We are a South African non-profit organisation looking to appoint a South African citizen in a European country on an employment contract.
What would the tax implications be, and do we need to apply for approvals if we proceed?
Thomas Lobban, legal manager: cross-border taxation at Tax Consulting South Africa responds:
We are not experts on European employment and labour law, but the question is extremely topical for any international employer and with a remote working arrangement. Thus, the same set of rules would apply to a foreign company hiring a South African to work in South Africa remotely; where they have no office. Also, the same rules will apply where South African company wants to hire a remote worker anywhere else in the world.
Before we deal with the rules, it is therefore important to note that being a non-profit does not impact your work visa, tax or labour rules. These rules are established under international law, so whether you are a normal enterprise or non-profit, the principles are the same.
There are seven areas of law which you need to understand and comply with. Synoptically, these are –
- Corporate registration. Where a company (including a non-profit) in country A (South Africa) has an employee in country B; the employee creates a corporate presence in South Africa. This comes with a registration requirement for the employer in country B. In South Africa that requirement for a foreign employer is section 23 of the South African Companies Act 71 of 2008.
- Company. The employer would also need to register under the tax system of country B, even where you are a non-profit. The technical term is that the employer creates a "permanent establishment" where the employee works. As an example, where a foreign charity has employees in South Africa, it still has a SARS requirement in South Africa. Even though income is exempt, this is still legally controlled by SARS and SARS must confirm the exempt nature hereof.
- Work visa. The employee must have a right to work (work visa, permanent residency or citizenship) in that European country. No employer can have an employee who illegally works for them in a country. In South Africa, as in most countries, noncompliance is a criminal offence and in South Africa the responsible human resources person can get arrested under section 49(3) of the Immigration Act 13 of 2002.
- PAYE and social security. The revenue authority of the European country has the right to collect PAYE and social security from the employer. The country where work is physically performed always have the first taxing right and same as in South Africa, SARS would look to collect this from the employer. There are some of exceptions, but these are rare and must be specifically claimed.
- Labour law. Where a foreign employer hires anyone to work in South Africa, there is still application of South African labour law. The CCMA will not be impressed to hear that a foreign employer thinks it is exempt from our labour laws. The same principle applies to hiring an employee from that country; so the employment agreement must conform with that country's labour laws and regulations.
- Exchange control. Where a South African charity wants to pay money abroad, especially to a South African citizen; the South African Reserve Bank will not allow the money to flow without the required process and approvals. Has the South African citizen financially emigrated on the SARS and SARB systems?
- Home and host compliance issues. Each country has specific laws applying to sectors in which someone operates. There must be a check done whether the activity is approved and regulated. For example, if you are a tax practitioner or financial advisor, you are regulated in South Africa even where you are based outside.
The complexity of the seven areas of law may be simplified by three categories of solutions. Some employers call these silos or "buckets", which is effectively how you classify the arrangement and each comes with its own benefits and disadvantages.
- Normal employment. The employer must then comply with all the seven requirements and typically this means a not-for-profit organisation must be established in that country and local advisors should be engaged to ensure compliance.
- Employer on record. This is similar to what is known as labour broking in South Africa, but for professional staff. There are local entities in that country which will become the employer on record and enter into a services agreement. This especially works well in Africa, but also the rest of the world, where you have a resource but do not want then to be create an employer registration requirement in the home country or an independent contractor arrangement.
- Independent contractor. The decision for a resource to work remotely is sometimes a personal decision. Where they create their own local services entity and perform the services on a subcontracting basis, the compliance shifts to the resource and not the employer. There are various anti-avoidance and deeming provisions to consider; so as long as these are followed, there is a compliant and sustainable approach. This would often not work where there is a bonus or share incentive scheme application; but as the case study is a non-profit, this would not apply.
It is clear how quickly an engagement such as the above can become complex and we strongly do not believe in a fingers-crossed approach. Where this is not planned optimally, you can land yourself in a precarious position with the relevant tax authorities in one or both countries.
Nothing trumps good, proactive planning. The above items should ideally form part of a "roadmap" discussion with a trusted provider that has relevant experts in-house who can pull this all together for you.
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