On 12 March 2025, the Minister of Finance, Enoch Godongwana, delivered South Africa’s 2025 Budget Speech to Parliament, and the tax amendments proposed included more than just an increase in the VAT rate. In the 2025 Budget Review, the Minister proposed changes to the rules that currently exempt lump sums, pensions and annuities received by South African residents from foreign retirement funds for previous employment outside South Africa. Megan Landers, Senior Manager: Cross Border AJM and Bradley Zebert, Senior Associate AJM take a closer look.
Retirement lump sum funds
Currently, South Africa taxes local retirement lump sum funds at a reduced rate, with the first R550,000 being exempt from tax. Any annuity payments will be taxed at the normal tax rates for individuals. However, South Africa provides relief in terms of our domestic law to pensioners who are South African residents receiving any lump sum, pension or annuity from foreign retirement funds. Section 10(1)(gC)(ii) of the Income Tax Act exempts from South African normal tax any lump sum, pension or annuity received by a South African resident from foreign retirement funds for past employment rendered outside South Africa.
Controversy around tax on foreign pensions
Interestingly, the section 10(1)(gC)(ii) foreign pension exemption was intended as an interim measure. The foreign pension exemption was introduced in 2000 when South Africa moved from a source basis of taxation to a worldwide basis of taxation. The taxation of foreign pensions raised controversy. Many reasons were put forward as to why foreign pensions should not be taxed in South Africa. It was argued that it might discourage foreigners from retiring in South Africa, that no deductions were allowed for that pension contribution in South Africa, that the income from a pension is static, and that any tax imposed thereon will effectively reduce the pensioners’ income.
It was decided that foreign pensions should not be taxed in South Africa to provide sufficient time to determine how contributions to foreign pension funds and the taxation of payments from foreign funds should be dealt with and to determine the economic impact of taxing foreign pensions.
The double tax agreement
Generally, foreign countries would also want to tax foreign pensions because they are from a source in that country. However, from a policy perspective, certain countries believe that taxation should be allocated on the basis of residence alone, as that country of residence will be required to support those pensioners in their old age. In line with this policy perspective and as a means to provide relief from double taxation, a double tax agreement may afford exclusive taxing rights to the country of residence. Amongst the double tax agreements concluded by South Africa with various countries, exclusive taxing rights are allocated to South Africa as the resident country in certain instances with regard to pension payments. These double tax agreements include the following: Austria, Belgium, Bulgaria, China,
Czech Republic, Denmark, Hungary, Israel, Italy, New Zealand, Portugal, Russia, Spain, and the United Kingdom.
Issues still need to resolved
Accordingly, when these double tax agreements are read with section 10(1)(gC)(ii), even though South Africa alone (as the country of residence) may tax the pension received by a resident individual in consideration of past employment in the aforementioned countries, it is exempt from South African income tax in terms of our domestic law, thereby resulting in double non-taxation.
It is unclear whether the problems initially resulting in foreign retirement income being exempt in South Africa have been resolved. Will foreign retirement income be taxed the same as South African retirement income, or will the amendment only capture instances of double non-taxation? The proposed changes to the foreign pension exemption are expected to be made as part of the upcoming legislative cycle in June/July 2025. In doing so, South Africa will need to balance various policy considerations and consider the effects of any potential double taxation where both South Africa and the foreign jurisdiction tax the income.
