An individual will be considered a resident in the Republic of South Africa (“South Africa”) for tax purposes if the individual can be considered an ordinary resident in terms of the common law or the physical presence test defined in terms of the Income Tax Act No. 58 of 1962 (“Income Tax Act”) is met. South African residents are taxed on their global income whereas non-residents are taxed on their income from a South African source.

Ordinary resident:

The common law ordinary residence test is a factual consideration and is established on a case by case basis. The following open list of factors will be considered:

  1. intention to be ordinarily resident in South Africa;
  2. most fixed and settled place of residence;
  3. place where the person stays most often, his / her habits and mode of life;
  4. place of business and personal interests of the natural person or the person’s family;
  5. employment and economic factors;
  6. immigration status of the person;
  7. location of the person’s belongings;
  8. nationality;
  9. family and social relations;
  10. political, cultural or other activities;
  11. application for permanent residence or citizenship;
  12. periods of stay abroad and the nature of the visits; and
  13. frequency and reason for visits.

The application of the above factors is not limited to the year of assessment in question and may extend to the person’s mode of life prior to and after the year of assessment.

In short, an individual’s ordinary residence is the country in which he would naturally and as matter of course return from his wanderings.

The physical presence test:

Should the individual not be found to be an ordinary resident in terms of the above test the physical presence test will be applied. The physical presence test is set out in section 1(1) of the Income Tax Act. The physical presence test is satisfied if the individual is present in South Africa for periods exceeding:

  1. 91 (ninety one) days in total during the year of assessment;
  2. 91 (ninety one) days in total during each of the 5 (five) years of assessment preceding the year of assessment; and
  3. 915 (nine hundred and fifteen) days in total during the 5 (five) years preceding the year of assessment.

Further to the above an individual who resides outside South Africa for a continuous period of 330 (three hundred and thirty) days is deemed no longer a resident from the day on which the individual is no longer physically present in South Africa.

An individual who fails both the ordinary residence test as well as the physical presence test is therefore considered a non-resident for tax purposes.

Dividends tax on non-residents:

Non-residents are liable for dividends tax as the income is derived from a South African source. Dividends tax is currently payable at 20% (twenty percent) and is withheld by a withholding agent who then pays the dividends tax to the South African Revenue Services. The rate of dividends tax may however be subject to double taxation agreements between South Africa and other countries which may cause this rate to be lowered.

Capital gains tax on the sale of shares:

Non-residents are not ordinarily liable for capital gains tax on the sale of shares in South Africa. The exception to this rule is in relation to property owning companies. A non-resident will be liable to capital gains tax where he sells shares in a company in which he owns 20% (twenty percent) or more of the equity shares in the company or 80% (eighty percent or more of the market value of the equity shares which are attributable to the immovable property in South Africa.

Conclusion:

Individuals who may be considered non-residents in terms of the South African Income Tax Act will, as a general rule, be taxed on their income from a South African source. It is important to firstly determine whether an individual will be considered a non-resident for purposes of South African tax legislation and thereafter understand the tax implications of being a non-resident shareholder in a South African entity.

09 May 2019