Looking to emigrate? First get your tax ducks in a row
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If the Covid-19 pandemic has shown us anything, it’s that it is possible for us to work productively from anywhere. Growing numbers of South Africans are taking the opportunity to either emigrate, or at least relocate to a different country, to experience a different lifestyle and explore new opportunities.
But while there are numerous attractive residency options available, including for example, Portugal and Cyprus, it’s critical that South Africans looking to emigrate take a close look at the tax implications before they move, warns Sovereign Trust consultant Ralph Wichtmann. Citizens who do not tax emigrate might find themselves being tax residents both locally and in their new country of residence, and thus be subject to tax on the same income twice.
“Even though you’re living in another country, you could still be viewed as a South African tax resident. To ensure you remain compliant and don’t get an unpleasant surprise in the form of an unexpected tax bill, it’s vital that you understand the tax residency rules and any double taxation treaties that are in place,” says Wichtmann.
South African tax residency can be determined by either one of two tests. One is the ordinary residence test, which looks at ‘the country to which a person would naturally and as a matter of course return to from their wanderings.’ So if your assets, family and permanent home are in South Africa, you’ll be seen as a South African tax resident. The second test is the physical presence test, which takes into account the number of days you spend in South Africa over a fixed period of time.
Most tax treaties contain a ‘tie-breaker’ clause which gives the sole taxing rights to the country where the taxpayer has a permanent home. If the taxpayer has a permanent home in both countries, the country where the taxpayer’s ‘centre of vital interests’ (personal/economic ties) are closer, is given taxing rights. If you don’t have a permanent home or the centre of vital interest cannot be determined, you’ll be taxed where you have a ‘habitual abode’, and failing that, the country where you are a national.
There are a few factors that tax residents need to bear in mind when they emigrate, says Wichtmann:
- Exit charges. Upon becoming tax non-resident in South Africa, there is a deemed sale of all your worldwide assets at market value and effectively a capital gains tax is payable.
- Capital taxes. It is also important to take note of the tax regime in the country to which you are moving to, and specifically whether they levy any wealth or capital taxes, or inheritance tax and estate duties. For example, in Spain and France, you are charged an annual tax that is based on the capital value of your worldwide estate.
Many countries offer special tax regimes to new residents, including various routes to obtain residency through ‘golden visa’ schemes or their equivalent.
Portugal offers the Non-Habitual Resident (NHR) regime which, with careful structuring, provides a ten-year tax-free holiday to new residents (apart from pension income, which is now taxed at 10%). The Golden Visa scheme also offers permanent residency to new non-EU residents in return for an investment of €350,000-€500,000 in an approved investment which includes real estate.
Cyprus is an increasingly popular location for South Africans, who get residency either by investing in property, one of several investment options, and this can also be facilitated through appropriate offshore structuring.
The UK will generally treat any new resident as non-domiciled in the UK, and therefore only subject to tax on income earned in the UK, or foreign income remitted to the UK. High-net-worth individuals can structure their affairs so that they pay little or no tax in the UK, and also remain outside the scope of the UK inheritance tax (IHT) regime which is 40% of the capital value of their worldwide estate. This ‘non-dom’ status can, with suitable planning, last 15 years or longer.
Greece will grant permanent residency to anybody who invests €250,000 in real estate. There are also a number of tax incentives available to new residents, which include pensioners only being taxed at a rate of 7%, and entrepreneurs only being taxed on 50% of their income.
“Some countries, like Hong Kong, Singapore and Thailand, only tax territorially. It is thus possible for those who are not working in the country to avoid all tax. Then there are a few countries that do not charge income tax, including Dubai, Monaco and many of the Caribbean countries, but if you are still tax resident in South Africa, you could still be liable for tax on your worldwide income,” said Wichtmann.
“There are many points to consider before making the decision to emigrate - and it’s always advisable to seek professional assistance before heading abroad.”