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Understanding the financial consequences of emigrating

If you are considering emigrating, it is important to have a holistic picture of all the South African tax (SARS) and South African exchange control (SARB) implications.

IMPORTANT NOTICE

This article is outdated as the emigration process it explains has changed.

Please read our latest article, What to consider before you emigrate, and click here or on the link below to view our latest emigration guide.

Please click here to access the latest emigration guide (December 2021).

Why you want to emigrate is critical to understanding the financial consequences and planning for these
Clients often tell us they want to emigrate. However, when we start unpacking this, we quickly realise that they don’t want to leave the South African lifestyle − what they really want is a plan B. Likewise, South African residents often leave South Africa temporarily with the intention to return at a later date. It is critical to understand your objective so that you can understand the financial impact and make informed decisions.

The ideal outcome will depend on your unique circumstances, which is why professional advice is essential
Below are a few general guidelines to consider when deciding whether to emigrate or have a plan B:

What will the financial gain be if you were to emigrate versus building a plan B?
Are you willing to give up the South African lifestyle, for example warm weather and the many outdoor activities on offer?
Where are your family and loved ones located?
Is alternative citizenship or residency easily and affordably available to you? For instance, if you do not qualify for citizenship in another country by, for example, descent, what is the financial impact of the residency or citizenship programmes on offer in other countries?

Everyone’s circumstances will be different and, as shown above, there are many factors to consider. Seeking professional advice can help you make the right decisions for your situation.

Emigration

Defining emigration
The Oxford dictionary defines emigration as ‘the act of leaving one’s own country to settle permanently in another’.

Emigration has both tax and exchange control implications
If you are considering emigrating, it is important to have a holistic picture of all the South African tax (SARS) and South African exchange control (SARB) implications during your lifetime. If you have South African resident children and/or grandchildren who are residing abroad but have not formalised their emigration, it is equally important to understand the impact your death may have on their ability to receive an inheritance from your South African estate.

There are separate processes that must be followed to end South African residency status for exchange control (excon) and tax purposes
The tax and excon processes could happen in tandem or independently, although from a tax perspective it is best to consider starting both at the same time.

	What it involves	What this means in practice
Excon process	To be designated an emigrant for exchange control purposes (in other words, if you want to leave South Africa to settle in another country permanently), you must follow the excon process as defined by SARB. This is also known as ‘financial emigration’.	Transferring your retirement savings Financial emigration enables you to: become designated as an emigrant; and make use of the exchange control facilities available to emigrants, including what is known as ‘externalisation’ or moving your accumulated retirement savings to your new country of residence. Inheritances from a South African estate You (or your beneficiaries if they are designated as emigrants) may receive inheritances paid to you abroad from a South African estate. If you live abroad and have not formalised your emigration with SARB, you will be regarded as a South African resident temporarily abroad for excon purposes. This means you or your beneficiaries may not directly receive an inheritance paid to you or them abroad from a South African estate. However, you or they may receive the inheritance paid to you in South Africa and you or they may, by following the stipulated process (eg obtaining a tax clearance certificate, where applicable), externalise the proceeds from an inheritance from a South African estate. You or they can do this through the individual foreign investment allowance (FIA), which is currently R10 million per calendar year, and/or through the single discretionary allowance (SDA), which is currently R1 million per calendar year.
Tax residency process	To become a non-resident for tax purposes you must cease to be a South African tax resident as defined in the Income Tax Act. The status of your tax residency is determined by whether you meet the ‘ordinary-residence test’ (subjective test) or the ‘physical-presence test’ (objective test) and whether you are deemed to be exclusively resident in another country. Ordinary-residence test: You regard South Africa to be your permanent or real home and the country to which you naturally and as a matter of course return to. Physical-presence test: You were in South Africa: for more than 91 days in total during that tax year; and for a period exceeding 91 days in total during each of the previous five tax years; and for a period exceeding 915 days in total during those previous five tax years, although you are not, at any stage during the relevant tax year, ordinarily resident in South Africa. Note: If you are deemed to be an exclusive resident of another country in terms of the so-called ‘tie-breaker’ test contained in the DTAs between South Africa and the other country, you cannot be a South African tax resident by way of the ordinarily-residence or physical-presence test.	What to do to become a non-resident for tax purposes You must prove that you are no longer ordinarily resident in South Africa by: illustrating the intention to become ordinarily resident in another country; and having taken or taking steps to carry out this intention. If you are no longer ordinarily resident in South Africa, you need to spend less than 91 days in total in South Africa in the following tax year. If you are a South African tax resident in terms of the physical-presence test, you can end tax residency by remaining physically outside of South Africa for a continuous period of at least 330 full days after the day on which you left South Africa. Capital gains tax impact Ceasing to be a tax resident triggers a deemed disposal of worldwide assets for capital gains tax (CGT) purposes, excluding South African immovable property. This tax cost associated with ceasing to be a tax resident may be material or immaterial: Material – where you own assets, which would trigger the CGT deeming provisions. Immaterial – where you do not own or did not own assets at the time of ceasing to be a South African tax resident. Tax clearance You do not need to obtain a SARS Tax Clearance Certificate to cease to be a South African tax resident.

