Foreign Employment Income Exemption | South African Revenue Service (2023)

What’s New?

  • 31 January 2020 – Interpretation note finalised

    Interpretation Note 16 (Issue 3) – Exemption from income tax: Foreign employment income
    Explanatory Note. This Note discusses the interpretation and application of the foreign employment remuneration exemption in section 10(1)(o)(ii).
  • 22October 2019 – Update on Foreign Employment Income Exemption

    Frequently asked questions were published on the topic of Foreign employment income exemption. An amendment to section 10(1)(o)(ii) of the Income Tax Act 1962 has been promulgated and will come into effect on 1 March 2020. The Frequently Asked Questions (FAQs) in this document have been compiled on the basis of questions that employees, employers and the public, at large, have about the implications of the amendment.

Residence-based tax system

From 1 March 2001, South Africa moved from a source-based to a residence-based tax system for individuals. This meant that tax residents would be subject to tax on worldwide income (excluding certain exemptions or exclusions) and non-residents would be subject to tax on income from a source within South Africa. For more information on the tax treatment of non-residents in South Africa, please refer to the Non-Residents webpage.

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Who is a tax resident?

An individual is a resident for tax purposes in South Africa either by way of ordinarily residence or by way of physical presence. The concept of “ordinarily residence” is not clearly defined and the determination of whether or not an individual is an ordinarily resident for tax purposes must be done on a case-by-case basis. A number of factors must be taken into account to make such a determination. Interpretation Note 3 (Issue 2): Resident: Definition in relation to a natural person – ordinarily resident sets out the list of factors that will be taken into account to determine whether an individual is ordinarily resident for tax purposes in South Africa.

An individual can also become a tax resident by way of physical presence. For more details in this regard, refer to Interpretation Note 4 (Issue 5): Resident: Definition in relation to a natural person – physical presence test.

An individual who is deemed to be exclusively a resident of another country for purposes of a tax treaty is excluded from the definition of “resident”. It follows that while an individual may qualify as a resident under the ordinarily resident or physical presence tests, that individual will not be regarded as a resident for South African tax purposes if that person is a resident of another country when applying a tax treaty.

What is the impact of financial emigration on tax residence?

Acquiring approval from the South African Reserve Bank to emigrate from a financial perspective is not connected to an individual’s tax residence. Financial emigration is merely one factor that may be taken into account to determine whether or not an individual broke his or her tax residence. An individual’s tax residence is not automatically broken when he or she financially emigrates. The deciding factor remains whether or not an individual breaks his or her ordinary residence.

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Breaking tax residence

The determination of whether an individual breaks his or her tax residence is a factual enquiry on whether or not that person ceases to be ordinarily resident in South Africa. An individual, who is resident by virtue of the physical presence test, ceases to be a resident when that person is physically outside the Republic for a continuous period of at least 330 full days. A deemed disposal for capital gains tax purposes takes place at the time when an individual breaks his or her tax residence. The individual will be deemed to dispose of his or her worldwide assets, excluding immovable property situated in South Africa.

For more information on the correct process to follow when you cease to be a tax resident, refer to the Cease to be a Resident webpage.

Exemption under section 10(1)(o)(ii) before 1 March 2020

The exemption under section 10(1)(o)(ii) applies to a South African tax resident who is an employee and renders services outside South Africa on behalf of an employer (South African or foreign) for longer than 183 full days in any 12-month period as well as a continuous period exceeding 60 full days outside South Africa in the same period of 12-months. The exemption does not apply to non-residents. If all the requirements are met, the resident will qualify for exemption on the entire portion of the remuneration relating to services rendered abroad. For further information on how the exemption operates, please refer to Interpretation Note 16 (Issue 2): Exemption from income tax: Foreign employment income.

This exemption, however, does not apply to remuneration derived by a person from services rendered outside South Africa for any employer in the public sector, or to a person who holds a public office to which that person was appointed or deemed to be appointed under an Act of Parliament. Income received by independent contractors are excluded from the scope of section 10(1)(o)(ii) as the income they receive is not considered to be remuneration.

