South African expats in the United Arab Emirates face huge tax bills on end of contract gratuities that they believed would be free of income tax.
From March 2020, the new South Africa Expat Tax will demand expats pay income tax on their worldwide income of ZAR1 million or more – including the cash value of any fringe benefit packages that go with their assignments.
In the UAE employers pay an end of contract gratuity to workers as a golden goodbye.
The amount paid depends on the length of service, but an expat ending a five year contract can expect a tax-free bonus of 21 days pay for each year of service.
Contact values to plunge
Assuming the expat earns at least ZAR1 million, the gratuity would be worth AED65,000 or ZAR255,000, with tax due at 45%.
Tax would also be due on the ongoing salary and benefits package throughout the contract.
South African expats will see the value of their contracts plunge as expensive cost of living in the UAE bites at their reduced incomes.
Emigration lawyers explained that a flood of misinformation about taking financial emigration as an option to avoid expat taxes .
Misinformation about financial emigration
“There is a lot of misinformation circulating in the South African expatriate community, perpetuated by service providers using scare tactics and promoting what will benefit them over what is best for expats at large,” say lawyer Jonty Leon and Claudia Aires of head of financial emigration at Financial Emigration.
“Many service providers use scare tactics and promote what will benefit them over what is best for their clients who are considering their options. Therefore, it is crucial that South Africans abroad should thoroughly understand how the tax law currently affects them ‒ and perhaps more so, how the law will affect them once the tax law amendment becomes effective.”
They argue that financial emigration or taking advantage of double taxation agreements South Africa has with other nations can lessen the financial blow for expats in the UAE and other locations.
Nevertheless, Leon and Aires warned lean years may be on the way for South African expats abroad.