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UK Double Tax Agreement - Layman Version

    • This document outlines the Double Taxation Agreement (DTA) between the Government of the Republic of South Africa and the Government of the United Kingdom of Great Britain and Northern Ireland. Its main purpose is to prevent income and capital gains from being taxed twice by both countries and to help prevent tax evasion.
    • This Convention was officially approved by the South African Parliament and came into effect on December 17, 2002.

When the Convention applies to taxes:

    • In South Africa:
      • For taxes withheld at source, it applies to amounts paid or credited on or after January 1, 2003.
      • For other taxes, it applies to taxable years beginning on or after January 1, 2003.
    • In the United Kingdom:
      • For income tax and capital gains tax, it applies to any year of assessment beginning on or after April 6, 2003.
      • For corporation tax, it applies to any financial year beginning on or after April 1, 2003.

Who and What Does This Agreement Cover?

      • Persons Covered: The Convention applies to individuals or companies who are residents of South Africa, the United Kingdom, or both. A “person” includes an individual, a company, and any other group of persons, but not a partnership.
      • Taxes Covered: This agreement applies to taxes on income and capital gains imposed by either country or its local authorities, regardless of how they are collected. This includes taxes on total income, specific types of income, and gains from selling movable or immovable property.

South African Taxes Covered:

      • Normal tax.
      • Secondary tax on companies (which is understood to be a tax on South African company profits, for which credit against UK tax is determined by Article 21(2)(b)).
      • Withholding tax on royalties.
      • United Kingdom Taxes Covered:
      • Income tax.
      • Corporation tax.
      • Capital gains tax. The Convention also applies to any new taxes that are identical or very similar to these existing ones, introduced by either country after the agreement was signed.

Key Concepts for Understanding Your Tax Position

    • Understanding “Residence” (Article 4)
      • Your “residence” is crucial because it often determines which country has the primary right to tax you.
      • Definition of a “Resident”: A person is considered a resident of a country for the purposes of this Convention if, under that country’s laws, they are liable to tax there based on factors like their domicile, residence, place of management, or place of incorporation. The term also includes the government itself and its local authorities.
      • What if you are a resident of BOTH South Africa and the UK? This DTA provides “tie-breaker rules” to determine your sole residence for Convention purposes, especially for individuals:

For Individuals:

      • You are a resident only in the country where you have a permanent home available to you.
      • If you have a permanent home in both countries, you are a resident only in the country where your personal and economic ties are closer (your “centre of vital interests”).
      • If this can’t be determined, you are a resident only in the country where you have an habitual abode (where you live most often).
      • If you have an habitual abode in both or neither, you are a resident only in the country of which you are a national (citizen).
      • If you are a national of both or neither, the tax authorities of both countries will mutually agree on your residence.
      • For Companies or Other Entities (not individuals): If an entity is a resident of both countries, it is considered a resident only of the country where its place of effective management is located.

Understanding “Permanent Establishment” (PE) (Article 5)

    • A “permanent establishment” generally means a fixed place of business through which a business is carried on. If a business operating from one country has a PE in the other, then the profits attributable to that PE may be taxed in the other country.
      • Examples of a Permanent Establishment: This commonly includes a place of management, a branch office, a factory, a workshop, a mine, an oil or gas well, a quarry, or any site for extracting natural resources, or an installation for exploring natural resources.
      • Construction Projects: A building site, construction, assembly, or installation project, or any related supervisory activity, is considered a PE only if it lasts for more than twelve months.
      • Professional Services: An individual performing professional or independent services can create a PE if those services continue in the other country for more than 183 days in any twelve-month period.
      • Activities NOT Considered a PE (Preparatory or Auxiliary): Certain activities are generally not considered a PE, even if they are fixed places of business. These include:
        • Using facilities solely for storage, display, or delivery of goods.
        • Maintaining a stock of goods solely for storage, display, or delivery.
        • Maintaining a stock of goods solely for processing by another business.
        • Maintaining a fixed place of business solely for purchasing goods or collecting information for the business.
        • Maintaining a fixed place of business solely for any preparatory or auxiliary activity.
      • Any combination of these activities, provided the overall activity is preparatory or auxiliary.
        • Agents: If someone acts on behalf of a business and habitually has the authority to sign contracts for that business in the other country, that business is usually considered to have a PE there, unless the agent’s activities are just preparatory or auxiliary. However, a business does not have a PE just because it carries on business through an independent agent (like a broker) acting in the ordinary course of their business.
        • Company Control: One company controlling another (e.g., a parent company and its subsidiary) does not automatically make either company a PE of the other.
      • How Different Types of Income Are Taxed for South Africans
        • This section is particularly relevant for South Africans working abroad or living in South Africa with income from the UK.