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The exemption under section 10(1)(o)(ii) from 1 March 2020

Residents will still be required to observe the 183 and 60 full days requirements in order to qualify for the exemption. Provided the “days” requirements are met, only the first R1.25 million of foreign employment income earned by a tax resident will qualify for exemption with effect from years of assessment commencing on or after 1 March 2020. Any foreign employment income earned over and above R1.25 million will be taxed in South Africa, applying the normal tax tables for that particular year of assessment.

Temporary relief in respect of the 2020 and 2021 years of assessment

The Taxation Laws Amendment Act, 2020 relaxed the days requirement to qualify for the foreign employment income exemption. In terms of the current provisions, individuals who spent more than 183 days in aggregate and a continuous 60 days working outside South Africa would have qualified for exemption in respect of their remuneration. However, due to travel bans during the COVID 19 pandemic, these individuals could not travel in order to work outside South Africa, and therefore could not qualify for the above-mentioned 183-day requirement.

The 183-days in aggregate requirement is reduced to an aggregate of 117 days. An individual is still required to comply with more than 60 consecutive days requirement in the same period that the 117 days have been met.

The amendment does not provide permanent relief and only applies to any 12-month period for the years of assessment ending from 29 February 2020 to 28 February 2021. This temporary relief is therefore only applicable to the 2020 and 2021 years of assessment.

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What type of income is covered?

The following amounts fall with the scope of the exemption:

  • salary;
  • taxable benefits;
  • leave pay;
  • wage;
  • overtime pay;
  • bonus;
  • gratuity;
  • commission;
  • fee;
  • emolument;
  • allowance (including travel allowances, advances and reimbursements;
  • amounts derived from broad-based employee share plans; or
  • amounts received in respect of a share vesting.

Can double taxation occur?

Yes, if an individual earns employment income in excess of R1.25 million and the double tax agreement between South Africa and the foreign country, if any, does not provide a sole taxing right to one country, both countries will have a right to tax the income. The portion of the income in excess of R1.25 million may end up being double taxed.

Generally, under the provisions of the relevant double tax agreement, if an employee renders services in a foreign country exceeding 183 days, both countries enjoy the right to tax the income. The country of source enjoys the first right to tax the employment income and the country of residence, in our case South Africa, will provide double tax relief in the form of a foreign tax credit to the extent that tax was paid in both countries, subject to limitations.

Relief from double tax?

Section 6quat is the mechanism under South Africa’s domestic law to claim relief from double tax where the amount received for services rendered outside South Africa is subject to tax in South Africa and in the foreign country. This credit may be claimed on assessment through an individual’s income tax return, provided certain requirements are met.

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An employer may at his or her discretion, under paragraph 10 of the Fourth Schedule, apply for a directive from SARS to take into account the potential section 6quat credit on a monthly basis to determine the employees’ tax liability. This will have to be done through a dedicated channel at SARS that will be made available to the public.

See the information on Directives under paragraph 10 of the Fourth Schedule.

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Who qualifies for foreign income exclusion? ›

A U.S. citizen or a U.S. resident alien who is physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

What is the foreign income exclusion for 2023? ›

The FEIE limit for the 2022 tax year is $112,000. Thanks to inflation, in the 2023 tax year (Filed in 2024) FEIE limit will increase to $120,000. This is the largest increase we have seen in recent years.

How much foreign income do you have to report? ›

How much is the Foreign Earned Income Exclusion for 2023? The maximum foreign earned income exclusion amount is updated every year. For the 2022 tax year (2023 calendar year) you could exclude up to $112,000 or even more if you incurred housing costs. (Exclusion is adjusted annually for inflation).

What happens if you don't declare foreign income? ›

If you committed a non-willful violation which was not due to any reasonable cause, you may face a civil penalty of up to $10,000 per violation. If you committed a willful violation, the penalties can rise to $100,000, or 50% of the foreign account balance at the time the each violation occurred.

