Knowing your tax residency is essential to knowing your personal or business tax responsibilities since it reduces legal risks, prevents double taxation, and improves financial planning—especially in jurisdictions with intricate residency laws.

1. What is tax residency?

The country granted primary taxation rights over an individual's worldwide income is generally determined by their permanent place of residence. In situations where an individual has residences in multiple countries, this determination is governed by the provisions outlined in the applicable double tax agreement between the respective nations.

Obtaining a tax residency certificate from the appropriate tax authorities in one's country of permanent residence is mandatory. Such certificate is required for each tax year.

2. How is tax residency determined?

The majority of countries implement a double taxation agreement (DTA). A Double Taxation Agreement (DTA) typically outlines the criteria for determining an individual's residency, beginning with the location of their permanent home. If an individual maintains a permanent home in both countries or in neither, additional criteria are applied, such as the location of their habitual residence or the place where their centre of vital interests is situated. Each country establishes its own terms within double tax agreements following permanent residency, which differ from nation to nation.

Further information on habitual abode: When an individual does not have a permanent residence in a single country or maintains permanent residences in both countries, certain DTAs utilize habitual abode as the subsequent criterion for assessment. This is the destination to which one returns after their travels or explorations. It can be compared to the place where one lives, where their spouse and pets are present, and to which they return after fulfilling their daily duties or obligations. The OECD Model Commentary offers a comprehensive and detailed interpretation of this.

An additional criterion outlined in a DTA pertains to an individual's center of vital interests. This assessment evaluates the location where personal, economic, and social connections are most substantial, often considering factors such as family relationships, property ownership, or business activities as key indicators of where these vital interests are situated. This assessment is highly complex; however, further details can be found in the commentary on the OECD model or the judgment in the case of Jonathan Oppenheimer vs The Commissioner for Her Majesty’s Revenue and Customs. Should all of the above remain unresolved, nationality would serve as the decisive factor. If none of the above criteria are met, the responsible tax authorities must address and determine the issue of residency.

In summary, to terminate tax residency in a particular country, a taxpayer should ensure the existence of only one permanent home. This can be accomplished by renting out the property to tenants in the jurisdiction where one intends to terminate tax residency (rendering the residence unavailable to the taxpayer) or by opting to sell the property. Renting a property in a foreign country may qualify as establishing a residence and can potentially be regarded as one's permanent home for the purposes of a (DTA).

3. Common tax residency scenarios

Individuals moving abroad

Example: An individual from South Africa relocates to the United Kingdom to reside there. On January 31, 2025, the taxpayer, along with their spouse and one minor child, will depart South Africa for the United Kingdom, subsequently leasing out their sole property in South Africa to tenants. Upon their arrival in the UK, they transitioned into their newly leased home. The taxpayer terminates South African tax residency in accordance with the terms of a Double Tax Agreement (DTA) between South Africa and the United Kingdom. Under Article 4(2)(a) of the agreement, an individual is considered a resident solely of the contracting state where they have a permanent home available to them.

The taxpayer is required to obtain a confirmation letter from HMRC, the UK tax authority, verifying their residency in the United Kingdom. (The HMRC typically issues a letter that serves as a tax residency certificate)

Cross-border workers

Example: Consider the scenario where a South African resident receives an employment offer in the UAE, a nation that has established a Double Taxation Agreement (DTA) with South Africa. The taxpayer's partner resides in South Africa. Under the terms of the taxpayer's employment contract, he works on a rotational schedule in the United Arab Emirates. During these rotations, the taxpayer returns to South Africa to reside with his spouse and subsequently travels back to the UAE to resume work after the completion of his rest and relaxation period in South Africa.

