Taxation Of Foreign Pensions Likely To Change

In terms of South African tax law, retirement benefits received by South African tax residents from foreign retirement funds may be fully exempt from tax in certain circumstances. Specifically, a tax exemption applies to any lump sum, pension, or annuity received by a tax resident from a source outside South Africa, if that amount is received as consideration for past employment outside South Africa.

In the 2025 draft tax legislation, it was proposed that this exemption be deleted. This would have resulted in South African tax residents being taxed on foreign sourced retirement benefits with effect from 1 March 2026. The reasons given for this proposal were firstly to prevent double non-taxation of these benefits and secondly to allow South Africa to exercise its taxing rights under double tax treaties.

As a result of public comments received, the proposal was withdrawn by National Treasury, but it was indicated that government would initiate a renewed consultative process with stakeholders. It is therefore expected that further proposals will be introduced in this regard.

In our view, the removal of the tax exemption would result in significant issues which should be considered before this change is legislated. These issues include potential double taxation of foreign retirement benefits funded out of after-tax income and the need to implement a comprehensive legislative framework to cater appropriately for the tax treatment of foreign retirement benefits to align this with benefits provided by South African retirement funds.

Employees may claim a tax deduction for foreign taxes paid on remuneration

Taxpayers may claim either a tax credit or may elect to claim a deduction for foreign taxes paid in respect of any foreign income which is included in their South African taxable income. However, the deductions which employees may claim against their remuneration are limited.

It is now proposed to include in the allowable deductions for employees, a deduction for foreign taxes paid in any foreign country on their remuneration. In particular, employees who derive taxable gains from foreign equity instruments in terms of a share incentive plan may elect to claim a tax deduction (as opposed to a tax credit) for foreign taxes paid on these gains.

Single employment tax registration for groups of companies proposed

In the 2025 Budget, it was indicated that one nominated employer for a group of companies or an employee share scheme trust within a group of companies would be allowed to register as the employer for purposes of employment tax compliance and filing obligations on behalf of multiple companies in a group. This would ease the administrative burden on both the tax authority and the companies as it would avoid multiple registrations of employers where this can be consolidated into one registration. This would be particularly beneficial in the context of share incentive arrangements involving employee share scheme trusts.

However, no proposed amendment was included in the 2025 draft tax legislation, and it is hoped that this change will be included in the 2026 legislative cycle.

Valuation of certain fringe benefits to increase for returning residents

The valuation of bursaries and scholarships provided by employers to relatives of employees and fringe benefits relating to residential property acquired by or used by employees (including loans for acquiring such properties) is based on an employee's prior year's remuneration. However, this excludes exempt remuneration for qualifying services rendered outside South Africa. With effect from 1 March 2026, such exempt remuneration will be included in the valuation of these fringe benefits. This means that employees who received exempt income from foreign services in a prior tax year will have a higher taxable value for these fringe benefits in the subsequent tax year or will no longer qualify for exemptions that they previously could claim. This change may affect South African tax residents who return to South Africa having worked abroad and receive these benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.