What is exempt foreign employment income? ›

the amount of income you earned is less than the amount at which you must start paying tax in the foreign country. the income falls into a special category that the foreign country exempts – for example, payments to visiting aid project workers.

How does the IRS know you have foreign income? ›

One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 300,000 FFIs (Foreign Financial Institutions) in over 110 countries actively report account holder information to the IRS.

What foreign income is exempt from tax? ›

If you're an expat and you qualify for a Foreign Earned Income Exclusion from your U.S. taxes, you can exclude up to $108,700 or even more if you incurred housing costs in 2021. (Exclusion is adjusted annually for inflation). For your 2022 tax filing, the maximum exclusion is $112,000 of foreign earned income.

Do I need to declare foreign income in US? ›

Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live.

How much foreign income is taxable in US? ›

The Foreign Earned Income Exclusion (FEIE, using IRS Form 2555) allows you to exclude a certain amount of your FOREIGN EARNED income from US tax. For tax year 2022 (filing in 2023) the exclusion amount is $112,000.

How do you calculate foreign income? ›

The simplest way to see if you paid foreign taxes is to look at the 1099 forms or K-1 schedules you receive. For example, the 2022 Form 1099-DIV lists the foreign taxes paid in box 7.

Does IRS audit foreign income? ›

Financial assets outside the U.S.

If the IRS suspects that you have $10,000 or more in one or more foreign financial accounts and have not filed a Foreign Bank Account Report (FBAR), or if they believe you misreported assets and income on the FBAR, you may be subject to audit.

Can the IRS look at foreign bank accounts? ›

In accordance with FATCA (Foreign Account Tax Compliance Act), more than 110 different foreign countries and more than 300,000 foreign financial institutions are actively reporting us account holder information to the IRS.

How do I know if my income is exempt? ›

To be exempt from withholding, both of the following must be true: You owed no federal income tax in the prior tax year, and. You expect to owe no federal income tax in the current tax year.

What is an example of exempt income? ›

Exempt income is income that you don't pay tax on (that is tax-free). You may still need to include these amounts in your tax return for use in other tax calculations. Examples of exempt income can include: some government pensions and payments, including the invalidity pension.

What is foreign employment income? ›

Foreign employment income is income you derive as an Australian resident working overseas as an employee. Foreign earnings includes income you earn such as salary, wages, commissions, bonuses, allowances and income assessed under the employee share scheme provisions.

What countries don t report to IRS? ›

Bermuda, Monaco, the Bahamas, and the United Arab Emirates (UAE) are four countries that do not have personal income taxes. If you renounce your U.S. citizenship, you may end up paying a tax penalty called an expatriation tax.

Can the IRS chase you overseas? ›

Yes. Regardless of where you live, the IRS can file a lien against your assets regardless if the assets are located in the US or in a foreign country. Just as long as you own the assets, they are subject to levy.

Which states do not tax foreign income? ›

States with no income tax for expats

Those states are: Alaska. Florida. Nevada.

How do I report foreign income on US tax return? ›

Schedule B. Foreign interest and foreign dividends are reported on the 1040 and Schedule B. Even if it is below $1,500, since the interest and/or dividends will (usually) originate from a foreign financial account, Schedule B is filed for Part III of the form.

Do US citizens have to pay taxes on foreign unearned income? ›

Is Foreign Unearned Income Taxable? Yes. When expats file their US Federal Tax Returns each year, they must report all of their worldwide income, including both earned and unearned income. Like earned income, you'll include your unearned income in your Adjusted Gross Income (AGI) on your tax return.

Do you get taxed twice on foreign income? ›

United States citizens who work in other countries do not get double taxed if they qualify for the Foreign-Earned Income Exemption. Expats should note that United States taxes are based on citizenship, not the physical location of the taxpayer.

How do you treat income as foreign income? ›

The foreign income i.e. income accruing or arising outside India in any financial year is liable to income-tax in that year even if it is not received or brought into India. There is no escape from liability to income-tax even if the remittance of income is restricted by the foreign country.

