New Definition of Residence in the South African VAT Act

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The South African Revenue Service (SARS) has recently updated the definition of "residence" in the VAT Act, effective from the 1st of January 2025.

The recent change in the VAT Act's definition of residence was made to align the VAT regulations with the criteria used in the Income Tax Act. This alignment aims to provide clarity and consistency across different tax regulations, ensuring that the criteria for determining residency are uniform. 

This change is significant for businesses and individuals as it helps in determining tax obligations and residency status more accurately.

According to the new definition, a resident is:

  • A natural person who is "ordinarily resident" in the Republic of South Africa or who was "physically present" in the Republic for a certain period or periods.

  • A person other than an individual, such as a company or trust, that is incorporated, established, or formed in the Republic or has its place of effective management in the Republic.

For entities other than individuals, the place of effective management is a crucial factor. This refers to the place where key management and commercial decisions are made in substance, rather than just formally.

When a company in South Africa provides VAT services and products to a non-resident client, there are specific rules and conditions that apply. Here’s a detailed look at these rules:

For services rendered to non-residents, the VAT Act allows for zero-rating under certain conditions. This means that VAT is charged at 0%, which can be beneficial for both the vendor and the client.

However, to qualify for zero-rating, the services must meet specific criteria outlined in Section 11 (2) (l) of the VAT Act.

These criteria include:

  • The services must be physically rendered in South Africa to a non-resident.

  • The services should not be directly connected to immovable property situated in South Africa.

  • The non-resident recipient must not be present in South Africa at the time the services are rendered.

For products, the VAT treatment depends on whether the goods are exported directly or indirectly:

  • Direct Export: If the vendor sells and consigns or delivers movable goods to a customer at an address outside South Africa, the export is regarded as a direct export, and the vendor may zero-rate the sale if all documentary and procedural requirements are met.

  • Indirect Export: If the recipient from outside South Africa removes or arranges for the removal of goods purchased in South Africa, the export is regarded as an indirect export. The supplier must generally charge VAT at 15% but may elect to zero-rate the supply under certain conditions.

It is crucial for vendors to maintain proper documentation to substantiate the zero-rating, as required by the South African Revenue Service (SARS). This includes tax invoices, written confirmation from the recipient that they are not a resident of the Republic, proof of payment, and proof of export for goods.

Example:

Imagine a South African consulting firm that provides services to a non-resident client based in the United Kingdom. Under the new VAT regulations, the definition of "residence" has been updated to align with the criteria used in the Income Tax Act. This means that the consulting firm needs to determine whether their client qualifies as a non-resident under the new definition.

If the client is indeed a non-resident, the consulting firm can apply the 0% VAT rate to the services provided, if the services meet the specific criteria outlined in the VAT Act. 

These criteria include that the services must be physically rendered in South Africa to a non-resident, should not be directly connected to immovable property situated in South Africa, and the non-resident recipient must not be present in South Africa at the time the services are rendered.

By applying the 0% VAT rate, the consulting firm can offer more competitive pricing to their non-resident client, potentially attracting more international business. 

However, the firm must ensure they maintain proper documentation to substantiate the zero-rating and comply with the new regulations to avoid any disputes with SARS.