Business Profits (Article 7)

        • General Rule: If a South African business operates in the UK, its profits are generally only taxable in South Africa, unless it has a permanent establishment (PE) in the UK.
        • With a PE: If it has a PE in the UK, then the UK may tax the profits, but only the portion that is attributable to that UK PE.
        • Calculating PE Profits: The profits attributed to the PE are what it would be expected to make if it were a separate, independent business. Expenses incurred for the PE, including management and administrative costs, are deductible. Simply purchasing goods for the business through a PE does not, by itself, result in profits being attributed to the PE.

Income from Employment (Salaries, Wages, etc.) (Article 14)

        • General Rule: If you are a resident of South Africa and receive income from employment, it is generally only taxable in South Africa, unless your employment is exercised (i.e., you work) in the United Kingdom. If you work in the UK, then the UK may tax that income.
        • The “183-Day Rule” (Important Exception): Even if you work in the UK, your employment income will be taxable only in South Africa (your resident state) if all of the following conditions are met:
      • You are present in the UK for 183 days or less in any twelve-month period.
      • Your remuneration is paid by, or on behalf of, an employer who is not a UK resident.
      • Your remuneration is not paid by (borne by) a permanent establishment your employer has in the UK.
        • Working on Ships or Aircraft: If you work aboard a ship or aircraft operated in international traffic, your remuneration may be taxed in the country where the enterprise operating the ship or aircraft is a resident.
        • Specific Rules Apply: This general rule is subject to specific rules regarding Directors’ Fees (Article 15), Pensions (Article 17), and Government Service (Article 18).

Pensions and Annuities (Article 17)

        • General Rule: Most pensions and other similar payments for past employment, as well as annuities, paid to a resident of South Africa, will be taxable only in South Africa. This is subject to the specific rules for government service pensions (Article 18(2)).
        • Pension Scheme Contributions (Important for Transfers/Moves):
          • If you are employed in one country (e.g., the UK) and contribute to a pension scheme established and recognized for tax in the other country (e.g., South Africa), your contributions may be deducted from your taxable income in the first country (e.g., UK).
          • This applies if you were not a resident of that first country and were already contributing to the scheme immediately before you started working there.
          • The pension scheme must also be recognized by the tax authorities of the first country as generally corresponding to a local recognized scheme.
          • Employer contributions to such a scheme are not treated as your taxable income and are deductible for the employer.

Capital Gains (Article 13)

          • Immovable Property: Gains from selling immovable property located in the UK (as defined in Article 6) may be taxed in the UK.
          • Shares or Interests Linked to Property: Gains from selling shares (unless quoted on an approved stock exchange) that get their value mainly from immovable property in the UK, or an interest in a partnership or trust whose assets are mainly such immovable property or shares, may be taxed in the UK.
          • Business Property (PE Assets): Gains from selling movable property that forms part of the business assets of a permanent establishment in the UK may be taxed in the UK.
          • Ships or Aircraft in International Traffic: Gains from selling ships or aircraft operated in international traffic, or related movable property, will be taxable only in the country where the selling enterprise is a resident (e.g., South Africa if the enterprise is resident there).
          • All Other Property: Gains from selling any other type of property not mentioned above will be taxable only in the country where the seller is a resident (e.g., South Africa if you are a resident there).
          • Special Rule for Individuals Who Move (Important for South Africans moving abroad): Even if you are a resident of the UK, South Africa still retains the right to tax capital gains from selling any property if:
            • You were a resident of South Africa at any time during the six years immediately before selling the property.
            • The property was held by you (or your spouse) before you became a UK resident.

