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The concept of “virtual emigration” refers to a cross-border relationship between where an employee performs employment services and the jurisdiction where the employer is located. Examples of virtual emigration arrangements would be where a South African employee of a United Kingdom company moves back to South Africa and retains the employment relationship with the United Kingdom employer, working remotely from Cape Town; or where an entity based in Canada allows one of its employees to reside in South Africa and work within South Africa remotely.The critical distinguishing factor of virtual emigration is the cross-border component, which means that the laws and regulations of more than one country applies to the working arrangement.
Service offering
Because we understand the nuance of expat tax and remote working, we are qualified to help with:
Applying for tax relief under a Double Taxation Agreement
Concluding a financial emigration
Expatriate tax returns and exemption qualification
Visa and permit application assistance
Foreign remittance and exchange control compliance
We understand the nuance of expatriate tax and the modern shift towards remote working. Our experienced consultants are there to guide you through every step of your virtual emigration journey.
Top 5 Considerations
1
Work Visa Status
The right of any employee to perform employment services is determined by the employee’s citizenship and residency status.
As a general rule, where someone performs employment services (equally self-employment) they must have a right to perform the service being physically located in a jurisdiction. This is an easy compliance tick when a South African citizen returns to South Africa and works remotely here for an international company. However, it becomes complex where for example an international company hires the USA national spouse of a USA expatriate, to work virtually in South Africa. There is no automatic employment right and the spouse must obtain a work visa or residency status which allows the right to exercise employment in South Africa. There is a criminal sanction for both the employer and employee in cases of non-compliance and the most severe penalty is an “undesirable status” stamp by Home Affairs and deportation, where caught working in breach. This is something which should be proactively planned and avoided, as getting a status corrected is a complex and costly process. Care should also be taken when hiring employees who are on student, retirement or spousal arrangements, as whilst they may be legally residing in a country; their status does not allow the right of employment or running their own business. This aspect must be considered on a case by case basis, as the work visa rules of each jurisdiction comes with its own nuances and exceptions. It should also be noted that in certain countries, like South Africa, where an employee does not have the right to work, the employer is not allowed to automatically terminate the employment relationship.
2
Labour Law
The principle of labour law is generally that the employee is entitled to the dispensation of the country where the employee is physically performing the employment services.
This creates unplanned risk for any international employer hiring a South African employee, as non-compliance with South African law comes with a disgruntled employee having strong recourse to the CCMA and labour court. It is well known that South African labour laws are heavily employee centric and far from the flexibility of a completely free market arrangement like the United States, where hiring and terminating employment relationships are far easier. Any South African employment arrangement with a remote employee based in South Africa, whether the person in a South African or under work visa, requires specific attention by the employer to ensure compliance with South African labour law. This does not only apply to the terms and conditions of employment and policies, but also how the employee is treated, especially where the employee does not operate within the rules. The same principles apply to hires by South African companies of employees everywhere else in the world, and the labour laws of each jurisdiction must be considered.
3
Employer Compliance
Where an employee is located in a specific country, this creates an economic and tax presence for the employer in the country where the employee is based.
For example, where a German firm hires a South African based employee, the German country should consider the registration requirement as an “external company” in South Africa under the Companies’ Act as well as Income Tax registration requirement for the company as the employee in South Africa creates a “permanent establishment” for the employer in South Africa. There is almost always a transfer pricing consideration triggered for the employer, which is a complex and compliance costly area of international tax law. Both the Companies Act and Income Tax Act compliance is triggered by having an employee in South Africa, which generally permanent or for more than 6 months perform employment services in South Africa. The same rules apply to South African companies hiring employees in India for example, the rules are generally very closely aligned as international corporate tax is governed by Double Tax Treaties, which contains similar provisions across jurisdictions.
4
Forex and Exchange Control
In South African there is exchange control, meaning that a South African employee that is exchange control resident must convert their foreign earning into ZAR within 30 days and where South African employers pay international employees, they must undergo a South Africa Reserve Bank process.
Earning in hard currency is an attractive pull for South African employees to enter into virtual emigration employment relationships, ensuring you know the do’s and don’ts of compliance is essential to ensure you do not get into hot water while maximising your earnings. The 30 day period to convert your earnings to Rand, means that by planning your conversion optimally, you can receive maximum Rand every month.
5
Employees’ Tax and Social Security
The employer is responsible for registration and payment of employees’ tax and social security.
In South Africa this refers to PAYE, SDL, UIF and COIDA. In many other countries there is also a high level of social security cost, such as the employer and employee contributions towards social security in the United Kingdom, China, Japan etc. Furthermore, employees are often subject to tax by virtue of PAYE in South Africa as well as liable for tax in the country where they are residing. This can raise the potential for double taxation, unless decisive steps are taken to mitigate and manage this risk. Double taxation can be avoided by applying certain domestic legal provisions or in terms of a double taxation agreement.
Planning and Current Legislative Framework
As with any area of employment or fiscal planning, the key is proactive planning and to ensure compliance and optimal treatment.
There are very well-developed laws which governs the principles of virtual emigration as the underlying principles have not changed, i.e. laws are drafted based on a “mischief” rule or purposive interpretation. Explained differently, whilst these laws where not drafted or developed with the concept of “virtual emigration”, they were formed to protect the principles and ensure compliance associated with international trade, which has been long in existence and well refined.