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The new rules around citizenship, exchange control and tax residency

The new rules around citizenship, exchange control and tax residency: part 1

The concept of “emigration”, as recognised by the Financial Surveillance Department of the South African Reserve Bank (SARB), has been phased out with effect 1 March 2021. This has created even more confusion around citizenship, exchange control (excon) residency and tax residency, and how the changes will affect different individuals and access to retirement funds.

Carla Rossouw, tax lead, and Jaya Leibowitz, senior legal adviser, at Allan Gray have done a great job at explaining the difference between these three concepts and the impact of each on access to investments. In the interests of clarity and understanding, we have made only minimal cuts to their article. This is information you may want to bookmark for future reference. Part 2 will follow.

1. Citizenship

A citizen is a legally recognised national of a state or commonwealth. In South Africa, you can be afforded citizenship in three ways: by birth, through descent or via naturalisation.

In South Africa, citizenship is a concept that exists independently of tax and excon residency. For example, if your family emigrated to another country when you were a child, you could have retained your South African citizenship, but you will not be a South African tax or excon resident.

As a South African citizen, you do not need to live in the Republic to retain your citizenship status. South Africa also allows its citizens to hold dual citizenship.

2. Exchange control residency

The concept of residency for excon purposes is distinct from tax residency.

South Africa’s excon regulations govern the amount of money you may take out of the country and the circumstances under which you may take money abroad.

Before 1 March 2021

The regulations previously created distinctions between the following individuals:

  • Resident: A person who has taken up permanent residence in South Africa.
  • Resident temporarily abroad: A resident who has departed from South Africa to a country outside the Common Monetary Area (CMA) (South Africa, Namibia, Lesotho, Eswatini) with no intention of taking up permanent residence in another country. This excludes residents who are abroad on holiday or business travel and includes residents who are living and working abroad.
  • Emigrant: A South African resident who is leaving or has left South Africa to take up permanent residence in a country outside the CMA.
  • Non-resident: A person whose normal place of residence is outside the CMA.

An individual or family unit intending to take up permanent residence outside of the CMA could apply to the SARB for financial emigration (or “formal emigration”), which would entitle the individual to take a specified amount of money out of South Africa via an emigrant capital account (also referred to as a rand-blocked account). A resident who followed this process would become an emigrant for excon purposes and would eventually become a non-resident.

After 1 March 2021

The concept of emigration for excon purposes has now been phased out and the process of controlling an emigrant’s remaining assets via an emigrant capital account has fallen away.

Moving forward, if you leave South Africa to take up permanent residence in another country, you will have to inform the South African Revenue Service (Sars) that you have ceased to be a South African tax resident. If you cease to be a South African tax resident, you will have to request a tax compliance status (TCS) for “emigration” from Sars before being permitted to transfer any funds abroad.

The SARB and Sars have confirmed that if you submitted an emigration application to an authorised dealer before 1 March 2021, you will be able to follow the previous emigration process.

Declaring yourself a resident temporarily abroad

If you are living outside of South Africa on a temporary basis (that is, you intend to return to South Africa eventually), and you did not formally emigrate prior to 1 March 2021, you should consider declaring yourself a “resident temporarily abroad”.

The SARB allows individuals who have declared themselves as residents temporarily abroad to receive pension and annuity payments directly into their foreign bank accounts, as well as monetary gifts and loans from other South African excon residents. These payments are permitted in addition to the annual R1 million single discretionary allowance (SDA), to which all South African residents (excluding those who have ceased to be South African tax residents) are entitled, and the R10m foreign capital allowance (FCA).

3. Tax residency

Tax residency determines where you have to pay tax and how much tax you need to pay. The concept of tax residency is distinct from excon residency and citizenship. You could be a South African tax resident without being a South African citizen or excon resident.

Countries use different rules or tests to determine when a person is considered a tax resident. As a result, you may qualify as a tax resident in more than one country simultaneously and therefore be subject to tax in those countries. The Organisation for Economic Co-operation and Development has a website where most countries have set out their own tests for tax residency relating to individuals and legal entities.

How to determine whether you are a South African tax resident

You are classified as a South African tax resident if you are “ordinarily resident” in South Africa. According to case law, you are ordinarily resident in South Africa if it is the country to which you will, naturally and as a matter of course, return after your wanderings. In other words, it is your real home. You could remain ordinarily resident for tax purposes in South Africa even if you leave the country for a substantial period, if you intend to return to South Africa after your travels.

Your intention is a subjective matter, and if you claim to be ordinarily resident in a country, all your surrounding actions and circumstances must support this claim. Factors that will be evaluated include:

  • Your place of business and personal interests.
  • Your most fixed and settled place of residence.
  • Family and social relationships, schools, places of worship, social clubs.
  • Your habitual abode – that is, the place where you stay most often, measured over time.
  • Sars Interpretation Note 3 (Issue 2) sets out the list of factors that will be taken into account to determine whether an individual is ordinarily resident for tax purposes in South Africa.

If you are not ordinarily resident in South Africa, you will still be considered a South African tax resident during a particular tax year if you have been inside South Africa for more than 91 days in that tax year, and each of the five preceding tax years, as well as for a total of more than 915 days in the preceding five years. This is referred to as the “physical presence” test.

For more details, please refer to Sars Interpretation Note 4 (Issue 5).

Tax residency in more than one country

While it is possible to be a tax resident in more than one country, you can only be ordinarily resident for tax purposes in one country at a time.

Most countries enter into double taxation agreements (DTAs), which are contracts entered into between two tax jurisdictions to avoid double taxation of the same amount earned by the same person.

A DTA will help you to determine the country in which you are ordinarily resident and will explain which country is allowed to tax particular income, and which country must provide tax relief for the tax already paid in the other country.

South Africa has negotiated separate DTAs with each foreign jurisdiction, so the rules that apply will vary from country to country.

Sars maintains a list on their website of all the DTAs that they have concluded with other countries.

When will you cease to be a South African tax resident?

You will cease to be a South African tax resident when you are no longer ordinarily resident in South Africa and are no longer a resident based on the physical presence test.

If you intend to become ordinarily resident in another country, you can confirm this intention with Sars.

You will also have to remain physically outside of the country for a continuous period of at least 330 full days to ensure that you are no longer a resident based on the physical presence test.

Since the 2018 tax year, the Sars personal income tax return has included a question that specifically asks whether you have “ceased to be a resident of South Africa during this year of assessment”. The date on which you ceased to be a tax resident will need to be provided when completing this information.

Alternatively, you can inform Sars by submitting the “Declaration: Cease to be a Tax Resident” form, available via the Sars website, along with the relevant documents which Sars may require to support your declaration.

It is important to be aware of the potential tax implications of ceasing to be a South African tax resident. The Income Tax Act treats you as having disposed of all your assets (excluding South African fixed property and shares in South African companies that are property rich), which may result in a capital gains tax liability. This is often referred to as an “exit charge”.

However, it is important to note that when your South African tax residency ends, it does not necessarily mean that you no longer have South African tax obligations. You are still required to complete a Sars tax return for any South African source income that you receive, and you may be subject to South African tax on that income, depending on the rules set out in the applicable DTA.

Part 2 will look at the new rules that govern taking assets out of the country if you cease to be a tax resident from 1 March 2021.

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