SARS Interpretation Note 16 Issue 4: Exemption from income tax: Foreign employment income (source: https://www.sars.gov.za/lapd-intr-in-2012-16-exemption-foreign-employment-income/)
INTERPRETATION NOTE 16 (Issue 4)
DATE: 28 June 2021
ACT : INCOME TAX ACT 58 OF 1962
SECTION : SECTION 10(1)(o)(ii)
SUBJECT : EXEMPTION FROM INCOME TAX: FOREIGN EMPLOYMENT INCOME
Preamble
In this Note unless the context indicates otherwise –
• “SDL” refers to the skills development levy under the Skills Development
Levies Act, 1999;
• “section” means a section of the Act;
• “the Act” means the Income Tax Act 58 of 1962;
• “UIF” refers to unemployment insurance fund contributions under the
Unemployment Insurance Contributions Act, 2002; and
• any other word or expression bears the meaning ascribed to it in the Act.
All guides and interpretation notes referred to in this Note are available on the SARS
documents should be consulted.
1. Purpose
This Note discusses the interpretation and application of the foreign employment
remuneration exemption in section 10(1)(o)(ii).
2. Background
The exemption under section 10(1)(o)(ii) was introduced in 2000 to prevent double
taxation of an individual’s income between South Africa and a host country. The
exemption creates opportunities for double non-taxation in instances where the host
country imposes little or no tax on employment income. This outcome is contrary to
the purpose for which the exemption was introduced. It was originally indicated that
the impact of the exemption would be monitored with specific focus on whether the
exemption is unduly exploited resulting in no foreign tax on foreign employment
income.
From 1 March 2020 and in respect of years of assessment commencing on or after
that date, foreign employment income earned by a tax resident of South Africa will no
longer be fully exempt as the exemption under section 10(1)(o)(ii) will be limited to
R1,25 million. Any foreign employment income earned over and above R1,25 million
will be subject to normal tax in South Africa, applying the normal tax rates for the
particular year of assessment. All requirements to qualify for the exemption under
section 10(1)(o)(ii) remain the same.
The Note discusses the requirements to qualify for the exemption under
section 10(1)(o)(ii). The impact of the limitation of the exemption and the correct
method of apportionment is also examined, as well as how the exemption affects gains
included in income upon the vesting of any equity instrument under section 8C.
3. The law
The relevant sections of the Act are quoted in Annexure A. A table displaying the
comparisons between section 10(1)(o)(i), 1 10(1)(o)(iA) 2 and 10(1)(o)(ii) insofar as the
application of an exemption from foreign employment services, is set out in
Annexure C.
4. Application of the law
4.1 Qualification criteria for the exemption
In order to qualify for the exemption, a taxpayer must be a tax resident of South Africa
who earns certain types of remuneration for employment services rendered outside
the Republic. The exemption will only be available provided the specified qualifying
periods are met and none of the exclusions apply.
These requirements are analysed and interpreted below.
4.1.1 Remuneration
Not all remuneration 3 qualifies for exemption under section 10(1)(o)(ii).
The remuneration that qualifies is remuneration received by or accrued to an employee
“by way of” the following amounts, namely, salary, leave pay, wage, overtime pay,
bonus, gratuity, commission, fee, emolument or allowance, for services rendered.
Amounts contemplated in paragraph (i) of the definition of “gross income” in
section 1(1) are also included, 4 as too are amounts referred to in sections 8, 5 8B 6 or
8C. 7
The exemption relates to remuneration received or accrued for services that were
rendered outside the Republic (see 4.1.4) during the qualifying periods (see 4.1.5).
Periods outside the Republic where no remuneration was earned fall outside the ambit
of section 10(1)(o)(ii). Remuneration received subsequent to a qualifying period, but in
respect of such qualifying period, will qualify for the exemption, but subject to any
applicable apportionment (see 4.3).
1 See Interpretation Note 34 (Issue 2) “Exemption from Income Tax: Remuneration Derived by a
Person as an Officer or Crew Member of a Ship” for a discussion on the operation of
section 10(1)(o)(i).
2 See Interpretation Note 34 for a discussion on the operation of section 10(1)(o)(iA).
3 The term remuneration is not “remuneration” as defined in the Fourth Schedule.
4 The cash equivalent of the value of any taxable benefit as calculated under the Seventh Schedule;
and the amount of any gain made by the exercise, cession or release of a right to acquire a
marketable security, under section 8A.
5 In the context of section 10(1)(o)(ii), this refers to allowances, advances and reimbursements under
section 8(1).
6 Taxation of amounts derived from broad-based employee share plans.
7 Taxation of directors and employees on vesting. See 4.3.
Remuneration received by or accrued during a qualifying period for services rendered
within the Republic does not qualify for exemption. Remuneration earned during a
qualifying period in respect of services that were rendered both inside and outside the
Republic must be apportioned (see 4.3) so that only the income relating to foreign
services is exempt.
4.1.2 Employment relationship
The exemption under section 10(1)(o)(ii) only applies if an employment relationship
exists. The services that are rendered for or on behalf of the employer must be
rendered under an employment contract.
The term “any employer” means that services rendered to resident or non-resident
employers could qualify for exemption.
The term “employee” 8 is not defined in the main body of the Act, and so must be given
its ordinary meaning. An “employee” under the common law excludes an independent
contractor or self-employed person. 9 Directors in their capacity as directors are holders
of an office, not employees, and to the extent that they earn director’s fees, such fees
do not qualify for exemption under section 10(1)(o)(ii).
