I get more and more questions about tax residency in South Africa. For this reason, I decide to draft a full guide that discusses the topic.
Overall South Africa does have high taxes but there are ways to improve your tax setup and minimize your taxes.
Key Takeaways on Tax Residency in South Africa
- You will obtain tax residency in South Africa if you meet the ordinary residence test or the physical presence test
- One needs to register with the South African Revenue Service to obtain a tax number
- Personal income tax rates in South Africa are progressive and go up to 45%
- The same tax rates apply to investment income (e.g. dividends) but all kinds of corrections and exemptions apply
- For business there are also different regimes to lower your tax burden
- It’s imperative to structure your tax affairs properly before becoming a tax resident of South Africa
Taxes in South Africa
When we look at tax residency in South Africa, we are interested in the different taxes and rates that can apply. You find an overview of some important ones below.
South African Personal Income Tax
South Africa has progressive income tax rates for individuals.
So, the more money you make, the higher the tax rate.
You don’t pay any tax on the first ZAR 237.000 (around EUR 12.000). After that, the first tax bracket starts at 18%. The highest tax rate is 45% for income above ZAR 1.817.000 (around EUR 94.000).
So, if you are on a Western income, chances are big that you’ll pay a fair bit in income taxes.
Unlike in many countries, the progressive tax rates also apply to capital gains.
Nevertheless, you can utilize a correction mechanism to limit the tax consequences. You only need to include the capital gains for 40% in your taxable basis.
This also applies to capital gains on cryptocurrencies.
Dividend Tax South Africa
Just like capital gains, you generally also pay progressive taxes on dividend income. However, some corrections apply to this principle.
Taxes on dividends depend on two factors. First of all, you need to determine if the dividend comes from a South African company or from a foreign entity. Second, you’ll have to assess your participation in the company which pays the dividend.
If you receive a dividend from a South African company, the company will immediately withhold 20% in taxes. This is your final tax. So, you will receive 80% of the gross dividend and this is the amount you keep after taxes.
In case you receive dividends from a foreign company, the rules get a bit more complex.
If you receive a dividend from a foreign company in which you hold a participation of at least 10%, the dividend will be fully exempt from taxes. So taking money out of your company as a dividend could be a way to optimize your taxes.
In case you don’t meet this threshold, you will have to include the dividends in your taxable basis for the progressive income tax rates. Yet, you only need to include part of the dividend. You do this by applying a ratio of 25/45 (or 55,56%) to the gross dividend.
In addition, you can potentially deduct any taxes you paid abroad from your tax liability in South Africa via a tax credit.
After learning about the tax exemption for foreign dividends from companies where you meet the participation threshold, many people immediately come up with setups to maximize their tax savings.
Please note that South Africa has various rules in place in order to counter the abuse of foreign structures for the sole purpose of saving taxes. One example is the rules regarding permanent establishments.
Social Contributions with Tax Residency in South Africa
Furthermore, you will also need to pay social contributions on your professional income.
However, in South Africa both the employer and the employee only pay 1% in social contributions. Moreover, the contributions are only calculated on a salary up to ZAR 212.000 (around EUR 11.000). This keeps the contributions low.
Moreover, social contributions are optional for self-employed individuals.
Corporate Income Tax in South Africa
The statutory corporate tax rate in South Africa is 27%.
However, South Africa does have some particular regimes and tax rates for small businesses.
If your company’s revenue is less than ZAR 20 million (around EUR 1 million) and meets certain conditions, the following rates apply:
- Up to ZAR 96.000 (around EUR 5.000): 0%
- From ZAR 96.000 to 365.000 (around EUR 19.000): 7%
- From ZAR 365.000 to 550.000 (around EUR 28.500): 21%
- Above ZAR 550.000: 27%
Moreover, companies with a turnover of less than ZAR 1 million (around EUR 52.000) can pay a turnover tax. The rates range from 0% to 3% of your turnover.
Also in this case, different thresholds apply:
- Up to ZAR 335.000 (around EUR 17.500): 0%
- From ZAR 335.000 to 500.000 (around EUR 26.000): 1%
- From ZAR 500.000 to 750.000 (around EUR 39.000): 2%
- Above ZAR 750.000: 3%
The turnover tax doesn’t only replace income tax but also VAT.
