South African payroll and tax compliance for non‑resident employers

A 2023 amendment to paragraph 2(1)(b) of the Fourth Schedule to the Income Tax Act requires non-resident employers to withhold employees’ tax (PAYE) only where they conduct business in South Africa through a permanent establishment (PE).

While this represented an important step forward in aligning PAYE withholding obligations with international tax principles, it does not fully address situations where:

• A non-resident employer has a permanent establishment in South Africa

• The relevant employee performs no services in South Africa, and

• Has no functional or economic connection to the permanent establishment.

Under the current legislation, a non-resident employer may still be obligated to withhold PAYE, purely because it has a permanent establishment, even though the employment relationship has no nexus to South Africa.

To correct this unintended outcome, National Treasury has proposed that the permanent establishment requirement for non-resident employers be amended, requiring that the employee be “effectively connected” to the permanent establishment before a PAYE withholding obligation arises.

While the proposed amendment is welcomed, the proposal is silent on the remaining inconsistencies with the obligation for non-resident employers to withhold PAYE and register for Skills Development Levies (SDL) and Unemployment Insurance Fund (UIF) contributions.

Both the Skills Development Levies Act and the Unemployment Insurance Contributions Act define “employer” by reference to the definition of “employer” in the Fourth Schedule, but without applying the permanent establishment limitation introduced for PAYE.

As a result, any employer who pays remuneration is liable for SDL and UIF regardless of whether the employer:

• Is resident or non-resident

• Has a permanent establishment in South Africa

• Has a representative employer in South Africa, or

• Is exempt from PAYE withholding.

A non-resident employer may therefore have no PAYE obligation yet still be required to register as an employer with SARS solely to pay SDL and UIF.

Until amendments are made to the SDL and UIF legislation, non-resident employers may be subject to compulsory registration and contribution obligations, irrespective of their South African tax presence. This situation may result in complex compliance issues and unintended administrative responsibilities as well as penalties and interest.

We will continue to monitor legislative developments and keep clients informed of further changes. In the meantime, employers should review their structures to ensure full compliance with all statutory requirements.