Many individuals are aware that if they cease to be SA tax resident, there is a so-called capital gains tax ‘exit charge’ that applies. In fact, the exit charge applies not only to individuals but also to other ‘persons’, including companies and trusts, upon cessation of SA tax residence.
The capital gains tax exit charge is achieved by deeming the person to have disposed of their worldwide assets, with some exceptions, at market value to a person who is SA tax resident. This disposal is deemed to have occurred on the date immediately before the day on which the person’s SA tax residency ceased. The person’s year of assessment is also deemed to have ended on the date of the deemed disposal.
Where the person is a provisional taxpayer, in terms of a strict reading of the Income Tax Act, the second provisional tax return and accompanying payment are due on that date as well, being the last day of the year of assessment. SARS apparently expects the provisional tax return and payment to be filed by such date, failing which penalties and interest may apply. However, this strict interpretation of the provisions leads to anomalies in some cases. For example, where an individual is SA tax resident due to the physical presence test and is physically absent from SA for at least 330 full days, the individual is deemed not to have been SA resident from the first day of the period of continuous absence. However, when the individual leaves SA, they may not know at that point whether or not they will return within the 330-day period. In such cases, the expectation to submit a second provisional tax return on the date of departure from SA is unrealistic.
Assets that do not give rise to the exit charge include immovable property in SA and personal-use assets. The definition of personal-use assets includes assets that are used by the individual mainly for purposes other than the carrying on of a trade. However, various assets such as financial instruments, immovable property, certain types of boats and aircraft are excluded from the definition of a personal-use asset.
In the case of a company that ceases to be SA tax resident, an additional dividends tax ‘exit charge’ arises. On the date immediately before the day on which the company ceased to be SA tax resident, the company is deemed to have declared and paid a dividend in specie, which dividend in specie may be subject to dividends tax at full rate (20%), exempt from dividends tax or subject to dividends tax at a reduced rate, depending on the nature of the shareholders and the shareholders’ jurisdictions of residence. The application of an exemption or reduced rate further depends on whether or not declaration and undertaking forms are held by the company by the date of the deemed declaration and payment. The amount of the dividend in specie is calculated as the sum of the market values of all the shares in that company on the date of the deemed declaration and payment, less the sum of the contributed tax capital of all the classes of shares in the company on that date. The dividend in specie is deemed to have been declared and paid to the shareholders in accordance with their effective interest in the shares of the company.
Also, in the case of a company that ceases to be SA tax resident, certain anti-avoidance claw-back measures have been enacted. These claw-back measures apply to tax foreign dividends that were previously exempt from income tax in the hands of the company within 3 years prior to the cessation of its SA residence, due to the application of the ‘participation exemption’. Capital gains that arose on the disposal of shares in a foreign company within the previous 3-year period that were excluded due to the ‘participation exemption’, are also clawed back. Prior to amendments brought about by the 2020 Taxation Laws Amendment Bill, a company could enjoy exemption from the deemed dividend in specie upon cessation of its SA tax residence if, for example, its shareholders were SA tax resident companies. What was perceived to be a loophole arose though in that once the company had become non-resident, if such shareholders held at least 10 percent of the equity shares and votes in the company, the disposal of shares in the (now) non-resident company could enjoy exclusion from capital gains tax in the hands of such shareholders, by virtue of the ‘participation exemption’. This loophole was closed with effect from 1 January 2021 by deeming a shareholder that holds at least 10 percent of the equity shares and voting rights in a company that ceases to be resident, to have disposed of the shares at market value on the date immediately before the day on which the company ceased to be resident. This provision is presumably only intended to apply if the deemed dividend in specie was exempt from the dividends tax ‘exit charge’ discussed above, although the wording is unclear in a number of respects.
Previously, while it was still possible for individuals to ‘financially emigrate’ from an exchange control perspective, a common fallacy was that financial emigration equated to cessation of SA tax residency. In fact, SA has a two-pronged tax residency test in the case of individuals, namely the ‘ordinary residence’ test and the ‘physical presence’ test. An individual’s exchange control residency status was not determinative of their tax residency status under either test. The ‘ordinary residence’ test is a common law test that seeks the location of the individual’s true or real home, or the place to which they would return after their wanderings. On the other hand, the physical presence test essentially requires a person to have been physically present in SA for periods exceeding 91 days in aggregate during each of the current year of assessment as well as each of the preceding five years of assessment in addition to having been physically present in SA for an aggregate period exceeding 915 days in the previous five years of assessment. The physical presence test does not apply to a person if they were resident in SA in terms of the ordinary residence test during a particular year of assessment.
In the case of a juristic person such as a company, SA also has a two-pronged tax residency test. The company is deemed to be SA tax resident either if it was incorporated in SA or if its place of effective management is located in SA.
Where a double tax agreement exists between SA and the person’s new jurisdiction of residency, it is important to consider whether the agreement deems the person to be exclusively resident in the other jurisdiction. In such a case, the SA domestic definition of ‘resident’ deems the person not to be SA tax resident. This applies both to individuals and juristic persons. Generally, if an individual is resident both in SA and a foreign jurisdiction, there are a series of tie-breaker tests in the double tax agreement to determine in which jurisdiction they are ultimately deemed to be tax resident. For example, the SA-UK double tax agreement’s first tie-breaker test is the jurisdiction in which he or she has a permanent home available, failing which the next tie-breaker test is the so-called ‘centre of vital interests’. In the case of a juristic person, the tie-breaker is generally the location of the juristic person’s place of effective management.
Where the majority of a company’s board of directors move offshore on a permanent basis, it may well be that the company’s place of effective management is no longer located in SA. If the company’s place of effective management is no longer in SA and it becomes a tax resident of a jurisdiction with which SA has a double tax agreement, the company would normally have ceased to be SA tax resident. From the company’s perspective, this may therefore trigger the capital gains tax as well as the dividends tax exit charges discussed above as well as having triggered a capital gains tax exit charge from the director’s individual perspectives.
Given the complexity of the provisions and potential quantum of tax usually at stake, it is critical that taxpayers obtain detailed tax advice covering not only the SA tax position but also the position in their new jurisdictions of residence, well prior to their move offshore.
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