4.1.3 Services rendered
The remuneration must be received in respect of services rendered. Amounts payable
by an employer to an employee, but which do not relate to services rendered, are not
included in the scope of the exemption. Payments for the relinquishment, termination,
loss, repudiation, cancellation or variation of any office or employment or of any
appointment (or right to be appointed) to an office or employment 10 are received by
virtue of such termination, loss, repudiation, cancellation or variation, not in respect of
services rendered, and are accordingly not exempt under section 10(1)(o)(ii).
4.1.4 Outside the Republic
In order to qualify for exemption, the services must be rendered “outside the Republic”.
The “Republic” is defined in section 1(1). The definition encompasses the landmass of
South Africa as well as its territorial waters, 11 which is a belt of sea adjacent to the
landmass but not exceeding 12 nautical miles (roughly 22,2 km) beyond the
baselines 12 of the country.
8 The definition of “employee” in paragraph 1 of the Fourth Schedule is not applicable.
9 See Interpretation Note 17 (Issue 5) “Employees’ Tax: Independent Contractors” for a discussion
on employees and independent contractors under the common law.
10 That is, amounts contemplated in paragraph (d)(i) of the definition of “gross income” in section 1(1).
11 Defined in section 4 of the Maritime Zones Act 15 of 1994 (MZA). This definition is aligned with what
constitutes a State’s territorial sea under international law, specifically Articles 2 and 3 of the United
Nations Convention on the Law of the Sea (UNCLOS), signed by South Africa on 5 December 1984
and ratified on 23 December 1997.
12 Defined in section 2 of the MZA and Article 3 of UNCLOS.
In certain circumstances, the Republic may extend beyond the geographical limits of
its landmass and territorial waters. The definition of the “Republic” specifically includes
those areas beyond the territorial sea which have been designated under international
or domestic law as areas where South Africa may exercise sovereign rights in respect
of the exploration or exploitation of natural resources. This definition is aligned with
domestic law 13 and international law, 14 which provide for South Africa’s right to explore
and exploit natural resources in the exclusive economic zone 15 and on the continental
shelf. 16
The exclusive economic zone extends to 200 nautical miles (roughly 370,6 km) from
the baselines. 17 The continental shelf extends to the outer edge of the continental
margin, or 200 nautical miles from the baselines, whichever is the greater. 18
These are factors that must be considered when determining whether a person renders
services in the Republic or outside the Republic, for purposes of section 10(1)(o)(ii).
Remuneration for services rendered beyond South Africa’s territorial seas but within
the exclusive economic zone or on the continental shelf will not qualify for exemption
under this section if the person’s employment services relate to the exploration or
exploitation of natural resources.
4.1.5 Days test
Period or periods exceeding 183 full days in aggregate
In order to qualify for the exemption, a person must be in employment, outside the
Republic, for at least 183 full days during any 12-month period. A “full day” means
24 hours (from 0h00 to 24h00). The 183 full days do not have to be consecutive or
continuous but, in order to meet the exemption requirements, a total of 183 full days in
any 12-month period must be exceeded. It is not necessary to exceed this period by a
full day. Any amount of time in excess of 183 full days, such as a few hours, will be
sufficient.
Calendar days must be looked at, not only work days, when calculating whether a
person has been outside the Republic for 183 full days.
Weekends, public holidays, annual leave days, sick leave days and rest periods (as
required under the specific terms of a contract of employment) that are spent outside
the Republic are taken into account for purposes of calculating the period or periods
outside the Republic.
13 Section 7 of the MZA.
14 Section 233 of the Constitution of the Republic of South Africa, 1996 provides that a court must
prefer an interpretation of domestic legislation that is consistent with international law over any
alternative interpretation that is inconsistent with international law.
15 Article 56(1)(a) of UNCLOS deals with a State’s “exclusive economic zone” and provides that a
coastal State has “…sovereign rights for the purpose of exploring and exploiting…the natural
resources, whether living or non-living, of the waters superadjacent to the seabed and of the seabed
and its subsoil…”
16 Article 77(1) of UNCLOS provides that a “…coastal State exercises over the continental shelf
sovereign rights for the purpose of exploring it and exploiting its natural resources.” In view of this
provision, it is unnecessary to consider for purposes of this Note whether the continental shelf forms
part of South Africa’s territory under customary international law.
17 Section 7 of the MZA and Article 57 of UNCLOS.
18 Section 8 of the MZA and Article 76(1) of UNCLOS.
Note: the rules applicable to qualifying days for apportionment of income are different
to the rules to calculate whether the 183-day or 60-continuous-day tests have been
met (on apportionment, see 4.3).
A distinction must be made between a situation where a person is in employment and
is actually outside the Republic but is not physically rendering services, and a situation
where a person is physically present outside the Republic but is not in employment.
Section 10(1)(o)(ii) clearly links the days test to the person’s employment. Days spent
outside the Republic when a person is not in employment do not qualify as days
outside the Republic under section 10(1)(o)(ii), and are thus not taken into account in
the determination of the 183 days for purposes of the exemption. Such broken periods
of employment may arise if an employee is employed at intervals. An employee may,
for example, be employed on a contract basis and enter into separate employment
contracts for each broken period of employment. The time in-between the contracts
where the employee is unemployed and where no services are rendered do not qualify
under section 10(1)(o)(ii) as days outside the Republic.
