Financial Emigration or Double Taxation Agreement?

By Jonty Leon, Attorney and Financial Emigration Legal Manager and Claudia Aires, Head of
Financial Emigration at Financial Emigration.

Financial emigration or Double Taxation Agreement?There is a lot of misinformation circulating in the South African expatriate community, perpetuated by service providers using scare tactics and promoting what will benefit them over what is best for expats at large. Here are some facts.

When it comes to choosing financial emigration (FE) or a Double Taxation Agreement (DTA), expatriates must understand that there can never be a one-size-fits-all approach. FE requires certain criteria to be met before one can undergo the process, while a DTA will only be suitable for certain individuals.

Unfortunately, many service providers use scare tactics and promote what will benefit them over what is best for their clients who are considering their options. Therefore, it is crucial that South Africans abroad should thoroughly understand how the tax law currently affects them ‒ and perhaps more so, how the law will affect them once the tax law amendment becomes effective on 1 March 2020.

Advantages of Financial Emigration

  • This process is arguably the simplest, cleanest and most compliant way of ceasing tax residency in South Africa. It is a formal process through the South African Revenue Service and the South African Reserve Bank.
  • The main requirement is that you have a serious intention not to return to South Africa on a permanent basis.
  • It ensures that your taxes are fully compliant, and that SARS decides on your tax residency status which they cannot later reverse. You can come back to South Africa and reverse this process yourself without worrying that SARS may attempt to tax you on those years you had been financially emigrated.

Disadvantages of Financial Emigration

  • Your South African bank account changes status from a resident account to a non-resident account, also commonly known as a “blocked asset” or “capital” account. This account is fully functional except that it no longer allows for internet banking transactions. This is done for security reasons and thus makes the account one of the safest accounts to be transacting with. Although safe, expats generally rely on being able to transact online.
  • You are no longer permitted to hold a credit card in South Africa or have personal loans. Thus, these will need to be settled before the FE process.
  • Once the FE process is completed, expats must ensure they do not fall foul of the physical presence test, which is entrenched in South African tax law. Thus, expats must limit their time in South Africa to less than 91 days a year to ensure they do not become tax residents of South Africa once again.

Advantages of a Double Taxation Agreement

  • South Africa does not have DTAs with all countries, so this will only apply to an expat who is living/working in a country that has concluded such an agreement with South Africa.
  • You do not need to undergo any formal process in South Africa, so it leaves you with the opportunity to make decisions on a whim if you ensures that you still fulfil the requirements of the DTA to be non-tax-resident in South Africa.
  • DTAs are also a less permanent solution, meaning that a person working abroad can apply for it and be fully exempt from paying taxes in South Africa on their foreign income. They will also not have to reverse any formal process if they do return to South Africa.

Disadvantages of a Double Taxation Agreement

  • Applying for a DTA is a yearly process, which can become an administrative nightmare.
  • To prove you fit the bill in terms of a DTA, SARS often requires a tax residency certificate from the country you are paying taxes in, and this can be a complex process. For instance, in the UAE, obtaining such a certificate can mean taking two full days of your time to go through the process.
  • Being a less permanent solution, DTAs are also therefore a riskier solution. Nothing is final when dealing with DTAs due to the yearly nature of the proof you need to provide. However, a way to solidify this is by obtaining a legal tax opinion confirming your non-residency in terms of the DTA.

Which is better?

Each client is different, and their specific circumstances must be considered when choosing the best legal avenue to go down. Everyone will firstly need to see if they fit the requirements of the options available, and if they do, they will need to weigh up the pros and cons of each.

Either way, you can be protected ‒ the new expatriate tax law does not have to be the straw that breaks the camel’s back.

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