Earning Income Abroad

The tagline for Dubai seems to be that it is a “Tax Haven” as employees can pay no taxes on their salary and companies are not required to pay any corporate income or capital gains tax. Not paying any tax is a very topical discussion amongst friends and colleagues alike.

The term “Tax Haven” is a description that was given to countries by the Organization for Economic Co-operation and Development (OECD) and its member countries. One of the tasks of the OECD is to look at taxation in various regions and make recommendations in this regard. The problem with this is that the countries they recommend on or refer to as “Tax Havens” are not always member countries to the OECD. In most instances third world countries with limited resources to build a strong banking system or simply countries that have limited if no natural resources and is required to be innovative (by no means illegal) in ensuring it grows its economy, mostly by luring investors by providing them with conducive investment conditions.

However, in my opinion, Dubai is far from being a Tax Haven. Yes, it levies no corporate, income, or capital gains tax as it simply does not have to. Why is it that if all other first-world countries levy taxes and Dubai does not it is seen as a tax haven and branded as such? Dubai has the ability to not levy any taxes which in turn is beneficial to you and me. Also bearing in mind that a reduced tax bill is to some extent offset by higher living costs and funding of your Dubai lifestyle. Let’s be honest, for the average person, it will cost you more to live in Dubai than it will cost in South Africa, relatively speaking.

Your requirement to pay “or not to pay” taxation is however not as simple as it may seem. Simply moving abroad and thinking that you have eliminated your responsibility for paying taxes in South African is far from the reality. South African residents are taxed on their worldwide income which means that no matter where you generate your earnings it has to be included in your South Africa Tax return. This is the same for companies however this matter is made more complex as corporates need to assess the effect of place of effective management and anti-avoidance rules. The taxpayer, therefore, has to manage his / her tax affairs extremely well ensuring that all potential pitfalls have been covered.

In recent months SARS has placed a strong emphasis on the taxation relating to residents working abroad, companies doing business internationally, as well as changes to the legislation making certain non-compliance a criminal offense.

The details below focus mainly on individuals working abroad. Taxation relating to corporates has been discussed in various other articles.

Residency vs Citizenship and the effect on taxation

Citizenship or residency do not dictate where you pay taxes.

You are not able to obtain citizenship in Dubai as this is a privilege kept for Emirates. Non-Emirates are only allowed to obtain residency for periods of 2 up to 10 years, depending on the specific residency application.

You will therefore not be able to formally emigrate from your country of residence to the UAE as you cannot become a citizen of the UAE. In other words, you cannot formally financially emigrate from South Africa to the UAE. Fortunately, this does not mean that you have to remain a tax-paying resident of South Africa as there is a difference between citizenship and tax residency.

One, therefore, has to carefully consider the difference between citizenship and tax residency. In most cases, these go hand in hand but it may very well be that you are a citizen of one country but required to pay taxes in another. It may therefore be the case that you remain a South African citizen but taxing rights are allocated to the UAE, in terms of the Double Taxation Agreement, allowing you to be taxed in the UAE and not in South Africa. If this however does not apply to you, you will be taxed in South Africa based on your salary received in the UAE, even if you reside and work in the UAE.

Tax residency

Tax residency dictates where you will be taxed and on what earnings.

As you are unable to formally emigrate to Dubai and renounce your South African citizenship you will have to look very closely at the requirements of tax residency and whether you are able to shift this to Dubai.

As indicated above it is quite possible to be a citizen of South Africa but to be a tax resident in Dubai. It is also possible to be residing in Dubai but still be a tax resident, and be taxed, in South Africa.

By definition as per the Income Tax Act of South Africa: A natural person is a tax resident in South Africa if:

  • That person is an ordinary resident in South Africa; or
  • Has passed the physical presence test.

Ordinary Resident

Looking at the first requirement: You are a resident for South African tax purposes:

  • If you are ordinarily resident in South Africa; or….

Ordinarily, ‘resident’ is not defined in the legislation however this is defined and laid out in numerous court cases on various occasions in the past. In short, a person is ordinarily resident of a country if that person will return to that country subsequent to their wanderings abroad. Secondly, your way of life, possessions, and family connection are all indicators of the fact that you will or will not return to the country to which you are deemed to be ordinarily resident. The determination is a question of fact and each case must be determined on its own merits.

In addition to the courts, SARS has also issued guidance in this regard in Interpretation note 3 in which it lists a number of guiding factors, however not exhaustive, to help determine a persons’ circumstances. These includes:

  • Your intention;
  • The natural person’s most fixed and settled place of residence;
  • The natural person’s habitual abode, that is, the place where that person stays most often, and his or her present habits and mode of life;
  • The place of business and personal interests of the natural person and his or her family;
  • Employment and economic factors;
  • The status of the individual in the Republic and in other countries, for example, whether he or she is an immigrant and what the work permit periods and conditions are;
  • The location of the natural person’s personal belongings;
  • The natural person’s nationality;
  • Family and social relations (for example, schools, places of worship and sports or social clubs);
  • Political, cultural, or other activities;
  • That natural person’s application for permanent residence or citizenship
  • Periods abroad, purpose and nature of visits
  • Frequency of and reasons for visits

For a taxpayer to prove that he /she is not a resident for taxation purposes in South Africa the taxpayer must objectively and on the basis of evidence proof that these factors do not point to South Africa.

