Financial emigration allows emigrating South Africans to enjoy their new life abroad free from concerns about paying tax to SARS on their foreign income and holdings. So it’s not just a nice-to-have but a necessary protection for one’s future wealth.

Why is financial emigration important?

Since the country moved to a residence-based tax system in 2001, South Africans must now pay tax on their worldwide earnings. Even after they emigrate physically, SARS continues to regard them as residents for tax purposes and holds them responsible to meet their tax obligations.

This means that they will have to submit annual tax returns to SARS in their new country of residence and ensure their account is paid up to date. If South Africa does not have a tax treaty with that jurisdiction, they will likely pay tax to both authorities, resulting in double taxation of their income.

Financial emigration is the only way to cease tax residency with SARS and be freed from these obligations and risks.

In addition, recent legislation compels emigrated taxpayers to wait 3 years before they can transfer their retirement fund encashment to their foreign bank account. Without financial emigration, they will not be able to access these funds.

Evidence for financial emigration

Financial emigration is initiated by informing SARS that one has emigrated and wishes to cease South African tax residency. This is done by filling out the prescribed Registration, Amendments and Verifications (RAV01) form. Unfortunately, this is only the beginning of a long and complex process that follows.

Every South African, by virtue of being born here, is considered to be ordinarily resident in South Africa. That is, after exhausting all other options, they would naturally return from their travels to this country. As long as this is true, they must pay tax to SARS whether they are physically present here or not.

So, to pursue financial emigration, they must convince SARS that they will not return but intend to reside outside the country permanently. And that requires them to provide objective evidence of that fact.

If they cannot, SARS will not flag them as non-resident on its database of taxpayers.

Requirements for financial emigration

Financial emigration encompasses the provision of factual information that can convince SARS a taxpayer should be allowed to cease tax residency.

On receiving the taxpayer’s RAV01 form, SARS will send them a letter requesting they submit documents supporting their claim. The sheer volume of information required can be intimidating but worth the effort to protect one’s foreign wealth.

Most importantly, it is critical that the taxpayer is fully compliant, with no outstanding submissions and not being in arrears. This would be immediate grounds for rejection. So, before initiating financial emigration, we advise that they seek a professional diagnostic to ensure their tax compliance status is sound.

When considering if a person qualifies for financial emigration, SARS may review:

• The type of foreign visa they hold
• Proof of permanent residence in the foreign jurisdiction
• A letter or certificate of tax residence from the foreign tax authority
• Property held in South Africa and what it is used for
• Any business interests in South Africa
• Family members’ details, including if they remain in South Africa and why
• Where social activities take place and where personal belongings are kept
• Visits to South Africa, including why and how often they occur

Financial emigration also includes information required for a SARS-issued Tax Compliance Status (TCS), such as a statement of assets and liabilities, as well as details of any pension, provident or retirement funds, insurance policies, trusts, private companies or close corporations.

In addition, SARS may seek the particulars of loans, donations, inheritances, bank accounts, local and foreign investment income, shares, the sale of property, royalty income, earnings, distributions from trusts, income from any local or foreign entity in which the taxpayer holds a direct or indirect beneficial interest, and other such details.

SARS will grant or reject an application to cease tax residency based on this and any other requested information.

What comes next?

Financial emigration is not just about ceasing tax residency but also events that follow. Two important considerations are exit tax and retirement fund encashment.

A taxpayer’s tax year ends on the day before they cease to be a tax resident of South Africa. On this day, SARS deems them to have sold certain of their assets, because this value will travel abroad with them. Therefore, they will have to pay capital gains tax (CGT) on these items, popularly called ‘exit tax’.

Taxpayers must inform themselves about which assets are subject to exit tax and which are not, and must be able to produce accurate records of their asset holdings to SARS on demand.

Financial emigration also encompasses the previously mentioned legislation requiring emigrated South Africans to be out of the country for 3 years before being able to transfer their encashed retirement funds.

Expatriates wishing to access these funds must be able to prove they have indeed been away for the prescribed period, and ceasing tax residency is a tangible milestone for this purpose.

Making financial emigration a priority

The timing of financial emigration is critical. Even after moving to another country, South Africans must still pay tax to SARS. This includes tax on their worldwide earnings from employment, investments and crypto trading, rental income, policy payouts, and any other income stream.

It can also mean CGT on the sale of their foreign assets, including investment holdings, properties and even the sale of their family residence. Ultimately, they may also pay tax on their estate after they pass on.

Yes, expatriates are often protected by double-tax agreements between South Africa and their local jurisdiction, relieving them of paying both governments. However, even this can become complicated. For example, if South Africa taxes worldwide income but the local government does not, the expatriate will be liable to pay tax on the remainder to SARS. 

After financial emigration, these complexities and their associated financial risk vanish. Not only will expatriate South Africans protect their current income but also their next-generation wealth.

So, the sooner they pursue financial emigration, the better.

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