Conversely, employees who remain in employment whilst outside the Republic, but
only render services for specified periods and then have rest periods, will be able to
claim the rest period days as days outside the Republic for purposes of the days test.
A common example is where employees work rotational shift periods, such as a
specified number of days rendering services followed by an equal number of days of
rest. Such rest periods are often required by local health and safety legislation. The
rest periods do not interrupt continuous employment, and such days are accepted as
falling within the scope of the days test.
Continuous period exceeding 60 full days
In addition to the requirement that services must have been rendered outside the
Republic for a period or periods exceeding 183 full days in aggregate during any period
of 12 months, a person must also have rendered services outside the Republic for a
continuous period exceeding 60 full days in the same period of 12 months. For
example, if a period of 12 months from 1 April 2013 to 31 March 2014 is used to
calculate whether the person spent a period or periods exceeding 183 full days in
aggregate outside the Republic, that same period of 12 months must be used to
determine whether the person spent a continuous period exceeding 60 full days
outside the Republic.
To exceed a continuous period of 60 full days does not mean that it must be exceeded
by a full day, but by any amount of time, even if this amounts to, for example, a few
minutes or hours.
Taxpayers must be in a position to substantiate their absences from the Republic and
that the absences were under an employment contract and to render services, and
may thus be required to provide some form of documentation when claiming the
exemption. 19 This documentation may include, without limiting the scope of what could
be requested by SARS, letters of secondment, employment contracts for foreign
services, travel schedules and copies of passports. This documentary proof will assist
in the verification of the period or periods worked outside the Republic.
19 Section 46(4) of the Tax Administration Act 28 of 2011.
During any period of 12 months
The remuneration that is exempted by this provision relates to amounts earned from
services rendered outside the Republic, if the days tests were met during “any period
of 12 months”.
The word “month” is not defined in the main body of the Act. 20 Section 2 of the
Interpretation Act 21 provides that, unless the context otherwise requires, the word
“month” in any law means a “calendar month”. Under dictionary meanings, a calendar
month could mean either one of the twelve named portions into which a calendar year
is divided, or it could mean a period of time which is calculated from a date in one
month to the same date in a successive month. 22
In Subbulutchmi v Minister of Police and Another, 23 James JP stated the following: 24
“According to the Interpretation Act 33 of 1957 a month means a calendar month. In
the absence of any clear indication to the contrary to be found in the words used in any
particular legislation a calendar month running from an arbitrary date expires with the
day in the succeeding month immediately preceding the day corresponding to the date
upon which the period starts. Thus, if a calendar month commences on the 10th of one
month it will expire at the end of the 9th day of the succeeding month.”
There are no clear indications in the context of section 10(1)(o)(ii) that the more
restrictive meaning of a named calendar month was intended. The contextual factors
in fact point the other way – the use of the word “any” prior to the words “period of
12 months” indicates that the meaning should be extended rather that restricted.
The period of 12 months referred to in section 10(1)(o)(ii) must therefore be given the
more extended meaning and does not need to commence on the first day of a named
calendar month or end on the last day of a named calendar month.
The period or periods exceeding 183 full days mentioned above must fall within a
period of 12 consecutive months. The period of 12 months is not necessarily a year of
assessment, a financial year, or a calendar year; it is any period of 12 consecutive
months.
Practical application
In identifying a period of 12 months that may be used, the period during which the
services were rendered to the employer should first be identified. A useful point to
commence the enquiry would be by looking from the first day of the month in which
remuneration from foreign services was received or accrued, and then working forward
12 months to determine whether the 183-day and 60-continuous-day tests were met.
If so, that is the end of the enquiry and the foreign remuneration will be exempt. If the
days tests are not met, the last day of the month in which foreign remuneration was
earned can be looked to, and then by working backwards 12 months.
20 The definition of “month” in paragraph 1 of the Fourth Schedule is not applicable.
21 Act 33 of 1957.
22 Concise Oxford English Dictionary. Edited by Catherine Soanes, Angus Stevenson. 11th ed. rev.
New York: Oxford University Press, 2006; Collins English Dictionary. 3rd Edition Glasgow: Harper
Collins, 1991.
23 1980 (3) SA 396 (D); subsequently approved by the Appellate Division in Minister of Police v
Subbulutchmi 1980 (4) SA 768 (A).
24 At page 397 F-G.
This is not an either/or approach. A person is entitled to look both forwards and
backwards over any period of 12 months, meaning that some periods may overlap.
If the first month in this test does not meet the requirement of the 183-full-days and 60-
continuous-full-days, the following month can be looked to, and worked forward or
backwards – meaning that the prior month that was looked at first, will be taken into
account again in assessing whether the days test was met for the second month. The
multiple use of any specified period is permitted due to the wording of the section that
permits the test to be conducted over “any” period of twelve months.
Although the first or last day of a month, and a full month, is used in the explanation
above, that is simply for illustrative purposes. Because a 12-month period can
commence or end on any day in the month, the 12-month period could commence, for
example, on the 12th of a month and end on the 11th of that month in the following year.
The test could therefore also be applied on a daily basis, which means that a person
can consider a 365- or 366-day period looking both forwards and backwards from any
specific day.
Example 1 – Meeting the requirements for a qualifying period
Facts:
X was seconded by a South African holding company to a subsidiary in Australia for
the period 1 March 2019 to 30 September 2019 (seven months). An employment
contract was entered into stipulating X would be remunerated by the South African
holding company. X did not return to the Republic during this period.
