Given how divergent different tax and residency systems work the world over it’s no wonder that people often confuse the different terms. The problem lies therein that neither tax residency nor citizenship are purely emblematic titles – each moniker comes with its own list of rights and obligations.
Understanding the Distinction: Residency vs. Citizenship
Before we delve into tax residency, it’s important to make a distinction between residency and citizenship.
What is citizenship?
Citizenship is a title bestowed onto any person considered a member of a particular state. While this is generally acquired by birth, citizenship can also be acquired through:
- Direct descent: if one of two parents holds a different citizenship than the other dual citizenship is often acquired automatically
- Lineage: where a person’s ancestors held citizenship different to their own, this can often be invoked to acquire dual or foreign citizenship
- Displacement: citizenship is often granted to individuals who have been forcibly displaced due to conflict or other factors.
- Naturalisation: individuals who have lived or worked a sufficient amount of time in a foreign country can be granted citizenship.
- Prestige: individuals who bring significant value to a foreign nation through investment, assets, fame, talent, or other acclaim can often fast-track their road to citizenship.
Cession of citizenship can also occur where two jurisdictions don’t allow for dual citizenship. South Africa is one such country that doesn’t allow dual citizenship unless dual citizenship was automatically acquired at birth (where two parents are citizens of different countries), or where Home Affairs is informed upfront of this intent and permits it.
Citizenship also determines the type of passport someone holds and therefore impacts visas and travel. One could, for instance, hold dual citizenship and have more than one passport, but this could become problematic when traveling between countries. South Africa requires that citizens exit and enter the country on the same passport.
What is residency?
Residency quite simply refers to a place where someone lives and is authorised to reside. Residency can be permanent but is usually temporary when people first land in a foreign country. Obtaining a residency permit is also a precursor to acquiring citizenship and completing the process of tax emigration.
While all citizens who live in their country of birth are considered permanent residents, for the most part, all residents aren’t considered citizens nor does residency annul citizenship.
When it comes to regulatory and legislative matters, residency is something that must be granted and confirmed by the jurisdiction where the individual resides – with certain permissions pre-approved based on the type of visa acquired before entering a country.
While residency cannot override citizenship it has a definite impact on tax residency.
Residency vs. Tax Residency
Many countries – South Africa included – have resident-based tax systems which means individuals are held liable for taxes on their worldwide income if they’re considered tax residents of that country. The reason why it’s important to establish tax residency is in order to avoid paying taxes on income sourced from outside South Africa.
Residency is usually determined by one of two tests - the ordinarily resident or physical presence test. Individuals who’ve spent 330 consecutive days outside South Africa preceding the year of assessment are also considered to have ceased their tax residency from the first day of leaving. Since tax years don’t span a full 330 days of a calendar year, this calculation will always span two years of assessment.
Physical Presence Test
The physical presence test is quite straightforward in that it relies on a calculation of the number of days you spend in South Africa consecutively and in aggregate during a tax year as well as the five tax years preceding the year of assessment.
To be considered a non-resident for tax purposes in SA you may not have spent:
- 91 days in total in SA during the year of assessment in question
- 91 days in total in SA for each of the five years preceding the current year of assessment
- 915 days in aggregate for the five years preceding the current year of assessment
Ordinarily Resident Test
The ordinarily resident test is a bit more notional in that the criteria for determining where an individual ordinarily resides is entirely contextual. This test does not simply use the geolocation of the person’s common residence but considers other factors such as where they’re most economically and socially active, where their family resides, what assets they hold in different jurisdictions, and so forth.
Common Monetary Area
It should be noted that the Common Monetary Area is treated differently to other foreign jurisdictions and the rules noted in tax residency articles won’t apply to these countries the same way. These include: Namibia, Lesotho, eSwatini and South Africa
Juristic/non-natural persons
Non-juristic or artificial ‘persons’ that don’t fall under the natural person criteria above are considered non-residents for tax purposes if they weren’t incorporated, established, or formed in SA and aren’t managed within South Africa.
However, it's not as simple as it seems...
While these residency tests still apply in some cases, they are mostly imposed in cases where individuals want to claim tax residency in South Africa and not the other way around. The introduction of the three-year rule and new AIT processes have thrown a few spanners in the works.
Read more about this in our next article.
In the meantime, feel free to contact us for an obligation-free consultation to discuss your tax and cross-border financial needs.
The information provided in this article and on this website is intended for general informational purposes only. It is not a substitute for professional advice, whether financial, legal, or otherwise. Before making any decisions or taking any actions based on the information provided on this site, we strongly recommend consulting with qualified professionals who can assess your specific circumstances and provide tailored guidance.