What it involves

What this means in practice

Excon process

To be designated an emigrant for exchange control purposes (in other words, if you want to leave South Africa to settle in another country permanently), you must follow the excon process as defined by SARB.

This is also known as ‘financial emigration’.

Transferring your retirement savings

Financial emigration enables you to:

become designated as an emigrant; and
make use of the exchange control facilities available to emigrants, including what is known as ‘externalisation’ or moving your accumulated retirement savings to your new country of residence.

Inheritances from a South African estate
You (or your beneficiaries if they are designated as emigrants) may receive inheritances paid to you abroad from a South African estate.

If you live abroad and have not formalised your emigration with SARB, you will be regarded as a South African resident temporarily abroad for excon purposes. This means you or your beneficiaries may not directly receive an inheritance paid to you or them abroad from a South African estate. However, you or they may receive the inheritance paid to you in South Africa and you or they may, by following the stipulated process (eg obtaining a tax clearance certificate, where applicable), externalise the proceeds from an inheritance from a South African estate. You or they can do this through the individual foreign investment allowance (FIA), which is currently R10 million per calendar year, and/or through the single discretionary allowance (SDA), which is currently R1 million per calendar year.

Tax residency process

To become a non-resident for tax purposes you must cease to be a South African tax resident as defined in the Income Tax Act.

The status of your tax residency is determined by whether you meet the ‘ordinary-residence test’ (subjective test) or the ‘physical-presence test’ (objective test) and whether you are deemed to be exclusively resident in another country.

Ordinary-residence test: You regard South Africa to be your permanent or real home and the country to which you naturally and as a matter of course return to.
Physical-presence test:
You were in South Africa:
- for more than 91 days in total during that tax year; and
- for a period exceeding 91 days in total during each of the previous five tax years; and
- for a period exceeding 915 days in total during those previous five tax years,

although you are not, at any stage during the relevant tax year, ordinarily resident in South Africa.

Note: If you are deemed to be an exclusive resident of another country in terms of the so-called ‘tie-breaker’ test contained in the DTAs between South Africa and the other country, you cannot be a South African tax resident by way of the ordinarily-residence or physical-presence test.

What to do to become a non-resident for tax purposes

You must prove that you are no longer ordinarily resident in South Africa by:
- illustrating the intention to become ordinarily resident in another country; and
- having taken or taking steps to carry out this intention.
If you are no longer ordinarily resident in South Africa, you need to spend less than 91 days in total in South Africa in the following tax year.
If you are a South African tax resident in terms of the physical-presence test, you can end tax residency by remaining physically outside of South Africa for a continuous period of at least 330 full days after the day on which you left South Africa.

Capital gains tax impact

Ceasing to be a tax resident triggers a deemed disposal of worldwide assets for capital gains tax (CGT) purposes, excluding South African immovable property.
This tax cost associated with ceasing to be a tax resident may be material or immaterial:
- Material – where you own assets, which would trigger the CGT deeming provisions.
- Immaterial – where you do not own or did not own assets at the time of ceasing to be a South African tax resident.

Tax clearance
You do not need to obtain a SARS Tax Clearance Certificate to cease to be a South African tax resident.

Get advice, and in most instances, you will also require a formal tax opinion
We advise clients who wish to end their residency status for South African tax purposes to obtain a formal tax opinion setting out both the South African tax implications as well as the tax implications (and timing) relevant to the country to which they intend immigrating.

Having a plan B

Unpacking the intention and purpose of having a plan B
From our conversations with our clients we have gathered that having a plan B is mostly about knowing that at any moment you can get on a plane and go and live in another country (where you own a property) and continue living the financial lifestyle you have been become accustomed to.

It is important to ensure you have enough capital abroad to fund your lifestyle
The good news is that South African residents can externalise a significant part of their South African assets without emigrating financially. In terms of the current excon limits, individuals can externalise R1 million per calendar year (through the SDA) without needing to obtain a tax clearance, and R10 million per calendar year (through the FIA) after having obtained a tax clearance certificate. In addition, SARB is considering special applications for externalising amounts well over these limits.