Result:
X was employed and rendered services outside the Republic for a continuous period
of 214 days. According to the filtering process of the flow diagram in Annexure B, it is
clear that X is entitled to the exemption under section 10(1)(o)(ii), as X meets both the
183-day and 60-continuous-day rule requirements.
Persons in transit through the Republic 25
A person is deemed to be outside the Republic where such a person is in transit
between two places outside the Republic and –
• the person does not formally enter the Republic through a port of entry as
contemplated in section 9(1) of the Immigration Act 13 of 2002; or
• the person does not formally enter the Republic at any other place as may be
permitted by the Director General of the Department of Home Affairs or the
Minister of Home Affairs under the Immigration Act.
This means that the point of departure and the point of destination of the journey that
is being undertaken must be outside the borders of the Republic (see 4.1.4).
25 Proviso (A) to section 10(1)(o)(ii).
4.1.6 Exceptions 26
The following two categories of employees are expressly excluded from the exemption:
• A public office holder, as contemplated in section 9(2)(g), who must be
appointed or deemed to be appointed under an Act of Parliament. 27
• Employees of employers, as contemplated under section 9(2)(h), in the
national, provincial or local sphere of government, certain constitutional
institutions, national and provincial public entities listed in Schedules 2 and 3
of the Public Finance Management Act, 28 and municipal entities. 29
4.2 Limitation of the exemption
From 1 March 2020, foreign employment income is no longer fully exempt under
section 10(1)(o)(ii). The exemption is limited to R1,25 million in respect of each year of
assessment during which the requirements of section 10(1)(o)(ii) are met.
The qualifying criteria (as set out in 4.1.1 to 4.1.5) for the exemption remain the same.
Any foreign employment income earned over and above R1,25 million will be taxed in
the Republic, applying the normal tax rates for that particular year of assessment.
A double tax situation may arise in respect of the portion of the remuneration earned
over and above the R1,25 million. This will happen where there is no tax treaty or
where a tax treaty does not provide a sole taxing right to one country; which means
both countries will have a right to tax the income and the country of residence, in our
case the Republic, will provide double tax relief. Section 6quat is the mechanism under
South Africa’s domestic law to claim relief from double tax where the amount received
for services rendered outside the Republic is subject to tax in the Republic and in the
foreign country. This credit may be claimed on assessment when an individual submits
an income tax return, provided certain requirements are met. This effectively means
that the foreign tax paid on the portion of remuneration included in income will be set-
off against the South African normal tax paid so that no double tax is ultimately
suffered. 30
An employer may at his or her discretion, under paragraph 10 of the Fourth Schedule,
apply for a directive from SARS to vary the basis on which employees’ tax is withheld
monthly in the Republic. The potential foreign tax credit is taken into account to
determine the employees’ tax that has to be withheld for payroll purposes. This is not
the actual granting of the section 6quat credit. The employee is still required to submit
an income tax return in which the actual foreign tax credit under section 6quat should
be claimed.
4.3 Apportionment of remuneration
A common misconception is that all remuneration received or accrued during the
qualifying period of 12 months is exempt. This is incorrect. Only the remuneration
received or accrued in respect of services rendered outside the Republic during the
qualifying period of 12 months is exempt. Remuneration received or accrued during a
qualifying period of 12 months in respect of services rendered within the Republic
26 Proviso (B) to section 10(1)(o)(ii).
27 Under section 9(2)(g).
28 Act 1 of 1999.
29 As defined in section 1 of the Local Government: Municipal Systems Act 32 of 2000.
30 See Interpretation Note 18 (Issue 4) “Rebates and Deduction for Foreign Taxes on Income” for a
detailed discussion on section 6quat.
remains subject to tax in South Africa. Once a person has met the 183-day and 60-
continuous-day tests under section 10(1)(o)(ii), the portion of the remuneration that
qualifies for the exemption under section 10(1)(o)(ii) must be calculated. The
exemption will be limited to R1,25 million.
It is accepted that it is correct to apportion income if it is clear that a portion of such
income relates to services rendered both inside and outside the Republic. However, if
the services rendered inside the Republic by a person are merely casual and
accidental, 31 or subsidiary and incidental, 32 then the originating cause of the
employment income will be fully outside the Republic and no apportionment will be
necessary.
Remuneration received or accrued by any employee relating to services rendered in
more than one year of assessment, is deemed to have accrued evenly over the period
during which the services were rendered. 33 An example could be a bonus that accrues
in one year but in relation to services rendered in both the current and the previous
year; or a gain included in income under section 8C (see 4.4 and Example 5).
SARS accepts the following as the correct method to calculate the exempt portion of
remuneration:
Work days outside the Republic for the period × Remuneration received
Total work days for the period during the period
= Exempt portion of remuneration limited to R1,25 million
“Work days” does not include weekends, public holidays or leave days. Only days of
actual services rendered are taken into account. A “period” refers to the full period
during a year of assessment over which a taxpayer is required to render services
outside the Republic. To the extent that incidental work days inside the Republic are
regarded as being from a source outside the Republic, those days must be considered
to be work days outside the Republic.
Remuneration received for services rendered during work days in the Republic is
subject to normal tax in South Africa and is excluded from the above formula.
Example 2 – Apportionment of income
Facts:
Z is employed by the South African subsidiary of a multi-national company. Due to
specialised knowledge, Z was requested to assist a New Zealand subsidiary and will
be leaving the Republic on 1 May 2020 to commence work on 2 May 2020. Z was
contracted to work in New Zealand until 19 December 2020. The subsidiary company
in New Zealand will be remunerating Z during this period. Z will be departing New
Zealand on 20 December 2020 to return to the Republic.
