Part 1: South Africa And The USA—Citizenship-Based Taxation

There have been a number of suggestions in various blogs that South Africa is somehow taxing on the basis of citizenship. American citizens (whether by accident or design) are most sensitive to any discussion of “citizenship-based taxation”. After all, U.S. tax policies combined with FATCA (which is part of the Internal Revenue Code) are destroying the lives of those who have entered the U.S. tax system.

I recently received an email that asked:

They’re talking about SA expats, people who no longer live in SA, being taxed by SA. Like us, these people are residents and earners in countries other than their country of origin (and, I would assume, citizenship). If this is not CBT, on what basis are they being taxed? If SA is just wanting to expand its definition of tax residency on what basis do they feel they can apply this to someone who no longer lives in their country?

The short answer…

South Africa imposes “worldwide taxation” on those who are “tax residents” of South Africa. The rules for an individual to qualify as a “tax resident” of South Africa are here. South African “tax residency” is irrelevant to citizenship.

Under South African law a resident is defined by the Income Tax Act, 1962, as either an individual who meets the physical presence test or an individual who is ordinarily resident in South Africa under South African common law. Note the emphasis on “residence”. In all countries except the United States, physical presence is a necessary condition to be a “tax resident”.

The question is: What is meant by residence?

Ordinarily resident (a “facts and circumstances” test):

A person will be considered to be ordinarily resident in South Africa, if South Africa is the country to which that person will naturally and as a matter of course return to after his or her wanderings. It could be described as that person’s usual or principal residence, or his or her real home.

Physical presence test (based on objective facts):

Any natural person who is not ordinarily resident (common law concept) in South Africa at any time during the year of assessment but meets all three requirements of the physical presence test, will be treated as being a resident. To meet the requirements of the physical presence test that person must be physically present in South Africa for a period or periods exceeding –

  • 91 days in total during the year of assessment under consideration, as well as
  • 91 days in total during each of the five years of assessment preceding the year of assessment; and
  • 915 days in total during those five preceding years of assessment.

An individual who fails to meet any one of these three requirements will not satisfy the physical presencetest.

Note that the “physical presence” test is a “sufficient” but NOT a “necessary” condition for South African “tax residency”. One can be considered to be a “tax resident” of South Africa with physical presence that would NOT satisfy the “physical presence” test, but would satisfy the “ordinarily resident” test.

Three ways to NOT be a South Africa “tax resident”

If the person is not ordinarily resident, does not meet the requirements of the physical presence test or is deemed to be exclusively a resident of another country under an agreement for the avoidance of double taxation, that person will be seen as a non-resident.

Where any person that is a resident ceases to be a resident during a year of assessment, that person must be regarded as not being a resident from the day on which that person ceases to be a resident.

South Africa “tax residents” are subject to “worldwide” and NOT “territorial” taxation!

Why all the commotion? Is this significantly different from other countries?

First, note that the South African definition of “tax residency” is irrelevant to citizenship. That said, it is likely that most South African “tax residents” happen to be South African citizens.

Second, note that South African tax residency can be terminated pursuant to the treaty “tie breaker” rules that may be part of various South Africa tax treaties. For example the South Africa U.S. tax treaty includes the usual tax treaty tie breaker (Article 4) which reads (for the full text of the treaty see below):

2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his status shall be determined as follows:

a) he shall be deemed to be a resident of the State in which he has a permanenthome available to him; if he has a permanent home available to him in both States, heshall be deemed to be a resident of the State with which his personal and economicrelations are closer (centre of vital interests)

b) if the State in which he has his centre of vital interests cannot be determined, orif he does not have a permanent home available to him in either State, he shall be deemedto be a resident of the State in which he has an habitual abode;

c) if he has an habitual abode in both States or in neither of them, he shall bedeemed to be a resident of the State of which he is a national;

d) if he is a national of both States or of neither of them, the competent authoritiesof the Contracting States shall settle the question by mutual agreement.

Practical application:

A South African citizen who was a “tax resident” of South Africa and who was living in the United States as a “U.S. tax resident”, and had a “permanent home” available to him ONLY in the United States, would NOT be considered to be a “tax resident” of South Africa. This shows that South Africa does NOT have “citizenship-based taxation”. Of course a U.S. citizen living in South Africa will always be a U.S. tax citizen. He cannot use the tax treaty “tie breaker” to end his U.S. “tax residency”. (This is the result of the “savings clause” found in Article 1 of the treaty.)

A citizen of South Africa can always cease to be a “tax resident” of South Africa. This is because South Africa does not have “citizenship-based taxation”.

A citizen of the United States can never cease to be a U.S. “tax resident” by NOT residing in the U.S. This is because the United States has both “citizenship-based taxation” and a treaty “savings clause” which guarantees that U.S. citizens can never escape U.S. tax residency.

South Africa does NOT have “citizenship-based taxation”. It does have very minimal requirements to meet the test(s) for “tax residency”

Minimal requirements to meet the test for “physical presence” in South Africa

The point is that it’s very easy to be a “tax resident” of South Africa. You can live there for three months of the year and be “physically present”. That is neither a large number of days nor a high percentage of days. That said, it is possible for citizens of South Africa to NOT be “tax residents” of South Africa.

