Government chasing rich taxpayers out of South Africa

Stakeholders have warned Parliament that scrapping the foreign pension tax exemption could deter wealthy retirees and returning expatriates from returning to South Africa, drive capital out of the country, and scare off investors.

The proposed removal of the tax exemption on foreign retirement funds for South African tax residents could have far-reaching negative consequences.

This includes deterring wealthy foreigners and expatriates from choosing South Africa as a retirement destination, discouraging return migration, and scaring off global investors from starting businesses in the country.

This was the message by stakeholders during public hearings before the Standing Committee on Finance on 21 and 22 October 2025.

The hearings concerned the draft 2025 Taxation Laws Amendment Bill and Tax Administration Laws Amendment Bill. If enacted, the proposed amendments will come into effect on 1 March 2026.

This will give the South African Revenue Service (SARS) taxing rights over foreign retirement funds of South Africans who have worked abroad and accumulated foreign retirement savings.

The taxman will also have the power to tax the retirement savings of foreign nationals who become South African tax residents.

Tax Consulting South Africa’s team lead of cross-border taxation, John-Paul Fraser, said that in daily practice, they see a growing number of enquiries from concerned expats reconsidering their planned return to South Africa.

Foreigners are also looking at whether a different country, such as Mauritius, would not be a better retirement choice.

This aligns with concerns expressed in September 2025 during virtual workshops by the National Treasury and SARS as part of the legislative process to approve the amendments.

During these sessions, advisors mentioned clients who said that if they have to move to protect their foreign pensions, they will do that, opting for lower tax rate jurisdictions.

Foreign retirees contribute a lot to the economy through housing, healthcare, education and investment when remitting foreign pensions into South Africa.

On top of this, they also have many friends and family members from overseas who frequently visit during the year and spend significant amounts on local hospitality, accommodation, and transport.

Due to the proposed amendments, South Africa will miss out on these contributions if foreign retirees leave due to the removal of tax-exempt benefits.

Long-term tax plans put at risk

Effective from 1 March 2017, section 10(1)(gC)(ii) of the Income Tax Act exempts certain foreign retirement benefits from normal tax, subject to specific requirements.

It applies to any lump sum, pension, or annuity received by a South African tax resident from a foreign source as compensation for past employment abroad.

Generally, because South Africa has a residence-based tax system, the country’s tax residents are required to declare and pay taxes on their worldwide income.

This section was designed to prevent double taxation on retirement funds already taxed in a foreign country or earned while an individual was not subject to South African tax.

According to Fraser, scrapping the exemption amounts to economic retrospectivity. Many individuals who are nearing retirement have structured their financial futures around it, and repealing it now would, in effect, change the rules in midstream.

They would unexpectedly go from zero to full tax, potentially leaving retirees financially exposed later. ASISA echoed this concern, warning that affected retirees could find themselves in a “financially precarious position”.

They will also be unable to supplement their income due to visa restrictions preventing them from working in South Africa.

According to ASISA’s presentation, its members question whether the proposal will have economic benefits for South Africa that outweigh the revenue loss due to the current tax exemption.

Retirees and expatriates contribute to the domestic economy through spending, investment, and paying VAT on goods and services – all of which could decline if they leave or choose not to return.

Fraser said removing the exemption risks discouraging skilled foreign nationals and investors from retiring in South Africa.

This undermines other government objectives to attract foreign skills and capital. He noted that the National Treasury and SARS did not provide data on how many taxpayers currently claim the exemption.

Without this data, the potential revenue gain from repealing the tax exemption cannot be accurately assessed.

Alternative policies

While stakeholders supported the goal of the proposed amendment to prevent double non-taxation, they argued that a blanket repeal is disproportionate.

ASISA urged the committee to retain the current exemption, or, at a minimum, opt for two partial exemptions. The first would allow the existing exemption to remain in place for retirement fund members who have retired on or before 28 February 2026.

The second would align the treatment of foreign retirement benefits with the existing exemption for remuneration earned for services rendered outside South Africa.

In this case, ASISA proposed that the first R1.25 million per annum of applicable retirement benefits, where South Africa holds taxing rights, should remain exempt from tax.

Fraser added alternative solutions to consider include partial exemptions or distinguishing genuine retirement savings from avoidance schemes.

The proposed repeal of the foreign pension exemption under the 2025 Taxation Laws Amendment Bill represents a pivotal moment for South Africa’s tax policy.

While aimed at curbing double non-taxation, the measure risks unintended consequences that need to be founded on proper information and impact investigation.

The next step of the legislative process is for Parliament to provide feedback and comments on the submissions from stakeholders who participated in the Public Hearings.