Physical Presence Test

For the second requirement (if you are not ordinarily resident) the person must be physically present in the Republic for a period or periods exceeding –

  • 91 days in aggregate during the year of assessment under consideration;
  • 91 days in aggregate during each of the five years of assessment preceding the year of assessment under consideration; and
  • 915 days in aggregate during the five preceding years of assessment.

A natural person who complies with all the requirements referred to above is a resident of the Republic, for tax purposes, for the year under consideration.

A natural person, who is resident by virtue of the physical presence test, ceases to be a resident when that person is physically outside the Republic for a continuous period of at least 330 full days. Residence will cease from the day that the person left the Republic.

General application of your tax residency status

Being either an ordinary resident or adhering to the requirements of the physical presence test means that you will be taxed in South Africa on your worldwide income, even if you are outside the country at the time of earning your income or salary.

Income taxes

As noted above, the Income Tax Act of South Africa taxes a tax resident on his / her worldwide income. Therefore, by residing in Dubai and earning a salary from an employer whilst you are there does not mean that you will not pay tax on your earnings in South Africa. Even if you are in Dubai for a full year or more you are not automatically exempted from paying taxes in South Africa if you are classified as a South African tax resident.

Income tax exemption Section 10(1)(o)

If you are a tax resident in South Africa and you are earning a salary in Dubai your full salary should be included in your South African tax return. Section 10(1)(o) which previously provided full exemption from paying taxes in South Africa, if certain criteria were met, was changed to limit this exemption to R1,25m per annum. In other word’s if you earn a salary above this threshold you will be paying taxes on the excess amount in South Africa.

This has a profound effect on the finances of an individual who previously was able to pay no taxes and now has to subject his / her salary to taxation.

By way of an example:

  • You are an engineer by profession. Let’s assume that you adhere to the requirement of being an ordinary resident for South African taxation purposes (refer above for an indication of being ordinarily resident).
  • Recently your employment position in South Africa has been adversely affected by the Covid 19 pandemic and you have decided to take up a position in Dubai as a practicing engineer with a local company. Your remuneration will be ZAR 3m.

Before the amended section 10(1)(o) you would have been able to apply this exemption, subject to adhering to the requirements as per the Act, resulting in you paying no income tax in the country where you are an ordinary resident being South Africa.

Due to recent changes you will now have to include your full salary as part of your worldwide income and are then able to apply the section 10(1)(o) exemption of ZAR1.25m effectively being taxed on ZAR1.75m. You will therefore be taxed on the full amount above this threshold.

Is it possible to pay no Taxes?

Paying no taxes is indeed very possible. You will however have to prove to SARS that you have emigrated for taxation purposes or the taxing rights should be allocated to Dubai based on the Double Taxation Agreement

Article 4 of the Double Taxation Agreement allocates taxing rights to either authority and if you do not want to pay taxes in South Africa then you will have to prove that, in terms of article 4 of this agreement, you are indeed a tax resident in Dubai.

In short, the country which can prove that the following requirements have been met will be allocated the taxing rights:

  1. Domicile, residence, place of effective management is in that country (in the event that both countries can apply this then)
  2. Where your permanent home is available or where the persons personal and economic relations are closer
  3. The country in which the person has a habitual abode

These requirements are fairly similar to those of being ordinarily resident. Therefore, if you cannot prove that your ordinary residence is in Dubai then you will most probably not be able to prove that taxing rights should be in Dubai based on this Agreement.

As part of the evidence, you will have to obtain a Tax Residency Certificate from the relevant authority in Dubai. This document indicates or proves that you are a tax resident in Dubai. Along with this and the other requirements which have to be met, you may be well on your way to paying no taxes at all.

Remember this, the onus of proving that you do not have to pay taxes in South Africa lies with the taxpayer. This proof should be objective and substance over form will prevail.

The reality

The reality is that if you leave South Africa to go and work in Dubai you will most probably remain a South African tax resident which will result in you being taxed on your worldwide income.

Not taking this into account and being found out by SARS can be a very costly mistake as your non-compliance will most definitely carry with it penalties, fines, and interest payable to SARS.

Not paying any taxes and being a tax resident of Dubai requires careful planning as you would have to ensure that you are not ordinarily resident or adhere to the physical presence test in South Africa. This is a big commitment and very similar to formal emigration.

To Go or to Stay

Taxes should not be the determining factor as to whether you want to spread your wings and explore other countries. Taxes should however not be forgotten about and should be very well managed. The principles mentioned in this article refer mainly to Dubai, however, they can be applied equally to other jurisdictions.