Minimal requirements to meet the test for “ordinary residence” in South Africa

Once one is “ordinarily resident” in South Africa, it becomes difficult to cease to be “ordinarily resident”. The easiest way to sever “ordinary residence” would be by using a “tax treaty tie breaker”. But as noted here:

South Africa has double tax agreements with Saudi Arabia and the United States of America. No such agreements exist between United Arab Emirates and South Africa. Generally, agreements for the avoidance of double taxation with another country stipulates that only the other country has a right to tax the income earned in the other country. Being physically domiciled in a host country does not automatically terminate the status of being `ordinarily resident for income tax purposes.

A brief history of South African tax residency will explain why this is newsworthy

1. On or around the year 2000, South Africa changed from a “territorial tax system” (only income from South African sources) was taxed to a system of “worldwide taxation”. South Africa “tax residents” were subject to “worldwide taxation”. One can imagine that this would be upsetting to South African “tax residents”.

2. The change to a system of “worldwide taxation” necessitated that there be a clear definition of South African “tax resident”. See the above discussion for how one is defined as a South African tax resident.

3. South African “tax residents” SUDDENLY became subject to tax on their “worldwide income”. But, there were certain exemptions. In fact, section 10(1)(o)(ii) of the Act excluded certain remuneration from “foreign employment” from the definition of “worldwide income”.

Section 10(1)(o)(ii) of the Act exempts from income tax:

“any remuneration as defined in paragraph 1 of the Fourth Schedule

(i) …

(ii) received by or accrued to any person during any year of assessment in respect of services rendered outside the Republic by that person for or on behalf of any employer, if that person was outside the Republic-

(aa) for a period or periods exceeding 183 full days in aggregate during any 12 months period commencing or ending during that year of assessment; and

(bb) for a continuous period exceeding 60 full days during that period of 12 months, and those services were rendered during that period or periods:

Provided that-

(A) for purposes of this subparagraph, a person who is in transit through the Republic between two places outside the Republic and who does not formally enter the Republic through a port of entry as defined in the Immigration Act,2002 (Act No. 13 of 2002), shall be deemed to be outside the Republic; and

(B) the provisions of this subparagraph shall not apply in respect of any remuneration derived in respect of the holding of any office or from services rendered for or on behalf of any employer, as contemplated in section 9(1)(e)”

This is the reason why foreign employment income was not subject to South African taxation.

4. In 2017 South Africa announced that it planned to end this exemption for foreign employment income. The exemption would be ended if the income was earned in a country that did NOT impose taxation on that income. As explained by one commentor:

The National Treasury announced taxation of South African expatriate employees, where no exemption under section 10(1)(o)(ii) will be allowed where there are not actual taxes paid in the host country.

“In other words, if you are a South African expat and living in a “tax-free” country such as Dubai or Qatar, you will now be taxed in South Africa on your income.

“Is this “in effect” the same as U.S. style “citizenship-based taxation”?

No, it’s not even close to the draconian rules of U.S. “citizenship-based taxation”. South African “tax residency” is based on a requirement of some degree of “physical presence” in South Africa. U.S. “citizenship-based taxation” does NOT and never has required any degree of “physical presence” in the United States. In fact, it’s an insult to South Africa to accuse the country of such draconian tax policies.

Is this (“in effect”) the same as how the United States taxes “Green Card” holders?

Yes. Green Card holders generally begin their “Green Card” years with a physical presence in the United States. Once they have a Green card, they are deemed to be resident in the United States until specific steps are taken to terminate their tax residency. (This was the issue in the Topsnik cases. A discussion of these cases is found here and here.)

It’s not the taxation of “worldwide income is unfair. It’s that it’s too difficult to cease to be “tax resident” of South Africa

Yes, it is using a definition of “tax resident” that allows one to be a “tax resident” of South Africa with very minimal ties to South Africa. Furthermore, employment in a country that does NOT have a tax treaty with South Africa will make it harder to break “tax residency” in South Africa. This combination of circumstances has prompted many people to suggest that South Africa is moving in the direction of “citizenship-based taxation”.

No, it’s not “citizenship-based taxation“. But, yes it’s extremely nasty!

By the way, it’s not easy to break “tax residency in Canada“. You may have to pay a “departure tax” to do so. Tax residency is NOT always the same thing as physical presence.

Have Questions? Contact John Richardson

The Reality of U.S. Citizenship Abroad

My name is John Richardson. I am a Toronto based lawyer – member of the Bar of Ontario. This means that, any counselling session you have with me will be governed by the rules of “lawyer client” privilege. This means that:

“What’s said in my office, stays in my office.”

The U.S. imposes complex rules and life restrictions on its citizens wherever they live. These restrictions are becoming more and more difficult for those U.S. citizens who choose to live outside the United States.

FATCA is the mechanism to enforce those “complex rules and life restrictions” on Americans abroad. As a result, many U.S. citizens abroad are renouncing their U.S. citizenship. Although this is very sad. It is also the reality.


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