The foreign services income exemption actually requires services to be rendered in order to qualify.

Many articles have been written about the application of the foreign income exemption provided for under Section 10(1)(o)(ii) of the Income Tax Act. This Section provides for an exemption from South African tax from specific employment income earned while rendering services outside South Africa. The Section limits such income qualifying for an exemption to any “[s]alary, 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(1) or an amount referred to in Section 8, 8B, or 8C” (SARS Interpretation Note 16 (Issue 2) dated 28 June 2021). Only employees may claim an exemption under Section 10(1)(o)(ii) independent contractors or self-employed persons do not qualify for the exemption.  However, the employer concerned that is paying the qualified income may be a resident (i.e. South African) or non-resident (i.e. foreign).

A typical scenario that may give rise to exempt income under this Section would be where a South African individual tax resident is employed in a foreign jurisdiction.  Such employment may be due to their South African employer seconding them to a foreign assignment, or where a South African individual is employed directly by a foreign employer.

Exemption criteria

To qualify for the exemption, such foreign secondment/employment must be for a period or periods exceeding 183 full days in any period of 12 months (such a 12-month period not needing to coincide with the tax year) and must include a continuous period exceeding 60 days within such 12-month period. The exemption must also be apportioned between services rendered outside the Republic and those rendered within the Republic.  In other words, the qualifying employment income would be exempt from tax whilst outside SA, but taxable whilst in SA. Where the employer is a South African resident, they are required to issue an IRP5 / IT3(a) certificate (as applicable) at the end of the tax year. Foreign remuneration must be disclosed under SARS code 3652, whilst SA remuneration is disclosed under SARS code 3601.  The SA remuneration is also subject to PAYE, and the employer must deduct the appropriate amount and pay it over to SARS. A non-resident employer is not required to deduct PAYE (which it would in any event not be able to do as it is unlikely to be registered as an employer with SARS), but the onus rests upon the employee to declare such income when completing their South African tax return.

With effect from 1 March 2020, the exempt amount is also limited to R1.25 million in respect of any tax year (year of assessment). Any amount exceeding R1.25 million will be subject to SA tax at the normal rates. Should any foreign tax have been paid on the excess amount, such foreign tax can be set off against their South African tax liability under Section 6quat, but limited to the amount payable in SA. Finally, to qualify for the Section 10(1)(o)(ii) exemption, one of the conditions is that the employee must render services. This requirement has given rise to a problem that one of my clients is currently facing.

“Houston, we have a problem …”

My client’s employer has had a successful South African business for a number of years, and about 15 years ago it took the decision to expand its activities beyond SA’s borders. Accordingly, my client was seconded to set up operations in a number of foreign jurisdictions. The employer continued to pay my client’s remuneration from South Africa, and the employment contract provided for an increased salary to be paid during periods in which my client was outside SA. However, because such remuneration has not exceeded R1.25 million per annum at any point, it is exempt from South African tax under Section 10(1)(o)(ii). Since it is well-known that living costs in the foreign jurisdictions concerned are higher than in SA due to the weakness of the Rand, this increased amount, coupled with the fact that no South African tax is payable, was intended to compensate my client for their increased living costs.

Unfortunately, my client took ill a few months ago, and their illness is of sufficient severity that the directors are considering retirement as the only realistic outcome for my client. I was thus approached by my client’s employer to advise them on whether such a pension can be paid, and what their tax obligations might be. The mechanisms of making pension payments to former employees in foreign jurisdictions involve applications to the South African Reserve Bank via their bank’s Exchange Control department and thus are beyond the scope of this article.  Unfortunately, on the tax front, it was not good news for my client or their employer.

Paragraph 4.1.3 of SARS Interpretation Note 16, which deals with the requirement that services be rendered, reads as follows:

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 [that is, amounts contemplated in Paragraph (d)(i) of the definition of ‘gross income’ in Section 1(1)] 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).

The Interpretation Note is completely silent concerning the payment of any pension to a former employee who retires and elects to remain in the foreign jurisdiction (or, in the case of my client, is too ill to be able to return to South Africa). However, while the payment of a pension may well be in recognition of past services rendered, and the amount of such pension may even be determined with reference to periods of services rendered (as is the case with defined benefit pension funds), it would be difficult to make a case that a pension is payable in respect of any ongoing services to be rendered.

On the contrary, it is common cause that a pension is normally paid to an employee who has retired from active service, whether due to superannuation or ill health. In other words, a pension provides an income to someone who is no longer rendering ongoing services. There are of course cases where an employee reaches their contracted retirement age, and by mutual agreement with their employer extends their retirement age. An alternative to this is for the employee to formally retire as per their contract, and then enter into a new contract of employment.

In both cases, the employee continues to render services and provided that payments made to them fall within the scope of Section 10(1)(o)(ii), there is no reason why the exemption cannot continue to be claimed. In the case of my client, their health precludes them from continuing to render services to their employment, hence the reason that retirement and the payment of a pension are under consideration.  Unfortunately, this means that any such pension paid falls outside the scope of Section 10(1)(o)(ii), and will be subject to normal SA income tax unless my client decides to formally emigrate.


Foreign secondments, or taking up a position with a foreign employer, can be an exciting and growth-enhancing aspect of one’s career and in cases where the employee remains a South African tax resident, the fact that such income is exempt from South African income tax (within the abovementioned parameters) is a valuable sweetener. However, when considering an opportunity, employees and employers need to carefully consider possible situations where the employee is unable to render services for reasons beyond their control, such as severe illness. Not only could this leave the employee in a situation where they face higher living costs (including medical expenses) than in SA especially if their illness precludes them from returning to SA it could also put them in an adverse tax situation, where they then end up having to navigate the complexities of Double Tax Agreements. It is therefore imperative that all parties concerned seek appropriate professional advice when considering any form of foreign employment.


Steven Jones is a registered SARS tax practitioner, a practising member of the South African Institute of Professional Accountants, and the editor of Personal Finance and Tax Breaks.

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.

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