If South African citizens hold a green card or are about to obtain one, they should beware of the adverse US tax and compliance consequences that could follow, according to Investec.
In most cases a green card means that holders are US tax residents; they must pay US federal income tax on all their worldwide income and gains.
If emigrants do not end their South African tax resident status by changing their ‘ordinarily resident’ status or meeting the physical presence test, 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.
This could result in up to 100% of a distribution made to a US resident being wiped out by tax, penalties and interest, Investec noted.
Being a beneficiary of a trust with certain investments can also result in tax obligations and reporting requirements.
Certain non-US mutual funds, ETFs, unit trusts or collective investment schemes may be seen as Passive Foreign Investment Corporation (PFIC) investments. PFICs are taxed at high rates, and could be subject to penalties and interest.
Lump sum payments from South African retirement funds 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 compared to one’s marginal income tax rate. The US may treat the payment as ordinary income, subject to income tax rates in the US.
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