As the global workforce becomes increasingly mobile and retirees seek out international destinations for their golden years, the issue of cross-border taxation has grown in importance.
One of the most critical tools in managing international tax burdens is the Double Tax Agreement (DTA) – especially in the context of pensions.
What is a DTA?
A DTA, also known as a tax treaty, is a bilateral agreement between two countries designed to avoid the double taxation of income. Without such an agreement, individuals or businesses could be taxed on the same income in both their country of residence and the country where the income is sourced.
DTAs allocate taxing rights between the two countries and often provide mechanisms for tax relief, such as exemptions or credits. South Africa has agreements with a number of countries to prevent the double taxation of income.
Why are DTAs important for pensions?
Pensions can be particularly complex from a tax perspective when an individual worked in one country, receives a pension from that country, but now resides in another country.
Without a DTA in place, both countries might seek to tax the same pension income, leading to an unfair and burdensome double taxation. DTAs help clarify which country has the primary right to tax that income and under what circumstances.
How DTAs treat pensions
Most DTAs follow similar principles, often based on the OECD Model Tax Convention. Here’s how they typically address pensions:
Private pensions (occupational and personal pensions)
- Usually taxed only in the country of residence.
- However, some treaties allow taxation in both countries, with relief provided through a tax credit or exemption.
Public pensions (government pensions)
- Typically taxed in the country that pays the pension.
- For example, a government pension from the UK paid to a former civil servant now living in Spain would usually be taxed only in the UK.
Lump sum payments
– The tax treatment varies. Some DTAs specify the treatment of lump-sum pension withdrawals, while others remain silent – leaving room for different interpretations, and potential disputes.
Common challenges and considerations
- Different definitions: What one country classifies as a ‘pension’ might not be the same in another. Some countries treat annuities, retirement account withdrawals, or severance payments differently.
- Pension timing: Taxation may depend on when and how pension income is received (e.g. regular payments vs. lump sum).
- Withholding taxes: In some cases, the source country may withhold tax at source even if the DTA allocates taxing rights to the country of residence. This requires individuals to claim a refund or credit.
- Residency rules: Your residency status determines where you pay tax under the DTA. Dual residency can complicate matters significantly.
Example – SA resident
Imagine a retired UK citizen who relocates to South Africa and receives a pension from a UK pension plan. Under the South Africa – United Kingdom DTA, private pensions are generally taxed only in the country of residence – in this case, South Africa.
Thus, the UK should not tax the pension, and South Africa would have the sole taxing rights (though local rules still apply). However, if the pension were a UK state pension, the treaty might allocate taxing rights to the UK instead.
Example – SA non-resident
A person who is not a tax resident of South Africa, and receives income from a source in South Africa, may apply for a directive for the relief from South African tax on pension and/or annuity income (excluding lump sums), or who wants a refund of tax that was withheld in terms of the Income Tax Act 58 of 1962.
The request should be in terms of the Double Taxation Agreement (DTA) that is in place between South Africa and the non-resident’s country of residence.
Note that effective from 11 April 2025, the IRP3(a) Application for a Tax Directive: Gratuities and Two-Pot Savings Withdrawals Benefit form must be used by the retirement fund when paying a withdrawal from the savings pot. SARS will then consider the relief from South African tax on such a withdrawal.
Key takeaways for pensioners
- Know the treaty: Always consult the specific DTA between the two countries involved.
- Get expert advice: Cross-border tax issues are complex. A qualified international tax advisor can help navigate residency issues, claim tax credits, or prevent double taxation.
- Plan ahead: Tax-efficient retirement planning should consider future residency and how different countries treat pension income.
- Stay compliant: Misreporting income due to misunderstanding treaty provisions can lead to penalties or audits.
Conclusion
Double Tax Agreements play a crucial role in protecting retirees from double taxation on their pension income. While they provide essential guidance and relief, they require careful interpretation and planning.
As global retirement becomes more common, understanding these agreements is more important than ever.
WRITTEN BY STEVEN JONES
Steven Jones is a retired tax practitioner and member of the South African Institute of Professional Accountants.
While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of 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.