Should I formally emigrate when I move overseas?
For anyone considering moving abroad through the EB-5 program, there is a big question mark around whether to formally emigrate, or just relocate. The first question to ask yourself is: how long do I plan to stay abroad? If you’re planning to move back to South Africa eventually, relocation is probably the right answer. If you’re planning to move permanently, formal emigration may be right for you.
Of course, if you’re not entirely sure how long you’re going to stay abroad, you’ll have to weigh up both options, and factor in any concerns you may have about the risks of being invested primarily in South Africa.
What is formal emigration?
Formal emigration, also known as ‘financial emigration’, is the process that formalises your permanent exit from South Africa for exchange control purposes. It changes your South African tax status from resident to non-resident. Once you are a non-resident for tax purposes, you will only be subject to SA tax on income that has its source in South Africa.
It’s important to note that this is a Reserve Bank process, and it does not affect your South African citizenship. You can formally emigrate and still keep your South African citizenship and passport. ‘Formal emigration’ is also not synonymous with emigration (i.e. moving abroad). Many South Africans informally emigrate and live overseas, without doing the formal process of changing their financial status in South Africa.
What happens when you formally emigrate?
- You qualify for a foreign capital allowance of R10 million per adult per calendar year, or R20 million per family unit.
- You’re granted a travel allowance of up to R1 million per adult and R200 000 per child under the age of 18 in the year you move.
- You’ll be able to export household and personal effects within an overall insured value of R2 million.
- The South African Revenue Service (SARS) will consider you a ‘non-resident’ when it comes to tax. This will result in capital gains tax (CGT) being triggered on all your assets, except for fixed property, at the time of formal emigration. But thereafter, you will not be liable for tax on income that has its source outside of South Africa.
- You’ll be able to gain early access to any retirement annuity savings and move these offshore.
- Any post-emigration inheritances will be treated as freely remittable i.e. no tax clearance is required.
What is ‘informal emigration’?
This is moving to another country, without permanently changing your SA tax residence status from resident to non-resident. It’s the simpler option, and you can always initiate the formal emigration process later on, but there are a couple of factors to consider before deciding this is the right option for you.
What happens when you relocate or ‘informally emigrate’?
- You will remain a SA tax resident. This means you will be liable for SA tax on your worldwide income. However, there are ‘physical presence’ criteria that may give you tax breaks in each individual year that you are living abroad. A tax specialist will be able to give advice based on your specific circumstances.
- You will be able to take money offshore via an annual foreign investment allowance. Currently, this allowance is R10 million per year, plus a single discretionary allowance of R1 million per year. This is subject to obtaining a foreign investment tax clearance certificate from SARS.
Exchange controls: subject to change?
For now, South Africa’s exchange control regulations are relatively ‘generous’. In 2015, the annual foreign investment allowance was increased from R4 million per year to R10 million, along with an additional single discretionary allowance of R1 million per year.
The million-dollar question is: How long will these allowances remain in place?
The other issue is that although the allowances are generous, they are subject to obtaining a clearance certificate from SARS. There have been complaints that these are getting increasingly difficult to obtain.
For anyone concerned about future changes to exchange controls, the obvious answer is to take as much money offshore as you can, while the gates are still open. And, likewise, if you’re looking to obtain foreign residency through investment, start the process as soon as possible.