Foreign Income Exemption vs Double Taxation Agreements (DTA Explained)
Foreign income exemption reduces taxable income in South Africa, while Double Tax Agreements (DTAs) prevent the same income from being taxed in two countries by allocating taxing rights or providing tax credits.
What Is a DTA?
A DTA refers to a Double Taxation Agreement, commonly known as a tax treaty. It is an agreement between two nations outlining the taxation of income in cases where an individual or business has ties to both jurisdictions.
A Double Tax Agreement (DTA) is a legally binding treaty between nations that takes precedence over domestic laws.
Key Differences: Exemption vs DTA
Factor | Exemption | DTA |
Scope | Employment income only | All income |
Cap | R1.25m | No cap, even where income exceeds R1,250,000 |
How DTAs Work
A DTA can result in a full exemption. Tax residency status establishes South Africa’s authority to impose taxes on your global income. South Africa imposes taxes on your global income if you are considered a tax resident.
South African non-residents are subject to taxation in South Africa solely on income derived from South African sources such as interest from a South African bank, a rental property located in South Africa, and similar sources.
When to Use Each
Scenario | Best Option |
Employment abroad | Section 10 exemption, or ceasing tax residency depending on the specific circumstances |
Investments abroad | 6quat Credit System — taxpayers who maintain tax residency are allowed a credit for foreign taxes paid on foreign sourced income to offset their final South African tax liability |
High income | Exemption, or ceasing tax residency depending on the specific circumstances |
Advanced Strategy
If a taxpayer qualifies as an exclusive tax resident of a foreign country by maintaining their sole residence in that country, which has a DTA with South Africa and the relocation is planned for an extended period, the most effective course of action is to:
- Submit an application to SARS to be classified as a non-resident for South African tax purposes, ensuring full exemption of the income
- If for any reason the tax residency application is denied, follow the exemption method along with Section 6quat to have foreign tax credits awarded
Case Study: UK Relocation
A South African tax resident holding British permanent residency relocates to the United Kingdom on 1 May 2026, following a period of unemployment in South Africa since the beginning of the tax year. The individual secures employment in the UK effective from 1 July 2026.
- South African source income (March 2026 to April 2026): R0
- UK-derived income (July 2026 to February 2027): R2,000,000
- Taxes paid in the UK (July 2026 to February 2027): R400,000
Assume that filing a tax return is not required in the UK, and the amount of R400,000 is proven as payable to the UK tax authorities as required under Section 6quat.
Option 1: Non-Residency Approved
The taxpayer submits an application to update their tax residency status to that of a non-South African tax resident, and SARS provides official confirmation. The taxpayer is permitted to submit their 2027 return declaring the R2 million income as entirely exempt, as the amount accrued to them as an exclusive deemed tax resident of another country by virtue of a DTA.
Option 2: Non-Residency Refused
SARS refuses to update the tax residency status, and the taxpayer has no other option but to file the return claiming the Section 10 exemption.
Item | Amount |
Foreign sourced income | R2,000,000 |
Exemption | -R1,250,000 |
Other deductions | R0 |
Taxable income | R750,000 |
Tax on amount (Tax year 2027) | R206,353 |
Less rebate | -R17,820 |
6quat (credit limited to tax due) | -R188,533 |
Net result | R0 |
Under circumstances where the taxpayer’s sole residence is in the UK, it is highly improbable that SARS would reject the taxpayer’s request to cease tax residency, provided the application is accurately submitted and appropriately supported.
Should the taxpayer’s application be denied due to the presence of another residence in South Africa, Option 2 may then become applicable. Under Option 2, an increase in income correlates with a heightened risk of owing an amount to SARS, while under Option 1 there is no cap on the exempt amount a taxpayer may earn in the other country.
Risk Areas to Watch
Misapplying a DTA This often happens when taxpayers think they qualify to be considered a tax resident in the other country but do not meet all the necessary conditions. This can result in unreported income and potential fines from SARS.
For instance, a taxpayer might believe that working in another country makes them a tax resident there, but may still be considered a tax resident of South Africa because their spouse and minor children live in South Africa.
Reporting income in the wrong country This might result in being taxed twice if income is reported in the wrong country, only to later realise that the other country had the primary right to tax it.
For instance, reporting rental income in the UK even though the property is in South Africa. South Africa held the primary taxing right, while the UK held a secondary right. It may not be possible to correct this after the UK return has been submitted.
Absence of required documentation Over the course of several years, a taxpayer may relocate from their original address and face challenges in acquiring evidence of their initial residence.
The tax authorities in that country may later be unable to verify the address. Providing proof of address and supporting documentation is essential for proving that a taxpayer had a residence available in the other country.
Frequently Asked Questions
Do DTAs eliminate tax?
Double Taxation Agreements do not abolish taxation but instead allocate global taxing rights to the individual’s country of residence.
Is it possible to apply both a DTA and the Section 10 exemption?
Yes and no. Yes, in the year an individual ceases tax residency, though it may not be practical. It is theoretically possible for an individual to spend part of the tax year outside South Africa, return briefly, and subsequently depart again with the intention of ceasing their South African residency. However, this scenario is uncommon.
A taxpayer generally ceases their residency upon initially leaving the country to establish residence in another nation. From the beginning of the tax year until the date of departure, a taxpayer will maintain their South African tax residency status. Following proper procedures, they will then be classified as a non-resident from the date of departure through to the end of the tax year.
Consequently, a taxpayer could be regarded as a South African tax resident for a portion of the year and thereby claim the foreign tax exemption while being classified as a non-resident earning foreign exempt income in another country during the remaining period, though such cases would be uncommon.
If South Africa and the foreign country both try to tax the same income, which country takes priority?
Under a DTA, taxing rights are allocated based on a set of criteria, with tax residency being the primary determining factor. The country where a taxpayer is considered a tax resident generally holds the primary taxing right over worldwide income.
The source country, where the income is earned, may also have taxing rights, but these are typically secondary.
Where both countries tax the same income, the country of residence usually allows a credit for taxes paid in the source country to prevent actual double taxation. This is why correctly establishing your tax residency status before earning foreign income is critical.
What happens if South Africa does not have a DTA with the country I am working in?
If no DTA exists between South Africa and the country where you are working, South African domestic law applies exclusively.
This means that as a South African tax resident, you will be taxed on your worldwide income with no treaty protection. However, you may still be able to claim relief under Section 6quat, which allows a credit for foreign taxes proven to be a final tax liability in the host country, provided all the qualifying criteria are met.
The Section 10 exemption may also still apply if the 183-day and 60 consecutive day requirements are satisfied.
Can a DTA be used to reduce withholding tax on dividends or interest earned abroad?
DTAs frequently contain provisions that reduce or cap the rate of withholding tax that a source country may apply to passive income such as dividends, interest, and royalties.
The specific rates vary depending on the treaty in question. South African tax residents earning this type of income abroad should review the applicable DTA to determine whether a reduced withholding rate applies, and whether any remaining foreign tax can be credited against their South African tax liability under Section 6quat.
A specialist tax practitioner should be consulted to ensure the correct rates and procedures are applied.