Offshore property investments: Is your client tax compliant?

By: Nicole Paulsen, Senior Associate, Tax, at corporate law firm CMS

Have you advised any of your clients to acquire foreign property, either for investment purposes or with the intention of eventually relocating to that foreign country? 

If they’re letting out the property, have you double-checked what the tax implications are? 

Many people are not aware of the tax risks and assume that, if they are liable for tax on the income earned, it would arise in the foreign jurisdiction only. The reality, though, may be quite different, even if there is a Double Taxation Agreement (DTA) in place.

A common misconception has arisen that, where taxes in respect of that property were paid in that foreign jurisdiction, the revenue earned from that property was either exempt in South Africa or did not need to be disclosed for tax or exchange control purposes. 

This stance, however, is based on a faulty premise. The rule is that South African tax residents are subject to tax on their worldwide income, regardless of where the source of income is and whether or not the income has been subject to tax in the foreign country of source. 

Taxation of foreign rental 

Given that South African residents are taxable on a worldwide basis, the rental arising in respect of the offshore property is taxable under our local tax act. Where a DTA exists, this may be useful in avoiding double taxation arising, as the name suggests.

Such a treaty to avoid double taxation does exist between South Africa and the UK – a popular jurisdiction for South Africans investing in offshore immovable property over the last while. Article 6(1) of the UK DTA, read with article 6(3), provides that where a South African resident receives rental income from the letting of immovable property situated in the UK, such income may be taxed in the UK.  

Therefore, the UK, as the country of source, generally has taxing rights; but worryingly, South Africa’s right to tax the income is not excluded. The word “may” means both jurisdictions can tax! 

The fact that similar taxes can be imposed by two jurisdictions on the same income arguably results in double taxation, which is always an unwanted outcome.  

Although relief from double taxation is also provided for in Article 21 of the UK DTA, the relief in the treaty is subject to certain additional limitations. It probably won’t help much in many cases, and leaves South African taxpayers open to having to pay taxes in both jurisdictions despite the treaty being in place!

South Africa’s domestic rules

There is some leeway, though, because South Africa provides unilateral tax relief from double taxation under its domestic laws. That means that South Africa has domestic rules that do not form part of a treaty, but do seek to avoid double taxation in some circumstances. However, even where these domestic rules apply, they may not necessarily provide full relief in respect of foreign taxes paid. In addition, the domestic laws are complicated and one would have to carefully work through them to determine whether they provide full relief from double taxation. There are also fairly complex documentary requirements which need to be adhered to.  

So, should you advise your client to use the treaty relief or the domestic rules? What can be done if the income or asset hasn’t been disclosed in the past? 

In order to remain compliant with tax obligations in South Africa, we advise taxpayers to:

• make sure that they disclose their asset to all regulatory authorities, including the tax man in both countries;
• disclose the income earned, even if it is exempt or not taxable for any reason;
• take advice before assuming that the income is not taxable in South Africa, because the treaty, as we have seen, does not give unilateral taxing rights to the UK; 
• avoid advice from friends who are not tax experts, especially the sort of advice commonly made when standing around the braai; and
• consider a voluntary disclosure if the asset or income hasn’t been properly disclosed historically.

Our experience is that there are a good number of South Africans inadvertently falling foul of these tips, particularly in relation to foreign property. Kicking the can down the road eventually only leads to a sore foot.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.