SA targets foreign pensions

With South Africa's National Treas­ury for­ging ahead with plans to go after for­eign pen­sions, mul­tina­tional pro­fes­sional ser­vice firm BDO warns the move will dis­cour­age wealthy for­eign nation­als from retir­ing in SA, reports Business Day. Cur­rently, for­eign pen­sions and social secur­ity pay­ments are exempt from income tax, but that is set to change with SA author­it­ies hav­ing taken a pos­i­tion that this is a loop­hole that has allowed the fiscus to forgo money due to it. The move, part of other mooted enhance­ments to SA’s tax regime, was first out­lined in this year’s Budget, with the state now hav­ing approached mem­bers of the pub­lic to weigh in on pro­pos­als. Accord­ing to the 2025 Draft Tax­a­tion Laws Amend­ment Bill (Draft TLAB), pub­lished last week, gov­ern­ment plans to remove the exemp­tion on tax treat­ment of for­eign retire­ment bene­fits. ‘It is pro­posed that an exemp­tion be removed so that all for­eign retire­ment bene­fits received by SA res­id­ents will be taxed in line with the coun­try’s res­id­ence-based tax sys­tem sub­ject to applic­able double tax­a­tion agree­ments,’ the National Treas­ury said. David Warneke, a part­ner at BDO SA, said the move would likely have a mater­ial effect on the fin­an­cial pos­i­tion of many retir­ees with for­eign pen­sions who have become exclus­ively SA tax res­id­ent and may cause them to emig­rate to a jur­is­dic­tion that does grant a sim­ilar exemp­tion. ‘Most of these indi­vidu­als are wealthy by SA stand­ards and their invest­ment and spend in SA provides much-needed eco­nomic bene­fits to the coun­try – among other things in the form of taxes: VAT, cap­ital gains tax, estate duty and income tax,’ Warneke said.

Another pro­posal from the National Treas­ury – which, if imple­men­ted in its cur­rent form, will effect­ively end the use of pref­er­ence shares as a tax-effi­cient fin­an­cing option in SA and likely push com­pan­ies towards debt fin­an­cing instead – is the move to amend sec­tion 8E of the Income Tax Act. The pro­posed amend­ment tar­gets pref­er­ence share struc­tures that mimic debt instru­ments, in what the gov­ern­ment regards as a tax loop­hole, says Business Day. SA’s cor­por­ate law majors have weighed in on the pro­pos­als, with con­sensus emer­ging in the industry that the pro­pos­als sig­nal a death of pref­er­ence shares as a fin­an­cing option in SA’s high fin­ance circles. ‘If intro­duced as pro­posed, the amend­ment will trig­ger gross-up clauses and likely lead to new or rene­go­ti­ated eco­nomic terms,’ experts from Baker McK­en­zie said. The firm said that for hold­ers of pref­er­ence shares, the reclas­si­fic­a­tion of dividends as tax­able income would mean that returns pre­vi­ously received as tax-free dividends may now be sub­ject to income tax at 27%. Cliffe Dek­ker Hofmeyr said that under the pro­pos­als, pref­er­ence share fund­ing struc­tures will become too expens­ive to be used as fund­ing instru­ments.