31 ITC 77 3 SATC 72.
32 COT (SR) v Shein 1958 (3) SA 14 (FC), 22 SATC 12.
33 Proviso (C) to section 10(1)(o)(ii).
For purposes of the example, it is assumed that Z will be returning to the Republic to
fulfil local employment obligations during the following periods, which will include travel
days:
• 22 June 2020 to 6 July 2020;
• 30 August 2020 to 7 September 2020; and
• 11 November 2020 to 20 November 2020.
Result:
The number of calendar days for which remuneration will be derived for services
rendered in New Zealand in the 2021 year of assessment will be as follows:
May Jun Jul Aug Sep Oct Nov Dec TOTAL
2 May 20 to 21 June 20 30 21 51
7 July 20 to 29 Aug 20 25 29 54
8 Sept 20 to 10 Nov 20 23 31 10 64
21 Nov 20 to 19 Dec 20 10 19 29
The total remuneration that Z will be receiving for services rendered during the period
2 May 2020 to 19 December 2020 will be R1 500 000.
As the table above indicates, the taxpayer will satisfy the requirements of the 183-day
and 60-continuous-day tests within a period of 12 months. The taxpayer will have two
easily identifiable qualifying periods:
• 2 May 2020 to 1 May 2021; and
• 20 December 2019 to 19 December 2020.
The following table sets out the work days outside the Republic for the period
2 May 2020 to 19 December 2020:
Actual work Actual work
Work days during Total work days
days outside days in the
period during period
the Republic Republic
2 May 20 to 21 Jun 20 34 34
22 Jun 20 to 6 Jul 20 11 11
7 Jul 20 to 29 Aug 20 38 38
30 Aug 20 to 7 Sep 20 6 6
8 Sep 20 to 10 Nov 20 45 45
11 Nov 20 to 20 Nov 20 8 8
21 Nov 20 to 19 Dec 20 19 19
Total 161 136 25
Z will not be required to work over weekends, and weekends have thus been excluded
from the total work days and actual work days calculations. Possible public holidays in
New Zealand have not been taken into account in this example.
The portion of Z’s remuneration that will be exempt from normal tax in South Africa
under section 10(1)(o)(ii) is calculated as follows:
Work days outside the Republic for the period × Remuneration received
Total work days for the period during the period
= Remuneration that may qualify for the exemption under section 10(1)(o)(ii)
= 136/161 × R1 500 000 = R1 267 081, however the exemption is limited to
R1 250 000.
Thus, R250 000 will be subject to normal tax in South Africa.
Of the R1 500 000 remuneration Z will be earning during the New Zealand assignment,
R1 267 081 relates to services rendered in New Zealand during the 2021 year of
assessment, and of that amount R1 250 000 will be exempt from normal tax in South
Africa. Z will be remunerated during this period by the New Zealand subsidiary.
R250 000 over and above the R1 250 000, which is made of the following two parts,
will be subject to normal tax in South Africa:
• R17 081 that relates to services rendered outside South Africa will be
subject to tax in South Africa, and may qualify for relief under
section 6quat(1), provided foreign taxes are proved to be payable on that
amount and the requirements under that section are met.
• R232 919 that will be earned during that period will relate to services
rendered in the Republic and will also be subject to normal tax in South
Africa. No relief in the form of a tax credit will be applicable against this
portion of the income.
Remuneration earned in the Republic during the 2021 year of assessment before the
assignment in New Zealand commences (that is, for the period 1 March 2020 to
1 May 2020) and after the assignment terminates (for the period 20 December 2020
to 28 February 2021) will be unaffected by the section 10(1)(o)(ii) exemption and will
be fully taxable in South Africa.
Example 3 – Apportionment of income taking into account leave days
Facts:
A South African resident employee, CE, is employed by a South African resident
multinational employer engaged in activities in Africa. CE is required to spend
considerable periods of time in various African countries fulfilling duties to the South
African employer.
For purposes of this example it is assumed that CE will meet the 183-day and 60-
continuous-day test for the entire 2021 year of assessment. CE will not be required to
render services on weekends or public holidays. CE will be outside the Republic for
the purpose of rendering services for the following full days:
• 1 March 2020 to 25 April 2020 (Angola);
• 26 April 2020 to 15 May 2020 (Namibia);
• 1 July 2020 to 6 August 2020 (Mozambique);
• 23 September 2020 to 15 November 2020 (Nigeria);
• 4 January 2021 to 13 February 2021 (Angola).
It is further assumed that CE will take annual leave whilst in the Republic from 25 May
2020 up to and including 5 June 2020. CE will also take a week’s annual leave whilst
in Nigeria, from 19 up to and including 23 October 2020. CE’s total remuneration from
services rendered both within and outside the Republic for the 2021 year of
assessment will be R1 450 000.
Result:
The remuneration attributable to CE’s services outside the Republic will qualify for
exemption. The portion that will be exempt must be calculated using the apportionment
formula. Leave days and weekends reduce the number of work days in the formula.
South African public holidays are also excluded from work days.
