the Republic and elsewhere.
- Where a living, breathing human being’s possessions are kept
- A person’s natural-born citizenship
- Community ties (including those to one’s home, place of worship, and extracurricular activities)
- Activism, whether political, cultural, or otherwise
- The petition for citizenship or permanent residency by that individual human being
- How long you were gone, where you went, and why
- How often they come into the country, and why
The aforementioned is not an all-inclusive list, but rather what are the likeliest factors that the South African government will consider.
Physical presence test
A natural person must meet the requirements by spending a minimum number of days in South Africa during the assessment year and the five years before to the assessment year in question.
A person must meet these requirements if they were physically present in the Republic for a total of more than the following numbers of days: 91 days in the year of assessment under consideration; 91 days in each of the five years of assessment preceding the year of assessment under consideration; 915 days in the five years preceding the year of assessment under consideration.
For tax purposes in the current year, a natural person is considered a resident of the Republic if he or she meets all of the criteria listed above.
Further, if someone satisfies the physical presence condition but then stays abroad for at least 330 consecutive days, they will no longer be considered a resident of South Africa as of the day they left.
What will happen if I change my tax residency as a digital nomad?
The SARS capital gains tax is triggered when you change your tax residency status. This is due to the fact that, apart from immovable property (a home, for example), you are presumed to have disposed of all your South African assets when you renounce your legal tax residency.
In other words, you need to have enough cash on hand to pay any capital gains tax bills that may come up if you change your tax residency. You may have to pay capital gains tax on the following types of assets:
- Unit trust investments (but not retirement savings, annuities, or other preservation funds) are an example of an investment.
- Gold or Krugerrands
- Assets that do not fall within the category of “immovable property”
In order to qualify for the exemption, residents must still meet the 183 and 60 full day standards.
With effect from years of assessment beginning on or after 1st March 2021, a tax resident will only be able to claim an exemption for the first R1.25 million of income generated from foreign work provided the “days” requirements are met.
Any salary or wages received abroad in excess of R1.25 million will be subject to taxation in South Africa in accordance with the standard tax rates in effect for the relevant assessment year.
How can I avoid paying taxes on money I earn while working abroad?
If any of the above apply to you, the next step is to submit an official request to SARS to have your tax residency status changed to that of a non-tax resident.
The first step is to register with SARS as a non-tax resident and submit the necessary paperwork. After changing your status and filing your first return as a non-tax resident, you will be exempt from filing a tax return with SARS on income earned outside of South Africa going forward and will be considered a non-tax resident of South Africa.
All money earned or received in South Africa must be reported to SARS, and this applies to both tax residents and non-residents. One such source of revenue could be rent collected from a South African property.
The DTA is still currently trying to settle the question of whether or not South Africans living abroad are tax residents of South Africa or the country to which they have emigrated.
However, if you find yourself in this ambiguous situation as a South African digital nomad, it may be exceedingly difficult to convince SARS that you are not a South African tax resident.
Making a formal application to SARS to modify your tax residency status to that of a non-tax resident (assuming you meet certain criteria) is the more effective and less administratively burdensome option for minimizing tax on foreign employment income.
It is crucial to comprehend the range of possibilities and the potential outcomes. Once one’s genuine goals have been determined, the next step is to compare the costs and benefits of the available solutions with the help of a legal tax opinion.
According to the Tax Administration Act, if a taxpayer acts in accordance with a tax opinion, the taxpayer is immune from penalties and interest assessed by SARS. Only a tax professional who is registered with SARS can issue a Tax Opinion.
Should you hire an expat financial advisor to help with South African digital nomad taxes?
Being a digital nomad has its advantages and disadvantages, and one of the latter is dealing with foreign tax issues. Here is where the assistance of an expat financial counselor may be of great value.
An expat financial advisor is a professional that specializes in assisting people with their financial needs while living overseas. They may help you with things like retirement and tax preparation, as well as general investment advice and planning for your financial future.
If you are concerned about the intricacies of digital nomad taxes, or even the impact of currency fluctuations on your investments while living abroad, consult with an expat financial counselor.