The taxpayer holds permanent residences in both South Africa and the United Arab Emirates. The next criterion specified by the DTA assesses the location of the taxpayer's primary center of vital interests. In this case, it includes both South Africa, where his wife resides, and the UAE, which is closely linked to his financial ventures. As a result, a conflict exists. The subsequent criterion concerns the location of his usual place of residence. Given the taxpayer's return to the UAE, it can be concluded that this represents his habitual residence. However, this taxpayer routinely returns to South Africa after his travels, thereby preserving a habitual residence in South Africa. Another conflict arises in accordance with the DTA. The next step is to confirm the individual's nationality. As a South African national, the individual retains their status as a South African tax resident and is subject to taxation on their global income. 

Retirees and Expats

Retirees may establish tax residency in countries with more favorable tax regimes; however, it is essential to fully sever ties with their previous country of residence to prevent the risk of dual tax obligations.

It is advisable for such individuals to consult with their retirement funds regarding their plans. Furthermore, individuals must be aware that a three-year waiting period applies after attaining non-resident status before any fund withdrawals can be initiated.

Digital Nomads

Digital nomads should recognize that prolonged stays in foreign countries could result in acquiring tax residency status.

4. Double taxation and tax treaties

Double taxation occurs when individuals are subjected to taxation by two or more jurisdictions on the same income earned in these countries, leading to the imposition of taxes twice on the same earnings. (First, at the source where services are provided, and second, in the country of tax residence where individuals are taxed on their global income.) Many countries negotiate tax treaties to address this issue and streamline administrative procedures.

 5. What Are Tax Treaties?

Tax treaties are bilateral agreements designed to prevent double taxation and tax evasion by defining the allocation of taxing rights for specific types of income or transactions between the participating jurisdictions and by offering mechanisms to mitigate or eliminate tax obligations.

Relief beyond the scope of a DTA

Foreign Tax Credit (FTC):

If a taxpayer retains their tax residency in South Africa and has paid taxes in a foreign or host country, these amounts may be claimed as tax credits in South Africa, provided it can be demonstrated that the payments were fully chargeable b y the foreign tax authorities and was made without any entitlement to recourse from the foreign jurisdiction. In essence, a tax return must be submitted in the host (foreign) country when mandated, or evidence should be provided to demonstrate that the deducted taxes represent the final liability to the tax authorities.

Claiming foreign tax credits has the potential to lower the total tax liability associated with foreign-earned income. This applies in situations where a Section 10 claim is initiated or where an exemption under Section 10 is not applicable.

Exemptions: A tax treaty may stipulate that certain incomes such as dividends, royalties, interest, or pensions are exempt from double taxation if they meet specific conditions. 

Tax treaties are in place to reduce the risk of double-taxation and clarify taxation for income earned in multiple jurisdictions.

6. Frequent Legal Changes

Residency rules: May be subject to complexity or misinterpretation. Moreover, changes in an individual’s circumstances can create difficulties in maintaining compliance.

Ambiguity in Rules: Subjective criteria, such as defining one's centre of vital interests, can create uncertainty.

Documentation Requirements: Tax authorities may require proof of residency such as visas, housing lease agreements, tax residency certificates or letters, employment contracts, etc. to validate residency claims.

7. Planning for Multi-Jurisdictional Situations

Effective tax planning ensures compliance and decreases financial risks across multiple jurisdictions.

Key strategies may include:

Assessing Residency Risks: Evaluate exposure to different tax jurisdictions prior to major life events such as relocation.

Timing Moves or Employment Changes: Coordinate them to take advantage of favorable tax years when making any transitions or employment changes.

Engaging Professional Advice: Engaging professional tax practitioners can assist in navigating complex tax residency rules.

Conclusion

Determining whether an individual fulfils the complex requirements to qualify as a non-tax resident can often be perplexing. There is often confusion between the Section 10 exemption and tax residency, as well as misunderstandings regarding concepts such as ordinary residence. Numerous individuals continue to reference financial immigration, despite its discontinuation as outlined in the Exchange Control Circular No. 6/2021.

Moreover, submitting an application to SARS can become complicated, and providing incorrect information may adversely affect the outcome and lead to additional challenges in future applications.

Contact us to discover how our expertise can assist you in being updated by SARS as a non-resident of South Africa.