Actual work Actual work
Work days during Total work days
days outside days in the
period during period
the Republic Republic
1 Mar 20 to 15 May 20* 51 51
16 May 20 to 30 Jun 20 31 21**
1 Jul 20 to 6 Aug 20 27 27
7 Aug 20 to 22 Sep 20 32 32
23 Sep 20 to 15 Nov 20 37 32#
16 Nov 20 to 3 Jan 21 32 32
4 Jan 21 to 13 Feb 21 30 30
14 Feb 21 to 28 Feb 21 10 10
Total 250 140 95
* It is irrelevant whether the services outside the Republic are rendered in a single foreign
jurisdiction or multiple jurisdictions. The requirement is simply that the employee be
rendering services outside the Republic.
** The 10 working days annual leave taken by CE whilst in the Republic reduces the number
of work days in the apportionment calculation.
#
The 5 working days annual leave taken by CE whilst outside the Republic reduces the
number of work days in the apportionment calculation.
The exempt portion of CE’s remuneration is therefore calculated as follows:
Work days outside the Republic for the period × Remuneration received
Total work days for the period
= Exempt remuneration under section 10(1)(o)(ii)
= 140/235## × R1 450 000 = R863 830
## The total of 250 work days must be reduced by the 15 days annual leave that CE took
during the year, as leave days must be excluded from the apportionment calculation. The
5 days leave that CE took whilst outside the Republic is taken into account in the total of
140 work days that CE was outside the Republic.
R863 830 is less than R1 250 000 and will therefore be fully exempt from taxation in
South Africa. The remainder of CE’s remuneration (that is, R586 170) will remain
subject to taxation in South Africa.
Certain employees are required, under the terms of their employment contracts as well
as the health and safety regulations in force in various jurisdictions, to take specified
rest days. Examples could include employees working shifts outside the Republic on
oil rigs, who render services for a number of weeks and then must take an equivalent
amount of time to rest. No actual services are rendered during the rest periods, even
though the employees remain in continuous employment during these periods. The
services that are rendered to earn the remuneration is the services that are rendered
during the work shifts. If those services are rendered offshore, and during a qualifying
period, all remuneration attributable to those offshore services will qualify for
exemption and no apportionment must be done. 34
The cash equivalent of the value of a taxable benefit, calculated under the Seventh
Schedule, also qualifies for exemption and thus apportionment.
4.4 Gains under section 8C and section 10(1)(o)(ii)
Employees may participate, by virtue of their employment, in various share incentive
schemes offered by their employers. Gains made under such share schemes are
subject to taxation in South Africa, but could qualify for exemption under
section 10(1)(o)(ii) under certain circumstances, discussed more fully below.
The inclusion of a gain in income under section 8C takes place when the “vesting” of
the equity instrument occurs. 35 However, vesting is not the originating cause of the
gain being received as income. The services rendered by the employee are the
originating cause. Thus, for purposes of section 10(1)(o)(ii), to correctly apportion the
gain between services rendered in the Republic and foreign services, the place where
the services were rendered must be looked to, and not the place where the right to
participate was offered or accepted, or the place where the employee was located
when vesting took place.
Ordinarily, share schemes serve two purposes:
• They reward employees who have performed well; and
• They provide a mechanism to retain an employee in employment for a specified
period.
Share schemes therefore generally have two periods relevant to the inclusion of the
gain as income: the “reward” period and the “lock-in” period. The “reward” period is
where employers grant rights to employees to participate in share schemes as a
reward for past performance, for example, participation due to exceptional
performance during the previous financial year of the employer. The “lock-in” period is
a forward-looking period, where employees are prohibited from benefiting under the
scheme until pre-determined fixed future dates, with the employees generally required
to be in employment at the end of the lock-in period in order to participate in the
34 If rest periods are taken in the Republic, it will have an impact of the 183-day and 60-continuous-
day test but it will not impact the apportionment calculation.
35 For a discussion on the operation of section 8C, see Interpretation Note 55 (Issue 2) “Taxation of
Directors and Employees on Vesting of Equity Instruments”.
benefits. The terms of the employment agreement and the rules and participation terms
of the share scheme will determine what these periods are.
Example 4 – Meaning of the “reward” and “lock-in” period
Facts:
On 1 May 2016, X, an employee of a South African holding company, acquired shares
from the South African company by virtue of employment. Under the agreement, X was
not permitted to dispose of the shares until 1 May 2020. The shares were granted both
for exceptional performance by X during the company’s previous financial year (1 May
2015 to 30 April 2016) and as an incentive to retain X’s services during the lock-in
period.
Result:
The following periods are relevant to determine the sourcing period of the gain:
The reward period: 1 May 2015 to 30 April 2016 (the period during which
services were rendered in respect of the reward).
The lock-in period: 1 May 2016 to 30 April 2020 (the period during which the
shares have not yet vested and for which the employee is required to render
services until the restriction is lifted).
The sourcing period runs therefore from 1 May 2015 to 30 April 2020, since under the
agreement the shares were granted to X for both as a reward for exceptional
performance during the company’s previous financial year and as an incentive to retain
X’s services during the lock-in period.
The location of services rendered during both the “reward” period and the “lock-in”
period must be taken into account when determining the period of apportionment of
the gain under section 10(1)(o)(ii).
The gain is taxable in the year that it vests, however, for purposes of determining the
portion of the gain that is exempt under section 10(1)(o)(ii), the gain is deemed to have
accrued evenly, and must therefore be apportioned evenly, over the period that the
services were rendered 36 (see 4.3).
