Financial emigration is the process whereby taxpayers change their status with the South African Reserve Bank (SARB) from resident to non-resident, which is purely for exchange control purposes but it does not change your citizenship status or affect your tax status in South Africa.
Physical emigration is different to that of financial emigration in that an individual physically relocates from one country to another one either in the short term or in the long term. However, once the individual’s assets move from their old country to their new country of residence and emigration becomes a permanent status then the process of financial emigration takes place.
For a small minority of individuals financial emigration may be a viable option but for the majority it is likely to be costly and may not provide significant tax relief in the long run.
Previously, SA tax residence working abroad, were exempt from paying tax in South Africa on their foreign employment income if they met the exemption rules pertaining to s10(1)(o)(ii) i.e. out of the country for more than 183 days in a 12-month period of which 60 of these days had to be consecutive (excluding the day you leave and come back). Now, the exemption is up to R1mil and any monies earned above this is taxable up to a maximum of 45%.
However, as South Africa has a residence-based system of taxation, your foreign income will only be taxable if you are a resident or deemed to be a resident in SA. To be considered an ordinary resident a taxpayer needs to meet either one of the two residency status tests; those being the ordinary resident test and the physical presence test. If the taxpayer meets the resident test then they may apply the R1mil exemption to their foreign income if they meet the criteria in s(10)(1)(o)(ii).
Before financially emigrating, consider whether you need to. First, assess your tax status. If you do not meet the ordinary residence definition and if there is a double tax agreement in place between SA and your new country, you may be a tax resident of a different country and your foreign income will not be taxed in SA. The only income which will be taxed in SA is your South African sourced income i.e. rental income on property which you still own in SA.
Financial emigration process involves:
- Completing a MP336 form
- Applying for a emigration tax clearance certificate from SARS
- Should have no assets in South Africa and be out of the country for at least five years
- Submit the application to SARB
Once financial emigration approval is received:
- The proceeds of the sale of any remaining assets in SA, will be deposited into an unblocked rand account from where it can be transferred overseas.
- A once-off capital gains tax liability will be triggered on certain assets in SA and abroad
- Backdating financial emigration is possible to avoid paying CGT on foreign assets obtained after leaving SA
- SA retirement annuities are accessible before the age of 55
- SA inheritance funds can be transferred out of the country without being subjected to SA resident exchange control processes.
For further information, contact ERH Accountants.