Is foreign income considered earned income? ›

The source of your earned income is the place where you perform the services for which you receive the income. Foreign earned income is income you receive for performing personal services in a foreign country. Where or how you are paid has no effect on the source of the income.

How do I report foreign income without w2? ›

How to File Your Taxes without a W-2
  1. Estimate your total wages and withholding using your final pay stub.
  2. Fill out the fields of Form 4852 based on your answers.
  3. Attach Form 4852 to your US annual tax return and submit both to the IRS.

How far back can the IRS audit you? ›

An audit the IRS conducts on you can include returns filed within the last three years, according to the IRS. "If we identify a substantial error, we may add additional years. We usually don't go back more than the last six years," a post on the agency's site states.

What are red flags for the IRS? ›

Taking Higher-than-Average Deductions, Losses or Credits

Taking a big loss from the sale of rental property or other investments can also spike the IRS's curiosity. Ditto for bad debt deductions or worthless stock. But if you have the proper documentation for your deduction, loss or credit, don't be afraid to claim it.

Who gets audited by IRS the most? ›

Who gets audited by the IRS the most? In terms of income levels, the IRS in recent years has audited taxpayers with incomes below $25,000 and above $500,000 at higher-than-average rates, according to government data.

What if my foreign bank account is less than 10000? ›

An account with a balance under $10,000 MAY need to be reported on an FBAR. A person required to file an FBAR must report all of his or her foreign financial accounts, including any accounts with balances under $10,000.

Why does IRS want to know about foreign accounts? ›

The U.S. government requires reporting of foreign financial accounts because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions.

How much money can I keep in a foreign bank account? ›

The Foreign Account Tax Compliance Act

FATCA requires any non-U.S. bank to report accounts held by American citizens worth over $50,000 or else be subject to 30% withholding penalties and possible exclusion from U.S. markets.

What income qualifies for 2555 exclusion? ›

What is Form 2555 used for? Form 2555 is the form you file to claim the Foreign Earned Income Exclusion, which allows you to exclude up to $112,000 of foreign earned income for the 2022 tax year. The Foreign Earned Income Exclusion exists the help prevent double-taxation.

Who is considered a foreign person by IRS? ›

A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U.S. person.

What is classified as foreign income? ›

Those sources of income might include wages from abroad, income from foreign investments (like company dividends), the money you get from rental payments on overseas properties, or cash from overseas pensions.

What foreign income is taxable in the US? ›

Do I still need to file a U.S. tax return? Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits.

What is the 2555 exclusion for 2022? ›

For the latest information about developments related to Form 2555 and its instructions, such as legislation enacted after they were published, go to Exclusion amount. For 2022, the maximum exclusion amount has increased to $112,000.

How do you become exempt from income? ›

Income that is non-taxable is called as exempt income.
Exemptions allowed under the following heads are required to be disclosed by a salaried individual when filing his or her income tax returns:
  1. HRA.
  2. LTA.
  3. Encashment of Leave.
  4. Pension.
  5. Gratuity.
  6. Voluntary Retirement Scheme.
  7. Perquisites.

Do I qualify for Form 2555? ›

To meet this test, you must be a U.S. citizen or resident alien who is physically present in a foreign country, or countries, for at least 330 full days during any period of 12 months in a row. A full day means the 24-hour period that starts at midnight.

Does IRS check foreign bank accounts? ›

The U.S. government requires reporting of foreign financial accounts because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions.

How do I report foreign income to US citizens? ›

U.S. taxpayers who own foreign financial accounts must report those accounts to the U.S. Treasury Department, even if the accounts don't generate any taxable income. Taxpayers should file a Report of Foreign Bank and Financial Accounts (FBAR) electronically by April 18, 2023, using the BSA E-Filing System.

How do you show foreign income? ›

If the income is a payment for your services rendered abroad, include it under 'Income from salary. Always select relevant income head based on the nature of income and list the foreign income under that particular head. 👉 After clubbing the foreign income, it would be a part of your income earned in India.

Do I need to claim foreign income? ›

Reporting Income

All income that you have earned from foreign and domestic sources must be declared on your personal tax return.


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