Introduction
If you’re a South African business owner earning income from international clients, investments abroad, or a foreign business entity, you have likely asked yourself: “How do I handle foreign income tax in South Africa?” The short answer is that SARS taxes South African residents on their worldwide income — but with specific exemptions, credits, and reporting requirements that can significantly reduce your tax burden.
At Blu Solutions, we specialise in helping business owners across Mossel Bay, George, Knysna, and Cape Town navigate the complexities of foreign income tax. In this comprehensive guide, we’ll walk you through a step-by-step process to ensure you remain compliant while legally minimising your tax liability.
1. Understand Who Must Declare Foreign Income
South Africa follows a residence-based tax system. This means if you are a South African tax resident, you must declare your worldwide income — including foreign earnings — to SARS.
How to Determine Your Tax Residency
SARS uses two tests to determine residency:
- Ordinarily resident test: Are you physically present in South Africa for more than 91 days per year, and do you consider SA your permanent home?
- Physical presence test: If you are not ordinarily resident, you become a resident if you are in SA for more than 91 days in the current year, 91 days in each of the previous 5 years, and 915 days in total over the last 5 years.
Tip: If you are a South African resident, even income from a UK-based client or a US bank account must be declared. Failure to do so can lead to penalties and interest.
2. The Foreign Employment Income Exemption (Section 10(1)(o)(ii))
For South African residents working abroad, the foreign employment income exemption under Section 10(1)(o)(ii) can be a game-changer. However, the rules changed significantly in 2020.
What Changed?
From 1 March 2020, the exemption is capped at R1.25 million per year of assessment. If you earn more than R1.25 million in foreign employment income, the full amount (including the first R1.25 million) becomes taxable in South Africa.
Example
Suppose you are a South African resident working remotely for a German company, earning R1.8 million per year. You will be taxed on the full R1.8 million in SA, but you can claim a foreign tax credit for any tax paid in Germany.
Action point: Keep proof of foreign taxes paid — you’ll need it to claim the credit.
3. How to Report Foreign Income on Your Tax Return
Reporting foreign income correctly is critical. Here’s how to do it step by step:
Step 1: Gather Your Documents
- Foreign payslips or invoices
- Bank statements showing foreign currency deposits
- Tax receipts from foreign revenue authorities
- Exchange rate calculations (SARS uses the average rate for the year)
Step 2: Complete the Relevant Sections
On your ITR12 tax return, look for the Foreign Income section. You will need to:
- Enter the gross foreign income in the original currency
- Convert to ZAR using the SARS-approved exchange rate
- Claim the foreign employment income exemption (if applicable)
- Claim foreign tax credits
Step 3: Submit Supporting Documents
SARS may request proof of foreign taxes paid, employment contracts, or bank statements. Keep these for at least 5 years.
4. Foreign Tax Credits: How to Avoid Double Taxation
South Africa has double tax agreements (DTAs) with many countries, including the UK, USA, Germany, and Australia. These agreements ensure you don’t pay tax twice on the same income.
How the Foreign Tax Credit Works
You can claim a credit for foreign taxes paid, but it is limited to the South African tax payable on that income. For example:
- Foreign income: R500,000
- SA tax on that income: R90,000
- Foreign tax paid: R70,000
- Credit allowed: R70,000 (you pay only R20,000 to SARS)
Important: You cannot claim a credit for foreign taxes paid on income that is exempt under Section 10(1)(o)(ii).
5. Foreign Assets and Investments: What You Must Declare
Many South African business owners have foreign investments, cryptocurrency, or rental properties abroad. These assets must be declared on your tax return.
Foreign Assets Disclosure
If the total cost of your foreign assets exceeds R500,000, you must complete the Foreign Assets Declaration section on your ITR12. This includes:
- Foreign bank accounts
- Shares and unit trusts
- Real estate
- Cryptocurrency held on foreign exchanges
Capital Gains Tax (CGT) on Foreign Assets
When you sell a foreign asset, you may be liable for CGT in South Africa. The inclusion rate is 40% for individuals (effective tax rate of 18% on the gain). However, you can claim a foreign tax credit if you paid CGT in the other country.
Tip: If you are a South African resident but live abroad, you may qualify for the foreign capital gains exemption on your primary residence — but only if you meet specific conditions.
6. Common Mistakes South African Business Owners Make
We see these errors frequently at Blu Solutions:
- Not declaring foreign income: SARS receives data from foreign tax authorities and banks. Hiding income is risky.
- Ignoring exchange rate fluctuations: SARS requires you to convert foreign income at the average rate for the year. Using a wrong rate can trigger an audit.
- Failing to claim foreign tax credits: Many business owners pay tax twice simply because they don’t know how to claim credits.
- Missing the R1.25 million cap: If your foreign employment income exceeds R1.25 million, the entire amount is taxable — not just the excess.
7. How Blu Solutions Can Help
Handling foreign income tax South Africa requires expert knowledge of SARS regulations, double tax agreements, and exchange rate rules. At Blu Solutions, we provide:
- Personalised tax planning for business owners with foreign income
- Preparation and submission of your ITR12 with foreign income sections
- Advice on foreign asset disclosure and CGT
- Assistance with SARS audits and queries
We serve clients in Mossel Bay, George, Knysna, and Cape Town — either in person or virtually. Contact us today for a consultation and ensure your foreign income is handled correctly.
Frequently Asked Questions (FAQ)
1. Do I have to pay tax on foreign income if I live in South Africa?
Yes, if you are a South African tax resident, you must declare and pay tax on your worldwide income, subject to exemptions and credits.
2. What is the foreign employment income exemption limit?
The exemption is capped at R1.25 million per year of assessment. If you earn more than that, the full amount is taxable in SA.
3. Can I claim a foreign tax credit for taxes paid abroad?
Yes, but only if the foreign income is not exempt under Section 10(1)(o)(ii). The credit is limited to the SA tax payable on that income.
4. What happens if I don’t declare foreign income?
SARS can impose penalties of up to 200% of the tax due, plus interest. In serious cases, criminal prosecution is possible.
5. Do I need to declare foreign assets?
Yes, if the total cost of your foreign assets exceeds R500,000, you must declare them on your ITR12.
Conclusion
Navigating foreign income tax South Africa doesn’t have to be overwhelming. By understanding your residency status, claiming the right exemptions, and reporting correctly, you can stay compliant and minimise your tax burden.
At Blu Solutions, we are committed to helping South African business owners in Mossel Bay, George, Knysna, and Cape Town manage their tax obligations with confidence. Whether you need a one-off review or ongoing tax support, our team is here to help.
Don’t leave your foreign income to chance. Get in touch with Blu Solutions today and let us handle the complexities for you.