Be aware of the risks

By Amanda Visser

Several South Africans found themselves trapped in foreign jurisdictions during the pandemic lockdowns. Many have since opted to make a lifestyle change and want to continue living in the foreign country but remain working for their South African employer.

There are risks to this arrangement, says Aneria Bouwer, senior consultant in the Bowmans tax team. It raises many questions about the impact on the remuneration package and which country has the right to tax the salary.

It also begs the question of whether the employer will be exposed to the jurisdiction of the labour courts in the foreign country and whether it could expose the employer to a corporate tax in that country.

Employment laws

Helen Wilsenach, Bowmans partner specialising in employment law, says they often find that people get over the emigration hurdle and then think it will be a “seamless” online transfer.

However, if the South African is based in the United Kingdom, they can trigger that country’s statutory employment laws. “It is always advisable to check what laws or obligations you may trigger and that you are comfortable that you can comply with these obligations. It also does not mean you have cut all ties with South African laws.”

Elizabeth Lang, a partner in the law firm Bird & Bird in London, says things become more complicated when someone continues working for a South African firm from the United Kingdom on a more permanent basis.

Even if the company is applying South African employment rights to the employee, they cannot stop the United Kingdom courts from giving protection to the employee. The test the employee will have to meet is whether they are ordinarily working in the United Kingdom.

“If the person has a place of residence in the United Kingdom, it is likely to be quite persuasive.” Lang notes that an employee who is dismissed can bring a claim of unfair dismissal in the United Kingdom without incurring any costs. “So, it can be quite tempting to try to bring claims even if ultimately they do not succeed,” she says.

Tax obligations

Bouwer, a member of the South African Institute of Taxation’s tax administration work group, says there may also be a tax withholding obligation on the South African company. It is important to understand the tax position of the individual.

When the individual is still tax resident in South Africa, the employer is obliged to withhold employee tax (Pay As You Earn), except to the extent that the person qualifies for the foreign earning exemption, which is capped at R1,25 million.

Another consideration to keep in mind is that when the employee ceases to be a tax resident in South Africa, there is the exit tax obligation. The employee will have to pay capital gains tax on certain South African assets. “It is important for employers to remind employees of that obligation and to get proper advice,” she says.

Simon Gough, legal director in the tax group of Bird & Bird, says the United Kingdom’s right to tax the salary of the South African will depend on whether they are resident in the United Kingdom. The United Kingdom has a statutory resident’s test which includes the automatic overseas tests, automatic United Kingdom test and sufficient ties test.

If the individual spends at least 183 days in the United Kingdom in a tax year, they meet the automatic United Kingdom test and are then resident in the United Kingdom. When someone is resident and domiciled in the United Kingdom, they have the strongest links to the United Kingdom and will be subject to United Kingdom tax on their worldwide income and gains.

Someone who is not resident or domiciled in the United Kingdom has weak links to the country, but they could still be subject to United Kingdom tax in relation to their United Kingdom sourced income. The double tax agreement provisions about employment still need to be considered to determine if the employee gets out of the United Kingdom tax net or not, says Gough.

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