Digital nomad visa raises tax and employment issues for foreign workers

South Africa has joined more than 50 countries that offer a digital nomad visa to foreign employees and individuals, giving them the opportunity and flexibility to live and work where they want.

Although lauded as a step in the right direction, foreign entities and workers must carefully consider the tax and employment implications of their arrangements. It could result in complex tax obligations, making their stay financially less favourable.

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South Africa’s digital nomad visa became effective in May following the implementation of the Second Amendment of the Immigration Regulations. It allows remote workers to work for a foreign employer in South Africa and allows individuals to derive income from foreign sources on a remote basis in SA. 

The foreigner must earn a gross income of at least R1 million per annum.

If the visa is issued for a period not longer than six months in a 36-month period, the remote worker must apply for exemption from the need to register for income tax in SA from the South African Revenue Service (Sars).

The individual will not be automatically exempt from tax.

If the visa is issued for a period longer than six months in the 36-month period, the remote worker must register with Sars.

Key needs of nomads

South African entrepreneur and digital nomad Gavin Moffat says the visa falls short of meeting the key needs of digital nomads.

“It glaringly overlooks critical factors such a friendly visa, tax, bureaucratic and legal framework,” he writes in an article published by TechCentral.

The requirement to register to pay taxes after six months, for example, will discourage longer stays – pushing nomads to depart at the five-month mark to avoid fiscal complications.

The assumption that digital nomads will significantly boost the local economy might also be overly optimistic. Nomads are known for their economic lifestyles, seeking to maximise their budgets. 

“This frugality, coupled with the potential short stays prompted by tax policies, might reduce their economic impact further,” says Moffat.

Tax risks 

Joon Chong, partner at Webber Wentzel, says an important consideration relates to the potential for the remote employee to create a permanent establishment of the foreign employer in SA.

If that is the case, the foreign employer must register with Sars as an employer and account for payroll taxes here. The Companies Act also requires foreign companies that have employees or carry out business in South Africa to register as an external company with the Companies and Intellectual Property Commission (CIPC). 

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The foreign company is automatically issued an income tax number with Sars and is then obliged to file provisional and annual tax returns, says Chong. 

Richard Leach, director of Global Tax Network, notes on the organisation’s website that the creation of a permanent establishment may, in a worst-case scenario, subject the profits from the work done by the remote employee to taxation in the host country. 

“This can result in complex tax obligations and can potentially impact the financial stability of both the employer and the employee,” he warns. 

According to Bloomberg Tax, an enterprise may cross the minimum business presence threshold and thereby create a permanent establishment in a foreign country when it is considered to maintain a “fixed place of business” in the host country and if the employee is a “dependent agent”.

Nature of working agreements

Chong explains that a marketing and sales director who finds new clients and negotiates contract terms would likely establish a permanent establishment in SA. 

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However, it is unlikely that a market researcher who identifies new markets and potential clients for the same foreign entity would create a permanent establishment. It is similarly unlikely that support functions for the sales platform provided by an individual in information technology would also create a permanent establishment.

If the work done by the remote worker results in the foreign employer “carrying on an enterprise” in SA, that may complicate tax matters even more, says Chong. The foreign employer must then register as a value-added tax (Vat) vendor with Sars.

Chong also explains that if the remote worker holds a senior strategic position and effectively “calls the shots” while living and working in SA, it may be seen that the foreign company is effectively managed from South Africa. The foreign company will be considered a South African resident for tax purposes and will be taxed on its worldwide income by Sars. 

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It would be prudent to take note of the impact of double tax agreements and how it could mitigate income tax exposure, Leach advises.

More reforms needed

Bowmans tax and employment specialists say further reforms are required to remove tax risks for foreign employers. “Without the removal of these tax risks, the digital nomad visa will not bring the economic boost our country so desperately needs,” they warn.

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Bowmans’s Chloë Loubser says an added provision to the Second Amendment relates to compliance with legislation governing the employment of workers in SA.

The intention may be to ensure that the terms and conditions of employment for foreign employees align with those of the Basic Conditions of Employment Act while they are working in SA, she adds.

This article was republished from Moneyweb. Read the original here