DOES FINANCIAL EMIGRATION CHANGE YOUR TAX RESIDENCY STATUS?

Financial emigration is incorrectly perceived as a solution to trigger a change in a person’s South African tax residency status to that of a non-resident. However, financial emigration may not necessarily produce the desired outcome.

WHAT IS FINANCIAL EMIGRATION?

Financial emigration is a formal application process applied for by a South African exchange control resident to place his / her non-resident status on record with the South African Reserve Bank (“SARB”). The application process is regulated by exchange control regulations and overseen by an authorised dealer (i.e. via the applicant’s financial institution). When a person lives abroad and does not formally emigrate through a SARB approved process, he / she is considered to be a South African exchange control resident temporarily abroad for exchange control purposes. All South African exchange control residents are subject to exchange control regulations in terms of which the quantum of funds that can be transferred abroad without approval from the South African Reserve Bank (“SARB”) is limited. Currently, exchange control residents are entitled to an annual R1 million single discretionary allowance and, subject to obtaining a tax clearance certificate, a R10 million foreign investment allowance with respect to the transfer of funds abroad. Where a person applies for financial emigration with the SARB, and his / her status is changed to that of a non-resident for exchange control purposes, he / she will no longer be subject to the limitations imposed by the SARB on the transfer of funds abroad, other than limitations imposed in respect of an applicant’s blocked account (i.e. a designated bank account under the control of the authorised dealer that is used to transfer funds offshore).

DOES FINANCIAL EMIGRATION CHANGE SOUTH AFRICAN TAX RESIDENCY STATUS?

A person’s tax residency status does not automatically change when he / she financially emigrates. In terms of section 1 of the Income Tax Act No. 58 (1962) (“ITA”), a natural person is a tax resident where such person is either ordinarily resident in South Africa, or where the requirements of the physical presence test are met, but excludes a person that is deemed to be exclusively a resident of another country for purposes of the application of any applicable double taxation agreement (“DTA”). For purposes of determining whether or not a person is ordinarily resident, a person’s tax residency status is generally a question of intent. This has been confirmed by case law and interpretative guidance issued by SARS, where it is made clear that emigration is only one of the factors that are considered in determining a person’s tax residency status.

WHEN SHOULD I FINANCIALLY EMIGRATE?

Whether or not to financially emigrate depends on the individual set of facts and circumstances. If you are a South African exchange control resident living abroad, you may want to consider financial emigration should you have no intention of returning to South Africa, as financial emigration:

• Removes the financial control exerted by the SARB on the transfer of funds;
• Allows you to access your retirement annuities, pension preservation fund and provident preservation fund; and
• Allows you to receive an inheritance from a South African estate without being subject to the associated SARB administrative processes.

Should you be indecisive with respect to whether or not to return to South Africa in the foreseeable future, it may not be prudent to financially emigrate, as it may be rendered as a failed emigration. Seeing as the SARB will start to phase out financial emigration from March 2021, it is advisable that a person contemplating formal emigration and who wants to gain access to their retirement funds obtain formal advice, given the impending tax law changes that could result in those funds being ‘trapped’ in South Africa for a period of three years. Formal emigration can only be successful where a person is in good standing with both the SARB and SARS. if you require more guidance on your tax residency status or any related queries regarding your personal or corporate tax planning challenges. To keep track of recent tax developments, please follow us on social media .