Financial emigration or tax emigration? What is the difference and which one is more important?

These are questions many South Africans relocating to another country ask themselves. And they need to know what to do about both financial emigration and tax emigration if they want to be free from SARS taxation and enjoy their wealth abroad unhindered.

In this article, we’ll answer those queries in detail.

In short:

• Tax emigration means ceasing South African tax residency so you can stop paying tax to SARS on your foreign income after you emigrate.
• Financial emigration was a term misused in the market to mean ceasing formal residency with SARB. It is, in fact, our proprietary process for guaranteed successful tax emigration and freeing personal wealth for exportation.

Of course, there’s much more to it, so be sure to read this article from top to bottom. The information below is invaluable and can make your life post South Africa much easier.

Defining tax emigration

Let’s start with tax emigration because its definition serves as the basis for financial emigration.

South Africa has a residency-based tax system that requires those born here to pay tax on their worldwide income.

Due to this, even after you emigrate physically, SARS will continue to treat you as a resident of South Africa for tax purposes. Tax emigration is required to close the loop.

Because no matter which country you moved to, you still have to declare your foreign income to SARS every year. And you still have to pay tax on it.

Income received from foreign employment is exempt up to R1.25 million. One annoyance, though, is that as the exchange rate between the two countries fluctuates, expatriates may find more or less of their foreign income subject to taxation.

The best way to be released from your tax obligation is through the formal process of tax emigration.

To pursue tax emigration, you must inform SARS that you are no longer a tax resident of South Africa. Most importantly, you must provide material evidence to objectively prove your intention to reside outside the country permanently.

If the proof is insufficient, SARS will not change your status to non-resident and you will remain obligated to pay tax to South Africa. Yes, tax emigration is not so easy.

After all, many South Africans move overseas temporarily on work assignments, sometimes for years, but with the intention of eventually returning. Others move abroad with the intention to return only after they retire.

So, being out of the country for an extended period is not enough to warrant tax emigration. It is evidence of intention that counts.

Tax emigration and double taxation

There are other very good reasons to pursue tax emigration promptly.

It may appear that South African taxpayers would have to pay tax to both the tax authority in the country where they reside and SARS. In practice, SARS has double-tax agreements with many governments around the world.

As a result, South Africans paying tax in another country will receive tax credits to offset the tax they would have paid in their home country. But they still have to be diligent about completing their tax returns every year for both governments. They must also apply for a local declaration of their tax status annually, to be submitted to SARS. Tax emigration does away with all this bother.

In rare cases, where tax credits are less than the full amount that would otherwise be due in South Africa, you would be required to pay the difference to SARS.

That said, not all countries have a double-tax agreement with South Africa and in those jurisdictions, South Africans will indeed pay double tax on their annual earnings.

Tax emigration is the ideal response to these situations, to cut the cord with SARS permanently and be released from the yearly administrative annoyance.

Bear in mind, though, that even afterwards, you still need to pay tax on any income earned in South Africa, such as rent from local property you own.

Let’s turn our attention to financial emigration.

Defining financial emigration

Believe it or not, financial emigration is a term first coined by Tax Consulting South Africa, of which Financial Emigration is a specialist division.

At the time, South Africans moving abroad had to first get formal approval of exchange control compliance from the South African Reserve Bank (SARB). Only then could they transfer their wealth to their new country of residence.

So, financial emigration originally referred to our proprietary service that guaranteed both formal and tax emigration.

So great was the interest in our offering, we established Financial Emigration to focus just on that need. Very quickly, the popularity and success of our methodology saw the use of the term explode in the market. Suddenly, everyone wanted to “financially emigrate”.

Quite soon, every service promising SARB approval was tagged as financial emigration to ride the wave. Some were good but some not so much, and some excluded the important step of tax emigration.

In fact, even SARS started using it, with a page explaining the requirements and articles on the topic appearing on its website.

Unfortunately, that surge meant financial emigration was somewhat stripped of its original intent to include tax emigration. For most people, it came to mean obtaining SARB approval only.

No more financial emigration?

In January 2021, the Taxation Laws Amendment Act (TLAA) was adopted, effectively doing away with the distinction between residents and non-residents for exchange control purposes. SARB approval was removed from the process and SARS took over the function entirely.

Therefore, taxpayers only needed to focus on tax emigration, for the most part. In response, many declared that the age of financial emigration had come to an end.

Of course, this is untrue. For us, financial emigration continues to be a dynamic and evolving suite of services that includes both tax emigration and wealth migration. It remains responsive to whatever laws, regulations and mechanisms prevail at a given time.

For example, more recent legislation prohibits emigrants from taking their retirement annuity payout out of the country for three years after they leave. While it is not a tax emigration concern, it definitely is essential to true financial emigration.

Of course, this again means proving objectively that you have, in fact, departed permanently. Without concrete evidence, you will not be able to access those funds.

There are also underlying considerations you must be aware of, such as the ability to backdate your application to the date of your physical departure.

As a result, financial emigration has quickly evolved to accommodate this new requirement and now forms part of our standard service expertise. In this way, it complements tax emigration greatly.

More essential than ever

To review:

• Tax emigration is the process of ceasing tax residency with SARS. Expatriates who succeed in their application will be freed from their obligation to pay tax on their foreign income.
• Financial emigration is our wider reaching proprietary method that encompasses all the aspects of wealth migration, including tax emigration.

This makes financial emigration even more critical for those who want to focus on their new life and say goodbye to SARS for good.

If you’re a South African expatriate who hasn’t pursued financial emigration, including tax emigration, it’s time to consider your options to protect your foreign income.