Dividends (Article 10)

            • Dividends paid by a company resident in one country (e.g., the UK) to a resident of the other country (e.g., South Africa) may be taxed in South Africa.
            • Tax in the Company’s Country: However, the country where the company paying the dividends is a resident (e.g., UK) may also tax those dividends, but the tax charged should not exceed 15% of the total dividend amount if the beneficial owner is a resident of the other country.
            • Exemption for Companies: Dividends are generally exempt from tax in the country where the company paying them is resident if the beneficial owner is a company resident in the other country and controls at least 10% of the voting power in the paying company.
            • Anti-Abuse Rule: The dividend rules do not apply if the main purpose of creating or assigning the shares was to gain an unfair advantage from this article.

Interest (Article 11)

            • Interest arising in one country (e.g., the UK) and paid to a beneficial owner who is a resident of the other country (e.g., South Africa) will generally be taxable only in South Africa.
            • Special Relationships: If interest payments between related parties are higher than what independent parties would agree on, the excess amount can be taxed according to the laws of each country.
            • Anti-Abuse Rule: The interest rules do not apply if the main purpose of creating or assigning the debt was to gain an unfair advantage from this article.

Royalties (Article 12)

            • Royalties arising in one country (e.g., the UK) and paid to a beneficial owner who is a resident of the other country (e.g., South Africa) will generally be taxable only in South Africa.
            • “Royalties” includes payments for using copyrights, patents, trademarks, designs, secret formulas, or for “know-how” (information about industrial, commercial, or scientific experience).
            • Special Relationships: Similar to interest, if royalty payments between related parties are higher than what independent parties would agree on, the excess can be taxed according to each country’s laws.
            • Anti-Abuse Rule: The royalty rules do not apply if the main purpose of creating or assigning the rights was to gain an unfair advantage from this article.

Income from Immovable Property (Article 6)

            • Income that a resident of South Africa receives from immovable property (like real estate, including income from agriculture or forestry) located in the UK may be taxed in the UK.
            • The term “immovable property” is defined by the laws of the country where the property is located, but generally includes things attached to land, livestock and equipment used in farming/forestry, and rights to natural resources. Ships and aircraft are not considered immovable property.

Shipping and Air Transport (Article 8)

            • Profits earned by a South African enterprise from operating ships or aircraft in “international traffic” (transport that goes beyond solely within the UK) will be taxable only in South Africa.
            • This also includes profits from renting ships or aircraft on a bareboat basis, and profits from the use or rental of containers used for transport, as long as these activities are incidental to international traffic operations.

Directors’ Fees (Article 15)

            • Fees and similar payments received by a resident of South Africa in their role as a member of the board of directors of a company resident in the UK may be taxed in the UK.

Entertainers and Sportspersons (Article 16)

            • Income earned by a South African resident as an entertainer (like a musician or actor) or a sportsperson from their personal activities in the UK may be taxed in the UK.
            • This also applies if the income goes to another person instead of directly to the entertainer/sportsperson.
            • Exception: If the visit to the UK is mainly or wholly supported by public funds from South Africa (or a local authority), or takes place under a cultural agreement, then the income is taxable only in South Africa.

Government Service (Article 18)

            • Salaries/Wages: Generally, salaries, wages, and similar payments (excluding pensions) paid by the South African government (or its subdivisions) to an individual for services rendered to them, will be taxable only in South Africa.
            • Exception: This income will be taxable only in the UK if the services are performed in the UK and the individual is a UK resident who is also a UK national, or who did not become a UK resident just to provide those services.
            • Pensions: Any pension paid by the South African government (or its subdivisions) for services rendered to them, will be taxable only in South Africa.
            • Exception: This pension will be taxable only in the UK if the individual is a UK resident and a UK national.
            • Business Activities: These government service rules do not apply if the services are rendered in connection with a business carried on by the government. In such cases, the rules for Employment Income, Directors’ Fees, Entertainers/Sportspersons, and Pensions (Articles 14, 15, 16, 17) apply.

Students and Apprentices (Article 19)

            • If you are a student or apprentice from South Africa who is temporarily in the UK solely for education or training, you will be exempt from tax in the UK on payments you receive from outside the UK for your maintenance, education, or training. This applies if you were a South African resident immediately before your visit to the UK.

