FAQ – Is Dubai a Tax Haven or Tax Trap?

Johannesburg – Dubai has become a magnet for internationally mobile professionals, entrepreneurs, and the very wealthy owing to its zero tax policy on employment or investment income.

Unsurprisingly, many South Africans seek employment in Dubai for this reason, but how can they shelter their offshore earnings or assets from taxation on return to South Africa?

“The devil is unfortunately in the detail and the answer is not that simple,” says Anton Maskowitz of RMB Private Bank’s International Advisory Services.

“What many of these South African nationals residing in Dubai do not realise, is that South Africa operates a resident-based tax system and expats’ worldwide income may still be taxable here.”

“Consequently, their immediate tax position is generally of far greater importance than a future tax planning strategy,” he says.

South Africa has a two-tiered approach to income tax residency. One tier is for people who are ‘ordinarily resident’; a second tier is where one falls within the ambit of the physical presence test.

The physical presence test makes a person resident for tax purposes in South Africa if present in the country for more than 91 days in a current tax year; for more than 91 days in each of the preceding five tax years, and for a period of more than 915 days in aggregate during that preceding five year period.

“This test is relative straightforward and if you are not physically present in South Africa for the prescribed periods, then one would fall outside the ambit of this test,” says Maskowitz.

“However, the Income Tax Act is clear that the physical presence test will only be relevant if you are not ordinarily resident,” says Maskowitz.

Ordinarily resident test

The ordinarily resident test, in comparison, is much more complex because, unlike the physical presence test, it is not defined in the Income Tax Act.

Although the South African Revenue Service (Sars) has issued an interpretation in 2002, each case must be tested on its own merits.

If a person has left South Africa, and has a clear intention to return at some point in the future, then that person is likely to remain an ordinarily resident for tax purposes in South Africa.

To fall outside the ambit of the ordinarily residence test, a person has to leave South Africa with a degree of permanence. This is a factual test and the courts have to determine whether a that individual had the intention to leave South Africa permanently.

“It is also important to note that Sars’ view independent contractors – professionals rendering their services on a contractual basis while abroad – as falling outside the scope of these conditions. This type of income would remain taxable in South Africa,” says Maskowitz.

“The Act also places the burden of proof on the taxpayer and where Sars is of the opinion you were ordinarily resident during your period of absence, it is up to you to prove the contrary,” Maskowitz adds.

Dubai, as part of the United Arab Emirates, does not have a double taxation treaty with South Africa because it does not impose any meaningful taxes normally covered in a Double Tax Treaty.

This means if one is still regarded as ordinarily resident in South Africa and earning income (other than employment income) one will remain taxable in the country on a worldwide basis.

Foreigners can generally not obtain permanent residency in Dubai and consequently immigration is not an option for South African nationals. Without permanent residency, formal emigration would arguably be much more difficult.

If you are relocating to Dubai, it is important to obtain expert tax advice before leaving South Africa to formulate your income tax resident status.

Failing to arrange your affairs carefully could see one subject to hefty fines and unexpected tax liabilities in the future.