South Africans with businesses overseas face an uphill battle with SARS

South Africans returning home after building businesses overseas could face significant new tax liabilities, including worldwide taxation and complex legal rules.

This is according to Tax Consulting South Africa’s Team Lead of Tax Technical, Bronwin Richards, who said many South African expatriates have spent years building successful businesses overseas.

With ongoing instability and security concerns in regions such as the Middle East, some expats are now returning home.

However, they are often unaware that doing so may trigger significant South African tax consequences for them and their offshore business interests.

South Africa has a residency-based tax system, meaning tax residents and non-resident taxpayers are subject to different tax treatment.

Consequently, foreign business ventures that previously fell outside the South African tax net may suddenly attract scrutiny from the South African Revenue Service (SARS).

It can also give rise to a new set of tax obligations when an individual reverts to being a South African tax resident.

In practice, Richards said they are seeing an increasing trend among returning expatriates who are sole or majority shareholders in foreign companies.

Expats are now finding that recommencing South African tax residency exposes them to Controlled Foreign Company (CFC) rules.

Likewise, expatriates who continue working for an employer abroad after returning home may create Permanent Establishment risks or Place of Effective Management implications.

This can happen if these expats continue managing offshore companies once they are back in South Africa, Richards explained.

“The result can be exposure to South African tax on worldwide income, the attribution of foreign company profits to South African shareholders, and, in certain circumstances, double taxation,” she said.

“These risks should be carefully evaluated before returning to South Africa and managed through proactive professional tax advice.”

Returning expats hit with worldwide taxation

According to Richards, these risks are especially applicable to expatriates working in jurisdictions such as the UAE, Qatar, and Saudi Arabia.

Those who moved here would typically formally cease their South African tax residency when they emigrated and have since benefited from being taxed only on locally sourced income.

Many expatriates have formally ceased to be South African tax residents, either temporarily under a Double Taxation Agreement or permanently through Financial Emigration.

While the circumstances and requirements differ for each process, the outcome is that South Africa does not tax foreign-sourced income of non-resident taxpayers, Richards said.

However, once an individual permanently returns to South Africa, SARS may regard them as having resumed South African tax residency.

This makes their worldwide income subject to South African tax again. “For business owners, this is where matters become way more complex,” Richards warned.

For a sole or majority shareholder in a foreign company, recommencing South African tax residency can create additional tax exposure through the CFC regime.

The CFC rules, as set out in section 9D of the South African Income Tax Act, are designed as anti-avoidance measures.

They aim to prevent South African residents from shifting taxable profits offshore through foreign corporate structures.

The foreign company’s income may be attributed directly to the South African shareholder and be included in that individual’s taxable income.

This can happen even where no funds are repatriated back to South Africa. This income is then taxed at the applicable Personal Income Tax rate, Richards explained.

“CFC legislation is a highly technical area of tax law, and returning expatriates owning offshore businesses should assess their structures carefully before recommencing South African tax residency,” she said.

Another often-overlooked issue is that businesses are defined not only by where they are incorporated but also by where they are managed.

Many entrepreneurs return to South Africa while continuing to oversee operations abroad, but effective management sits in South Africa.

SARS places significant emphasis on a company’s Place of Effective Management, and from a tax perspective, these facts play a significant role.

In some cases, SARS may conclude that the strategic direction and decisions of an offshore company are being determined from South Africa.

When this happens, the company itself could become tax-resident in South Africa, and its worldwide income would be taxed locally.

Tax risks for South Africans coming home

According to Richards, the tax risks for returning South African expatriates are not limited to business owners.

Those who continue working remotely for foreign employers after returning home can inadvertently create a Permanent Establishment.

This can happen if it constitutes a physical presence as defined by law, and a taxable local footprint for their overseas employer in South Africa.

“At the same time, the individual may unknowingly forfeit their non-resident status and the tax benefits coming with it,” Richards said.

“Many expatriates assume they can simply continue performing the same role from South Africa while remaining employed by a foreign company. Unfortunately, tax authorities often view matters differently.”

Profits attributable to a person in South Africa may be subject to local taxes, including Corporate Income Tax. When this profit is also taxed in a jurisdiction outside South Africa, double taxation arises.

In certain circumstances, Richards explained that a company may be regarded as tax resident in more than one jurisdiction.

Double Tax Agreements may then provide relief through mechanisms such as foreign tax credits or treaty-based allocation of taxing rights. This is also a specialised field that requires cross-border tax expertise.

Richards added that many business owners and entrepreneurs underestimate how quickly a straightforward relocation can become an international tax issue.

They could be forced to confront problems relating to tax residency, CFC rules, Place of Effective Management considerations, and Permanent Establishment risks.

“The irony is that the more successful your offshore business has become, the greater the potential exposure if not navigated with care,” he said.

“Before making the move home, business owners should assess how their return may affect both their personal tax position and the tax position of the companies they control.”