The sourcing period for section 8C gains will, depending on the circumstances, be as
follows:
• From the first day of the “reward” period that gave rise to the granting of a right
to participate in a share scheme, up to the date of vesting of the equity
instrument under section 8C; or
• From the date of grant to the date of vesting of the equity instrument, where
there is simply a “lock-in” period and no “reward” period.
36 Proviso (C) to section 10(1)(o)(ii).
Once the sourcing period of the gain is determined and the employee has qualified for
the section 10(1)(o)(ii) exemption, the exempt portion must be calculated based on the
following apportionment method:
Work days outside the Republic in the sourcing period × Section 8C gain
Total work days in the sourcing period
= Exempt portion of the gain under section 10(1)(o)(ii)
Weekends, public holidays and leave days are excluded from work days for purposes
of this calculation (see 4.3).
The “sourcing period” in this formula refers to the “reward” period and the “lock-in”
period that the share gains relate to, as discussed above.
Example 5 – Apportionment of gains made under section 8C
Facts:
On 1 July 2015, DG, an employee of a South African holding company, acquired
45 000 shares (at R5 each) from the South African company by virtue of employment.
Under the agreement, DG is not permitted to dispose of the shares until 1 July 2020.
The shares were granted solely to retain DG’s services.
DG rendered services to a Nigerian subsidiary company, during the period 1 April 2017
to 31 March 2020. DG met the 183-day and 60-continuous-day tests for this entire
period, and thus any remuneration earned for services rendered outside the Republic
during that period qualifies for exemption under section 10(1)(o)(ii).
DG also rendered services outside the Republic, during the lock-in period but outside
any qualifying period, from 1 October 2015 to 30 October 2015.
It is assumed for purposes of this example that DG received in March 2020 a bonus of
R900 000 and a salary of R400 000.
On 1 July 2020, when DG will become entitled to dispose of the shares, they will vest
under section 8C, and, it is assumed that they will have a market value of R85 per
share. DG will therefore make a gain of R3 600 000 [R45 000 × (R85 – R5)].
To simplify illustration in this example, any leave days taken are ignored.
Result:
The portion of the gain DG will make on the vesting of the equity instruments that
relates to services rendered outside the Republic during the qualifying period of
12 months will be exempt from taxation under section 10(1)(o)(ii). The exempt portion
must be calculated as follows:
Work days outside the Republic for the sourcing period × Section 8C gain
Total work days for the sourcing period
= The portion of the Section 8C gain that may qualify for exemption under
section 10(1)(o)(ii).
Years of Did Total Total Section Deemed Portion of the
assessment section work work 10(1)(o)(ii) accrual for gain qualifying
during 10(1)(o)(ii) days days apportionment section for the
source apply? outside ratio 10(1)(o)(ii) exemption in
period (Y/N) the purposes 2021
Republic
1/7/2015 – N 169 0 No portion R3 600 000 × RNil
28/2/2016 exempt 169/1252 =
(2016) R485 942,49
1/3/2016 – N 250 0 No portion R3 600 000 × RNil
28/2/2017 exempt 250/1252 =
(2017) R718 849,84
1/3/2017 – Y 250 228 228/250 R3 600 000 × R718 849,84
28/2/2018 250/1252 = 228/250 =
(2018) R718 849,84 R655 591,05
1/3/2018 – Y 250 250 250/250 R3 600 000 × R718 849,84 ×
28/2/2019 250/1252 = 250/250 =
(2019) R718 849,84 R718 849,84
1/3/2019 – Y 250 250 250/250 R3 600 000 × R718 849,84 ×
28/2/2020 250/1252 = 250/250 =
(2020) R718 849,84 R718 849,84
1/3/2020 – Y 83 22 22/83 R3 600 000 × RNil *
1/7/2020 83/1252 =
(2021) R238 658,15
TOTALS 1252 750 R3 600 000 R2 093 290,73**
* Since DG’s remuneration for foreign services will exceed R1,25 million in
March 2020, the full amount of R63 258,79 (R238 658,15 × 22/83) will be taxable.
** The total taxable gain to be included in the 2021 year of assessment is
R1 506 709,27 (R3 600 000 – R2 093 290,73).
There are a total of 1 252 work days during the sourcing period, being from 1 July 2015
to 1 July 2020. The gain is deemed to be spread evenly over this period for purposes
of the exemption under section 10(1)(o)(ii). 37
37 Proviso (C) to section 10(1)(o)(ii).
The gains attributable to periods where services were rendered outside the Republic,
but that do not fall within a qualifying 12-month period, being the period of 1 to
30 October 2015, do not qualify as days outside the Republic under the formula, and
the gains attributable to services rendered during those periods remain fully taxable in
South Africa.
