Global Employer Services News

Effective 22 December 2023, new South African tax legislation requires non-resident employers with a permanent establishment (PE) in the country to register as employers for employees’ tax (PAYE) purposes and to withhold PAYE from remuneration paid to their employees. This change could have a significant impact on employers with employees that opt to work in South Africa remotely, a situation that has become common recently. This new legislation means that foreign employers need to take greater care to ensure compliance with regard to their remote working population.

Previous regulations

Until this change, only South African resident employers or representative employers in the case of foreign employers were obligated to withhold PAYE. If there was no representative employer for the foreign employer, the employee was responsible for settling his or her personal tax liability through the provisional tax regime.

New compliance requirements

Under the new legislation, any remuneration paid from 22 December 2023 is subject to PAYE withholding. Therefore, some foreign employers may already find themselves out of compliance with South African PAYE regulations. These foreign employers are also required to contribute to the Skills Development Levies (SDL) and the Unemployment Insurance Fund (UIF) through the South African Revenue Service (SARS), regardless of whether the foreign employer has a subsidiary or offices in South Africa.

Understanding Permanent Establishments (PEs)

According to the South African Income Tax Laws, a PE is defined in line with Article 5 of the OECD Model Tax Convention, encompassing a fixed place of business or authority to conclude contracts through employees or agents in South Africa.

Some foreign employers may not realise that their business activities have established a PE in South Africa by considering only the above contexts. However, the definition of a PE in South Africa extends beyond the traditional scope and can give rise to a PE in various situations, including but not limited to the following:

• Home Office with Contract Signing Authority: If a senior employee works from their home office in South Africa and has the authority to sign contracts on behalf of the foreign company, this can create a PE.
• Long-Term Construction Projects: A construction project that continues for at least six months can result in a PE.
• Storage and Distribution Activities: A foreign company that rents storage space in South Africa to import and temporarily store goods that have already been sold to South African customers (pre-ordered before export) can establish a PE. This situation applies even if the company views itself merely as a distributor, conducting most of its business activities abroad, with only one employee in South Africa to assist with distribution.
• Provision of Services: Providing services in South Africa for an extended period, particularly if employees or contractors of the foreign company are present in South Africa for those services, can establish a PE.
• Management or Control: If significant management or control functions are carried out in South Africa, this may establish a PE.

Determining whether a PE is established is a complex matter that requires thorough analysis of the relevant double taxation agreement and potentially any multilateral agreement applicable in respect of the foreign company's tax jurisdiction and South Africa. It also requires an in-depth understating of the business’s operations and transactions in South Africa. 

How to ensure compliance

1. Assess PE Status: Verify if the business activities create a PE in South Africa. Only those with a PE are required to register as employers and withhold PAYE.
2. Register as an External Company: If it is determined that a PE has been established, the business must register as an "external company" with the Companies and Intellectual Property Commission (CIPC). This step is necessary to register as an employer with SARS.
3. Handle Payroll Administration: After registration, the business must manage a South African payroll by registering as an employer with SARS and perform monthly payroll duties.

Foreign employers should avoid rushing to register for PAYE in South Africa unless they are certain they have a PE, such as a fully operational branch. Instead, they should first obtain a tax opinion to confirm their status and then proceed with PAYE registration if necessary.

Importance of compliance

Non-compliance can result in significant penalties. We therefore recommend foreign employers act promptly to understand and comply with these requirements to avoid penalties and ensure smooth business operations in South Africa.

Therefore, it is vital for foreign employers with South African operations or employees to seek professional tax advice.  The BDO South Africa team can help ensure you meet all tax obligations under the new legislation.


Dumisa Sihawu
Rirhandzu Shabalala
BDO in South Africa