Other Income (Article 20)

            • For any other types of income of a South African resident that are not specifically covered in other articles of the Convention, they will generally be taxable only in South Africa, regardless of where the income arises.
            • Exception: If this “other income” (unless it’s from immovable property) is connected to a permanent establishment in the UK, then the UK may tax that income.
            • General Residual Rule: Even if not covered elsewhere, items of income of a South African resident that arise in the UK may also be taxed in the UK.

How Double Taxation is Avoided (Article 21)

          • Since some income types may be taxed in both South Africa and the UK under the Convention, both countries provide mechanisms to avoid actual double taxation.
            • For South African Residents: If you pay UK tax on income that is also taxable in South Africa (according to this Convention), South Africa will allow you to deduct the UK tax paid from your South African tax liability. However, this deduction cannot exceed the portion of your total South African tax that relates to that UK-sourced income.
            • For United Kingdom Residents: If you pay South African tax on profits, income, or capital gains from sources within South Africa (according to this Convention), the UK will allow you to credit that South African tax against your UK tax liability on the same income.
            • Special rule for dividends: If a South African company pays a dividend to a UK company that controls at least 10% of the voting power in the South African company, the UK tax credit will also take into account the South African tax paid by the South African company on the profits from which the dividend was paid.
            • Source of Income: For UK residents, any profits, income, and capital gains that may be taxed in South Africa under this Convention are considered to have arisen from sources in South Africa.

Limitation of Relief (Article 22)

          • This is important if you are taxed on a “remittance basis” in one country (e.g., if the UK only taxes you on income actually brought into the UK, not your worldwide income).
            • If income or gains are relieved from tax in one country (e.g., South Africa) under this Convention, but the other country (e.g., the UK) only taxes that income when it’s remitted or received there (not on the full amount), then the tax relief provided by the first country will only apply to the amount that is actually taxed in the other country.

Fairness and Cooperation

Non-discrimination (Article 23)

    • Citizens of one country should not face more burdensome taxes or tax requirements in the other country than that country’s own citizens in similar situations.
    • A permanent establishment of a business from one country in the other country should not be taxed less favorably than local businesses doing the same activities.
    • Payments like interest and royalties made by a business in one country to a resident of the other country should generally be deductible under the same conditions as if they were paid to a local resident.
    • Businesses owned or controlled by residents of the other country should not be subjected to more burdensome taxes than similar local businesses.
    • However, neither country is obliged to grant personal tax allowances or reliefs to individuals who are not resident in that country.
    • South Africa specifically can impose a tax on the profits of a UK company’s permanent establishment in South Africa at a rate that is not more than five percentage points higher than its normal company tax rate.

Mutual Agreement Procedure (Article 24)

    • If you believe that the actions of South Africa or the UK (or both) have resulted in taxation that is not in line with this Convention, you can present your case to the tax authorities of your country of residence (or nationality, in certain non-discrimination cases).
    • The tax authorities will try to resolve the issue by mutual agreement with their counterparts in the other country, aiming to avoid taxation that is contrary to the Convention.
    • They can also consult to resolve any difficulties or doubts about interpreting or applying the Convention, and to eliminate double taxation in situations not specifically covered. They can communicate directly for this purpose.

Exchange of Information (Article 25)

    • The tax authorities of South Africa and the UK will exchange information that is necessary to carry out the provisions of this Convention or their domestic tax laws, particularly to prevent fraud and facilitate measures against legal avoidance.
    • Any information received is treated as secret and can only be disclosed to persons or authorities involved in the assessment, collection, enforcement, prosecution, or appeals related to the taxes covered by the Convention. This information can be disclosed in public court proceedings or judicial decisions.
    • However, neither country is obliged to:
    • Carry out administrative measures that go against its own laws or administrative practices.
    • Supply information that is not obtainable under its own laws or in the normal course of its administration.
    • Supply information that would reveal trade, business, industrial, commercial, or professional secrets, or information that would be contrary to public policy.

Diplomatic and Consular Missions (Article 26)

    • This Convention does not affect the tax privileges of members of diplomatic or permanent missions or consular posts under international law or special agreements.
    • Generally, such individuals (and their families) from one country or a third state, located in the other country, are not considered residents of that other country for Convention purposes if they are only taxed on income or capital gains from sources within that other country
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