Leveraged Legal Products
SOUTH AFRICAN REVENUE SERVICE
Date of 1st issue : 27 March 2003
Date of 2nd issue : 2 February 2017
Date of 3rd issue : 31 January 2020
Annexure A – The law
Definition of “Republic” in section 1(1)
“Republic” means the Republic of South Africa and, when used in a geographical sense, includes
the territorial sea thereof as well as any area outside the territorial sea which has been or may be
designated, under international law and the laws of South Africa, as areas within which South Africa
may exercise sovereign rights or jurisdiction with regard to the exploration or exploitation of natural
resources;
Section 10(1)(o)
(o) any form of remuneration—
(ii) to the extent to which that remuneration does not exceed one million Rand in
respect of a year of assessment and is received by or accrues to any employee
during any year of assessment by way of any salary, leave pay, wage, overtime
pay, bonus, gratuity, commission, fee, emolument or allowance, including any
amount referred to in paragraph (i) of the definition of gross income in section 1 or
an amount referred to in section 8, 8B or 8C in respect of services rendered outside
the Republic by that employee for or on behalf of any employer, if that employee
was outside the Republic—
(aa) for a period or periods exceeding 183 full days in aggregate during any
period of 12 months; and
(bb) for a continuous period exceeding 60 full days during that period of
12 months,
and those services were rendered during that period or periods: Provided that—
(A) for purposes of this subparagraph, a person who is in transit through the
Republic between two places outside the Republic and who does not
formally enter the Republic through a port of entry as contemplated in
section 9(1) of the Immigration Act, 2002 (Act No. 13 of 2002), or at any
other place as may be permitted by the Director General of the Department
of Home Affairs or the Minister of Home Affairs in terms of that Act, shall be
deemed to be outside the Republic;
(B) the provisions of this subparagraph shall not apply in respect of any
remuneration—
(AA) derived in respect of the holding of a public office contemplated in
section 9(2)(g); or
(BB) received by or accrued to any person in respect of services rendered
or work or labour performed as contemplated in section 9(2)(h); and
(C) for the purposes of this subparagraph, where remuneration is received by or
accrues to any employee during any year of assessment in respect of
services rendered by that employee in more than one year of assessment,
the remuneration is deemed to have accrued evenly over the period that
those services were rendered;
Annexure B – Diagram
Basic steps to be followed in determining the exemption
Was remuneration received or did it accrue, or was it deemed to have
accrued (as envisaged in section 10(1)(o)(ii)(C)) for services rendered
outside the Republic during the year of assessment?
No Yes
Is the taxpayer a person referred to in section 9(2)(g) or section 9(2)(h)?
Yes No
Was the taxpayer outside the Republic for a period or periods exceeding
183 full days in total during any period of 12 months during which the
services were rendered?
No Yes
Was the taxpayer outside the Republic for a continuous period exceeding
60 full days during the period of 12 months mentioned above?
No Yes
Were the services rendered during the 183 full days and 60 full days
mentioned above?
No Yes
No exemption Exemption limited
to R1,25 million
Annexure C – Comparison between section 10(1)(o)(i), (iA) and (ii)
Relevant aspect Section 10(1)(o)(i) Section 10(1)(o)(iA) Section 10(1)(o)(ii)
Remuneration As defined in paragraph 1 As defined in paragraph 1 Salary, leave pay, wage,
of the Fourth Schedule to of the Fourth Schedule to overtime pay, bonus,
the Act. the Act. gratuity, commission, fee,
emolument or allowance,
including any amount
referred to in paragraph (i)
of the definition of “gross
income” in section 1(1) or
an amount referred to in
section 8, 8B or 8C.
Employee Item (aa): Any officers and Any officers and crew Any employee, excluding
crew members, excluding members, excluding an an independent contractor
an independent contractor independent contractor or or self-employed person.
or self-employed person. self-employed person.
Item (bb): Only officers or
crew members solely
employed for the
navigation of the ship,
excluding an independent
contractor or self-
employed person.
Employer Resident or non-resident Resident or non-resident Resident or non-resident
employers. employers. employers.
Qualifying ship Any ship (international or South African registered N/A
South African) engaged in ships as defined in
a specified activity (see section 12Q(1) mainly
below). engaged in a specified
activity (see below).
Activities of ship Item (aa): international Item (aa): international N/A
transportation for reward shipping as defined in
of passengers or goods. section 12Q(1), meaning
the conveyance for
compensation of
passengers or goods by
means of the operation of
a South African ship
mainly engaged in
international traffic.
Item (bb): prospecting, Item (bb): fishing outside
exploration or mining for or the Republic.
production of any minerals
(including natural oils)
from the seabed outside
the Republic.
Qualifying period During a year of During a year of During any 12 month
assessment assessment period
Relevant aspect Section 10(1)(o)(i) Section 10(1)(o)(iA) Section 10(1)(o)(ii)
Outside the Item (aa): Beyond the Item (aa): Beyond the Beyond the territorial
Republic territorial waters (that is territorial waters (that is waters (that is 12 nautical
12 nautical miles from the 12 nautical miles) for any miles) for any person
baselines) for any officer officer or crew member. rendering employment
or crew member. services; which may
include—
• any officer or crew
member employed on a
ship engaged in
prospecting,
exploration, mining or
production of or for
minerals but not
employed for the
navigation of the ship or
for the exploration or
exploitation of natural
resources; or
• any officer or crew
member employed on a
South African ship
mainly engaged in
fishing but not
employed for the
exploitation of natural
resources.
Item (bb): Beyond the For purposes of item (bb): Beyond the edge of the
edge of the continental Beyond the edge of the continental shelf (that is
shelf or 200 nautical miles, continental shelf or the 200 nautical miles) for any
whichever is the greater EEZ (for any officer or person or officer or crew
for an officer or crew crew member, depending employed for the
member navigating the on the type of fishing exploration or exploitation
ship. done. of natural resources.
Days requirement For a period or periods No days requirement For –
exceeding 183 full days in during a year of • a period or periods
aggregate during a year of assessment. exceeding 183 full days
assessment. in aggregate during any
period of 12 months;
and
• for a continuous period
exceeding 60 full days
during that period of
12 months.
Apportionment No No Yes, to the extent that
required? services are rendered
outside the Republic.
Diamond Export Levy Act, 2007