Depending on the location of your home and the amenities it provides, they will also recommend the appropriate amount of cash reserves to keep on hand at all times (to cover unexpected expenses).
It can be helpful to work with an expat financial consultant to ensure that your financial needs are being met.
They provide assistance in optimizing monetary reserves. Working with a qualified financial advisor while living abroad can help you save for retirement, manage your investments, and minimize your tax liability. Having worked with other expatriates before, this can be a huge benefit.
They assist with the finer points of your financial management. Budgeting and debt management are only two examples of the services offered by financial advisors that people typically struggle to perform on their own due to a lack of knowledge or experience.
Investment risk can also be mitigated with the assistance of an expat financial counselor. Investment risk can be mitigated through diversification, which can be achieved with the assistance of a financial counselor.
Investing in multiple distinct asset classes (such as stocks, bonds, and real estate) reduces the risk of losing everything if the value of any one asset class drops.
They may also suggest investment vehicles that are suitable for an expat’s lifestyle, such as an offshore account or local investments that you are unfamiliar with.
Benefits and drawbacks of working with an expat financial planner
There are a number of benefits to working with an expat financial advisor if you need assistance managing your finances.
To begin with, they can assist you in optimizing your savings. A competent advisor will examine your financial situation carefully, learn about your long-term objectives, and advise you on whether or not certain risks are worthwhile.
They can assist you navigate the murky waters of the investment world and ensure that your money is being put to good use.
If you’re interested in investing in stocks and shares or real estate, having a professional on hand will give you piece of mind that all bases are covered.
A financial advisor’s expertise extends to recommending safe investments that will help your money grow without exposing you to undue danger.
Finding the correct assets, preparing for retirement, and dealing with local institutions are all tasks that an expat financial advisor can help with. They can also help push you to contribute to a retirement fund or in opening investment accounts for future heirs.
Furthermore, having someone who understands how much money needs saving each month and year can make all the difference in attaining success or failure in accomplishing certain goals such as saving for a house or buying furnishings.
Among an expat financial advisor’s primary roles is to educate their clients on the differences between the tax systems of their home country and their country of residence.
Failure to comply with tax regulations can result in severe fines, making tax compliance a top priority for foreigners. To avoid any potential tax issues in either their home country or their new country of residency, an expat financial counselor can be of great assistance.
They can also advise expats on how to comply with local regulations regarding the disclosure of overseas bank and investment accounts.
They can advise expats on how to meet their tax responsibilities in their host nation, including determining taxable income, qualifying for any applicable deductions, and learning about any applicable tax treaties.
Expats who work with a financial advisor can make the most of their tax situation. They can also advise foreigners on how to arrange their finances in a way that reduces their tax burden.
This is especially useful as expats face unique challenges when it comes to things like retirement planning, particularly when taking tax implications into account.
Last but not least, if you’re working overseas, it’s crucial to have someone who is familiar with both local and international regulations handling your tax payments.
However, there are a few disadvantages to working with an international financial advisor.
An expat financial counselor may not be the best choice for an expat who is uncomfortable discussing money matters with a stranger.
If an expat is living on what would be considered a poor salary in a foreign country, he or she may not be able to afford the fees levied by some of the larger financial services companies. This is where personal financial planners can be a better option.
Last but not least, keep in mind that an expat financial counselor may not have as much knowledge about the local economy as a local one.
An expat financial advisor may be useful if you want guidance on investing in real estate or equities, but they may not be the ideal choice if you need information on the local banking system or other financial institutions.
It can be difficult and time-consuming for expats and digital nomads to learn about and follow foreign tax regulations.
An expat financial advisor can ease worries about taxation by explaining the rules and helping clients comply with them. This can free expats from the potential financial and legal repercussions of noncompliance, allowing them to focus on their job and personal lives.
Basically, an expat financial advisor helps ease the burden of expats’ international tax problems, digital nomad or not. They can aid expats in navigating the tax code, making the most of tax breaks, saving for retirement, staying in compliance, and getting some much-needed peace of mind.
Working with an expat financial advisor can help you stay within the bounds of tax rules and make the most of your money while enjoying the perks of the digital nomad lifestyle.
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