Although getting a green card may be a huge positive for South African emigrants, bad planning could put them in an unwanted tax position.
According to Investec, in most cases, a green card means that the holder is a US tax resident (for US federal income tax purposes), meaning they must pay tax in the US on all their worldwide income and gains.
However, suppose the emigrant does not end their SA tax resident status by changing their “ordinarily resident” status or meeting the physical presence test. In that case, they will also be held liable for tax on a worldwide basis in South Africa.
“It may be tempting to claim treaty relief in terms of the double taxation agreement concluded between SA and the US, but formal advice must be obtained from US immigration specialists, since claiming treaty relief may have an impact on your US immigration status,” Investec said.
In addition, distributions from trusts are taxed aggressively from a US perspective and may also have additional penalties and interest.
“This could result in up to 100% of a distribution made to a US person being wiped out by tax, penalties and interest,” Investec noted.
“In the same breath, whether a distribution is made or not, being a beneficiary of a trust with certain investments or with underlying companies can also result in tax obligations and reporting requirements.”
An SA tax resident with a green card must also look at both jurisdictions from a tax perspective regarding their investments.
For instance, certain foreign (non-US) mutual funds, ETFs, unit trusts or collective investment schemes may be seen as Passive Foreign Investment Corporations, also known as “PFIC” investments.
PFICS are taxed at high rates – especially among the highest income brackets – and could also be subject to penalties and interest.
Some investment policies, including endowment policies and wrappers, could also be taxable in South Africa by the relevant insurance house and in the US – again resulting in double taxation.
“When it comes to SA retirement funds, lump sum payments from SA retirement products are generally taxable at the withdrawal benefit table rate or the retirement lump sum benefit table rate. These tables generally provide a preferential tax rate in comparison to your marginal income tax rates. The US may in certain circumstances treat the payment as ordinary income subject to income tax rates in the US,” Investec said,
“Ensuring that you file your US tax returns timeously and correctly is but one of the items to tick off to ensure compliance in the US. If you hold a green card or are about to obtain a green card, beware of the adverse US tax and compliance consequences that follow.”