National Treasury has withdrawn its proposal to remove the tax exemption on foreign pensions received by South African tax residents, following extensive public opposition and warnings from tax experts about the potential economic impact.
Treasury has indicated that although the amendment will not proceed for now, the issue remains under review and may be revisited after a further round of consultation.
The proposal was contained in the draft Taxation Laws Amendment Bill (TLAB) published in August. It sought to delete section 10(1)(gC)(ii) of the Income Tax Act, which currently exempts pensions, annuities, and lump-sum payments from foreign sources from local taxation.
During a meeting of the National Assembly’s Standing Committee on Finance on Tuesday, Treasury’s deputy director-general for tax and financial sector policy, Chris Axelson, said the amendment has been withdrawn. He said Treasury had anticipated resistance to the change and would now take a more consultative approach before deciding on any future steps.
Axelson explained that the exemption was originally intended to be temporary, and Treasury had always planned to review it. Although the proposal has been withdrawn, he said Treasury remains concerned about the sustainability of the current framework.
“Treasury is still concerned that South Africa is giving up its taxing rights on foreign pensions and that the law creates instances of double non-taxation,” he said.
“Government will now start a new consultative process with stakeholders to find a balanced approach that addresses these concerns while also protecting retirees and investors.”
Treasury’s main concern has been that, in certain circumstances, neither South Africa nor the foreign country taxes pension income, creating double non-taxation. This can occur when South Africa waives its taxing rights under a double taxation agreement (DTA) and the other country also chooses not to tax the pension.
Under the withdrawn proposal, which would have taken effect from 1 March 2026 for years of assessment beginning on or after that date, South Africa would have acquired the right to tax any lump sum, pension, or annuity received by or accrued to a South African tax resident from a foreign source – except where the income derived from a social security system or where the relevant DTA gave exclusive taxing rights to the foreign jurisdiction.
Double non-taxation
Axelson provided examples of how double non-taxation could arise under existing arrangements. In cases where a South African tax resident receives a private pension from a country such as France or Germany, those pensions are taxed in the foreign country. However, if the DTA gives South Africa the right to tax the income but the domestic exemption overrides this, the result is that the income is not taxed in either jurisdiction.
In other situations, such as where the foreign tax rate is higher, a shift in taxing rights to South Africa could result in a lower tax burden for the taxpayer and a corresponding gain for the South African fiscus.
He noted that the effect of any change would depend on the specific provisions of the applicable DTA. Where an agreement gave the foreign jurisdiction sole taxing rights, the proposed amendment would not have altered the tax outcome. But where South Africa held the taxing right and the exemption prevented its application, the removal of the exemption would have had a significant impact.
Axelson said the goal was to balance the protection of South Africa’s taxing rights under DTAs with the complex tax treatment of retirement income across different countries, while recognising the economic contributions made by expatriates and foreign retirees living in South Africa.
He acknowledged that the proposed change would have represented a significant shift in policy, and the government would explore ways to mitigate its impact if it was re-introduced.
“The government will initiate a renewed consultative process with stakeholders to identify a balanced approach that both addresses the stakeholder concerns raised and aligns with the government’s commitment to prevent double non-taxation,” Axelson said.
Impact on expats and foreign retirees
The amendment would have affected South Africans who had worked abroad, returning expatriates, and foreign nationals retiring in South Africa.
Stakeholders warned that the removal of the exemption could discourage skilled professionals and retirees from settling in the country and could undermine confidence in South Africa’s tax system. Many argued that the proposal lacked sufficient data and analysis to justify its potential economic consequences.
Critics of the proposal pointed out that retirees nearing or already in retirement had made long-term financial decisions on the assumption that the foreign pension exemption would remain in place. Removing it abruptly, they argued, would be unfair and could leave many individuals in financial distress.
They also warned that South Africa’s attractiveness as a retirement destination could be compromised, given the role foreign retirees play in the domestic economy through investment and consumption.
Treasury has reiterated that the issue is not closed and that further engagement will take place with industry bodies, tax experts, and affected groups. The aim, Axelson said, is to develop a fair and sustainable framework that protects both the country’s tax base and the financial stability of retirees.
