In a post-pandemic world, more South Africans are ditching the office for a laptop lifestyle, either working for SA companies from overseas or striking out on their own as digital nomads. This new way of working is freeing and flexible, but it can also lead to some serious tax headaches. Whether you’re a South African company with employees living abroad or an individual working remotely for a local firm, there are tax rules you need to be aware of. Every situation is different, but there are some common issues that crop up when working remotely across borders.
Let’s break down the basics and figure out what you need to know about digital nomad taxes.
Tax implications of working remotely from another country
Remote work tax implications for employers
When a South African company has employees working remotely overseas, a big question arises: could the company end up paying tax in that foreign country? This can happen if the company is seen as doing business there.
This usually happens in two ways:
- Setting up shop: If the company is considered to have a permanent base in the foreign country, like an office or a team, it might owe tax on profits made there.
- Moving the boss: If the company’s top decision-makers move to the foreign country, the company itself might be seen as based there for tax purposes.
Whether or not this happens depends on what the employee does, the tax laws of the foreign country, and any tax treaties between South Africa and that country.
Employees’ tax withholding obligations – withholding tax on foreign services
Figuring out who pays tax and where can be tricky for both South African companies and their employees working overseas. South African law says companies must usually withhold tax from their employees’ paycheques and send it to the South African Revenue Service (SARS). However, if a South African employee lives and works abroad remotely, things get more complicated.
The country where the South African employee is working remotely might also want a piece of the tax pie. This means the company might need to withhold tax in two places. This can be tough on the employee, who might have to wait to get their money back, causing cash flow problems.
In such a case, a South African employee working remotely may be entitled to:
- A refund on amounts not taxable in South Africa (usually where the employee has delivered services abroad, and is either a non-resident for tax purposes, or qualifies for tax relief in terms of a Double Taxation Agreement between South Africa and the relevant host tax jurisdiction.)
- Tax exemption in the form of the foreign employment income exemption on remuneration for services rendered abroad, as long as the individual meets the time-based requirements.
- A tax credit for taxes paid in a foreign country on earnings also taxable in South Africa.
However, unless the employer has applied for and obtained a hardship directive from SARS, this can only be claimed when the employee submits their annual South African income tax return. South Africans working abroad must submit a tax return annually, if they still qualify as tax residents.
Read more: A comprehensive guide to the SARS foreign income tax exemption for South Africans working abroad.
What is a hardship directive and what tax implications does it have for working remotely from another country?
South African tax legislation requires an employer to deduct from South African employees’ tax from the total amount of income paid to employees, at the relevant marginal rate. By obtaining a hardship directive from SARS, it is possible to deduct a lower amount of tax from the individual, which can provide some relief.
How does tax residency impact South African employees relocating abroad?
In respect of South Africans moving abroad for work, it must be decided whether they will cease to be South African tax residents because of their relocation, and if so, when this will take effect. Ceasing South African tax residency is essentially a factual enquiry that examines both objective and subjective factors. It depends on the individual’s personal circumstances, and is tested by SARS using the ordinarily resident test, or the physically present test.
If the individual ceases South African tax residency, they become a non-resident for tax purposes, which means that they will only be taxed on their income sourced in South Africa. However, before this can happen, the individual might need to settle an exit tax bill with SARS.
Until the individual becomes a non-resident for tax purposes, they can make use of the foreign employment income exemption, provided they meet the requirements to do so. In terms of this exemption, up to R1.25 million of foreign income can be excluded from their South African tax return.
Read more:
- South African expat tax explained – maximising foreign income and minimising tax burdens.
- How to handle your final South African tax return as an emigrating resident.
Tax deductions for remote workers and digital nomads
South Africans working remotely who are taxable in South Africa must make certain disclosures in their annual income tax return and file their returns on time.
Tax deductions for home office expenses
To qualify, the home office must be a dedicated workspace, not just a dining table. The individual must also generally need to work from home more than half the time (unless earning mostly commission). It is possible to claim a portion of your home’s costs, like rent or bond interest, and the value of office equipment over time. However, not all expenses are covered – internet costs, for example, usually aren’t. It’s important to keep detailed records of home office expenses. SARS is strict about proof, so individuals must be ready to show exactly what they spent and why.
FinGlobal: tax specialists for South Africans abroad
Unsure about the tax implications of working remotely from another country? FinGlobal can assist. We can help you with clarifying your status as a South African tax resident
and determining whether or not it’s in your best interest to maintain South African tax residency, or complete tax emigration to break your tax ties with SARS. We’re here to guide you on all aspects of expat tax compliance, providing expert assistance on your tax returns, tax clearance, tax refunds and more.
To find out how FinGlobal can streamline your tax affairs and ensure you’re always on the right side of the tax authorities, leave your contact details below and we’ll be in touch to discuss your unique situation.