Treasury Backs Down (For Now) on Taxing Foreign Pensions

People who have retired here after living and working overseas and who receive a pension from a foreign source are currently exempt from paying income tax in South Africa. A recent move by National Treasury to tax foreign pensions, while not off the table, has been shelved for the time being.

In 2000/01, when South Africa moved to a worldwide basis of taxation, the taxation of foreign pensions became an issue. An exemption was introduced into the Income Tax Act with the provision that it would be reviewed in the future.

The Explanatory Memorandum to the Revenue Laws Amendment Bill of 2000 noted: “The issue of the taxation of foreign pensions has raised some controversy. Currently foreign pensions and social security payments are exempt from income tax. It is, however, international practice for a country of residence to tax foreign pensions. Many reasons have been put forward as to why foreign pensions should not be taxable once the Republic moves to a worldwide basis of taxation. It is argued that this may discourage foreigners from retiring in the Republic. Furthermore, it is argued that the income from a pension is static and that any tax imposed thereon will effectively reduce the pensioners’ income. This argument is not necessarily correct as in most instances the country of source in any event taxes the pension if it is not taxed in the country of residence. Various other problems, such as the deductibility of contributions to foreign pension funds and the taxation of lump-sum payments from these funds will have to be addressed.

“From a practical point of view, it is, therefore, proposed that foreign pensions not be taxed at this stage. It must, however, be noted that this is merely an interim measure and that the issue of the taxation of foreign pensions will be revisited…”

In March this year, David Warneke, head of tax technical at advisory firm BDO, said that Treasury, in its 2025 Budget Review, proposed “changes to the rules that currently exempt lump sums, pensions and annuities received by South African residents from foreign retirement funds for previous employment outside South Africa, with amendments in the current legislative cycle”.

The concern was particularly around pensions from countries such as the UK, with which South Africa has a double-taxation agreement, which has had the effect that the pensions are not taxed in either country.

Warneke commented: “The rather cryptic wording in the Budget Review makes it unclear whether the proposal would be merely to change the rules such that the exemption would no longer apply only in cases of double non-taxation. It seems more likely that it will be to simply remove the exemption insofar as it applies to lump sums, pensions and annuities, whether or not double non-taxation applies.”

He questioned the fairness of such an amendment, “given that South Africa would be taxing the withdrawal of amounts from foreign retirement funds under circumstances which, unlike withdrawals from South African retirement funds, no deduction for South African income tax was given when contributions were made. So, unlike the case of contributions to a South African retirement fund, in the case of a foreign retirement fund there was no direct loss to the fiscus at the point when the contributions were made.”

At the beginning of November, after input from tax experts, including the South African Institute of Taxation (SAIT), Treasury backed down on its proposed repeal of the exemption, which would have seen the tax on foreign pensions take effect from March 1, 2026.

According to a report by Moonstone Information Refinery, during a meeting of the National Assembly’s Standing Committee on Finance, Treasury’s deputy director-general for tax and financial sector policy, Chris Axelson, said the amendment had been withdrawn and it would take a more consultative approach in addressing the issue.

“Treasury is still concerned that South Africa is giving up its taxing rights on foreign pensions and that the law creates instances of double non-taxation,” Axelson is quoted as saying. “Government will now start a new consultative process with stakeholders to find a balanced approach that addresses these concerns while also protecting retirees and investors.”

In a subsequent release, SAIT said: “SAIT welcomes Treasury’s decision to partially withdraw the proposed repeal of Section 10(1)(gC)(ii) of the Income Tax Act, a move that safeguards South Africa’s attractiveness as a retirement destination and mitigates potential harm to the local economy.”