Over the past couple of years, remote work has become increasingly prevalent as many employees have transitioned from working at their employer’s office to working from home, at least some of the time.
There is also evidence of a trend for South African companies to employ staff to work in other countries for a number of reasons. This may be because the South African employer has actively recruited employees who live overseas or, as is becoming increasingly popular, it may be because South African employees are relocating. permanently in another country while working for a South African employer.
Each of these scenarios may involve different tax consequences depending on the facts, but some key issues arise when employees of a South African corporate employer work remotely overseas.
Corporate Tax Considerations
Where an employee of a South African company is working overseas, a key consideration from a corporation tax perspective is whether that employee’s activities in the foreign country could create a taxable presence for the employing company in that foreign country.
This would most likely be the case if:
- The corporate employer is deemed to be carrying on business or trade in the foreign country through a permanent establishment located in that country (in which case the profits of the South African employer which are attributable to such permanent establishment may be taxed); Where
- The employing company may be considered tax resident in that country, usually due to the transfer of its place of effective management to that jurisdiction (in which case it may be fully taxable there).
Determining whether such a taxable presence may arise for the South African corporate employer will generally depend on the role and activities of the employee, the domestic law of the country concerned as well as the provisions of any double tax treaty entered into between South Africa South and abroad. country, if applicable.
Employee tax withholding obligations
An important practical question for the South African corporate employer and the employee is whether, and in which jurisdiction(s), employee tax withholding obligations may arise.
In terms of South African tax law, unless an employer has obtained a hardship directive from the South African Revenue Service (SARS) to deduct a lower amount of employee tax, they must deduct the South African employees tax at the applicable marginal rate of the entire remuneration paid to employees. Employees must submit South African tax returns.
The position of the relevant foreign country must also be taken into account. This often depends on where and for how long the services are rendered by the employee, as well as the provisions of any double tax treaty between South Africa and the foreign country, if any.
Where the relevant foreign country also requires employee tax withholding (usually accompanied by a local reporting obligation for both employer and employee), this would result in a double withholding tax obligation for the employee. ’employer.
The employee may be entitled to:
- A reimbursement in respect of amounts which are not taxable in South Africa (generally where the employee has rendered services overseas and is either a non-resident or eligible for relief under an applicable agreement to avoid double taxation concluded between South Africa and the State concerned jurisdiction);
- Exemption from foreign income as remuneration for services rendered abroad, provided they spend the required time abroad; and or
- A credit for foreign taxes paid on income which is also taxable in South Africa.
However, unless the employer has requested and obtained a SARS hardship directive (see above), this can only be claimed when the employee submits their annual South African tax return.
This can cause a temporary cash flow problem for the employee and so it is best to ask for a hardship directive, if possible.
SA tax residency for employees moving abroad
For South Africans moving abroad, it will be necessary to determine whether they will cease to be South African tax residents following their relocation and, if so, when this will happen.
This is a factual investigation based on various factors and will depend on the individual’s personal situation.
If it is determined that the employee will cease to be tax resident in South Africa, various deemed elimination and timing rules apply. Any resulting tax liability should be determined and settled through an interim tax payment.
The employee must also make certain disclosures in their annual tax return and file these returns in a timely manner.
Home office expenses
Employees working from home who are taxable in South Africa may qualify for a tax deduction for certain expenses they incur in connection with their home office, provided they meet certain conditions.
To benefit from the tax deduction, among others, the home office must be specifically equipped for work purposes. In addition, the employee must work more than 50% of the time at the home office (unless the employee primarily earns commissions or other variable income), and the home office must be used regularly and exclusively for business purposes. .
Deductible expenses include part of the costs related to head office premises and the depreciation of fixed assets. Certain other expenses, such as Internet expenses, cannot be claimed.
Taxpayers bear the burden of proving that they are entitled to the tax deductions they can claim. Adequate supporting documentation is required to prove that the relevant requirements in this regard have been met. SARS said many claims for the home office deduction were denied due to inadequate supporting documentation.
Employees should also keep in mind that working from home and claiming a deduction for home office expenses may affect the extent to which they are entitled to claim the so-called “residency exclusion”. principal” of capital gains tax when they finally sell their home.
The above are some of the major tax issues that should be carefully considered when considering remote work arrangements. In addition to these and other tax considerations (employer and employee), there are various employment laws, exchange control and other regulatory issues that may arise, both locally and in the relevant offshore jurisdiction. Most of these issues are factual and require tailored legal analysis.
As the frequency of remote work outside of South Africa increases, South African employers will need to keep these complexities in mind when evaluating and implementing remote work arrangements. DM
Jenny Klein is a senior partner in the tax department of ENSafrica. Megan Stuart-Steer is a senior associate in the tax department of ENSafrica.