JOHANNESBURG – A new double-tax agreement between South Africa and the United Arab Emirates (UAE) may offer reprieve for South Africans working in Dubai if National Treasury’s proposal to amend the exemption on foreign employment income applicable to South African tax residents is introduced.
The proposal, which could see South African tax residents who work in places with favourable tax jurisdictions for more than 183 days a year and who currently don’t pay tax in these jurisdictions or in South Africa, taxed in South Africa in future (subject to conditions), has been a major source of worry for some locals working abroad.
Cor Kraamwinkel, international tax partner at PwC, says the tax treaty between South Africa and the United Arab Emirates came into force in November last year. A tax treaty generally aims to eliminate double taxation.
He says a South African working and living in Dubai will most likely have been sponsored by a local employer and will have entered Dubai on a sponsored work visa. Subject to procedure, such a visa may entitle the person to a UAE tax residency certificate. Many South Africans working in Dubai may have left South Africa with the intention to work in Dubai for a few years, but to return to South Africa in due course and for tax purposes they will still be regarded as a South African tax resident. Due to the UAE tax residency certificate, they will however also be a tax resident in the UAE.
South African tax law regards individuals as South African tax residents if they are “ordinarily resident” in the country, unless they are exclusive tax residents of another country for purposes of a double-tax agreement, he adds.
Where an individual qualifies for South African as well as UAE tax residency status, the treaty between South Africa and the UAE will trigger the residency tiebreaker, as an individual can only be a tax resident of one of the countries for treaty purposes. To determine the tax residency status of the individual, the dual residency tiebreaker test will be applied. Some of the considerations that will be taken into account are the location of the individual’s permanent home and where his or her centre of vital interest (effectively economic and family interests) is situated.
Due to the new treaty, many South Africans working in Dubai may cease to be South African tax residents. Should the proposed amendment of the foreign employment income-tax exemption in respect of South African tax residents come into effect, such individuals will no longer be impacted, Kraamwinkel says.
“So whether or not you earn foreign income – as long as it is not sourced from South Africa (which it will not be because you work and live in Dubai) – you will not be subject to tax in South Africa. So this proposed change in law may not have such a widespread impact as what at first sight may have been apparent.
“What the impact would be is that you’ve left the South African tax net, and you would need to pay your exit taxes, if any. So you are deemed to dispose of whatever it is and file your return.”
While there are an estimated 120 000 South Africans living and working in Dubai, Kraamwinkel cautions that people should not jump to conclusions about their tax residency status – the implications will need to be determined by examining the specific facts and circumstances on a case-by-case basis.
Some individuals working in Dubai may still be regarded as South African tax residents, in which case they may still be impacted by the proposed foreign employment income-tax exemption amendment if it is introduced in future.