You can’t qualify for the turnover tax if you offer certain services (e.g. consulting). Therefore, you should always double check upfront if you are eligible for this regime.
The aforementioned regimes for small business are accessible both to companies as well as sole proprietors / freelancers.
Requirements for Obtaining Tax Residency
You get tax residency in South Africa if you meet certain conditions. Basically, there are two ways in which you can qualify as a tax resident of South Africa.
Physical Presence Test
Many digital nomads know that a country could see them as a tax resident if they spend a certain amount of days in the country. We call this the days test.
South Africa has its own version of the test to determine if they consider you a tax resident. Therefore, you qualify as a tax resident if you spend the following time in South Africa:
- >91 days in the country during the current tax year;
- >91 days in South Africa during each of the previous 5 tax years;
- >915 days in total in South Africa during the previous 5 tax years.
You do need to meet all three of the conditions to qualify as a South African tax resident. In order to lose your tax residency under the physical presence test you need to stay out of the country for a continuous period of 330 days.
Important when assessing those conditions is to know that the tax year in South Africa runs from 1 March till 28 February.
The physical presence test is the most straightforward test to determine your tax residency in South Africa. However, it only applies if you don’t meet the ordinary residence test.
Ordinary Residence Test
The main test to determine tax residency in South Africa is the ordinary residence test.
There is no fixed definition of an ordinary resident of South Africa.
Therefore, the South African Revenue Service (SARS) takes into account various elements to determine your tax status under this test:
- Your most fixed or settled place of residence;
- Where your (close) family lives;
- What is the location of your assets;
- Which economic and financial ties to you have to South Africa;
- Frequency and duration of your visits.
These elements are just examples of criteria which SARS often looks at to apply the ordinary residence test.
Nevertheless, you can see that as a digital nomad you could meet the ordinary residence test if you go (back) to South Africa on a consistent basis. So, if you go to South Africa each year for a few months while you don’t have another home base or you aren’t a tax resident anywhere else, that could trigger tax residence in South Africa.
Consequences of Tax Residency in South Africa
If you obtain tax residency in South Africa you will need to report your worldwide income.
So, it doesn’t matter if you work for a South African company or for one abroad. You will need to report all of the income in South Africa.
Furthermore, this could also have (tax) consequences for any companies you are involved with outside of South Africa.
How to Become a Tax Resident in South Africa
First of all, you should meet the criteria to become a tax resident in South Africa.
You can do this by either meeting the ordinary residence test or the physical presence test. You can find the details for each of those tests in the paragraphs above.
If you know you will meet any of those criteria, you should proactively inform the South African Revenue Service and apply for a South African Tax Number.
SARS might ask you to provide some more information on your personal and professional situation to assess your request.
Your tax reference number will allow you to remain tax compliant and manage all of your tax filings.
Which tax filings you’ll have to take care off will depend on your situation. Tax filing requirements are different for employees, self-employed individuals and companies.
Don’t forget that double tax treaties can impact your tax status.
If you qualify as a tax resident of South Africa and another country at the same time according to their local legislation, the double tax treaty will determine where you will actually have to pay your income taxes. The other country will then have to exempt you from taxes.
Should You Become a Non-Tax Resident of South Africa?
If you are currently a tax resident of South Africa and you are not happy with the taxes you pay, you can try to become a non-tax resident.
Anyhow, if you have a business in South Africa, the business will remain subject to South African taxes. Therefore, you should reconsider your whole tax setup to optimize your taxes.
How is South Africa for Digital Nomads?
Many people see Cape Town as a dream destination to escape from the winter in Europe. It offers a great lifestyle and is in the ideal timezone.
However, there are many more places you explore in South Africa. There is the whole coastline which includes the famous Garden Route. Additionally, we can’t forget to mention the game reserves that offer safaris like you’ve never experienced before.
South Africa also wants to attract more digital nomads and also finally launched the digital nomad visa South Africa.
Work With Me
If you want to discuss how to optimize your tax setup, you can reach out to me.
We can discuss how to structure your taxes if you get tax residency in South Africa or we can explore other opportunities which might suit you better!
