Tax Considerations for South African Companies Acting as Employers of Record for Foreign Employers

Tax Considerations for South African Companies Acting as Employers of Record for Foreign Employers

• 11 June 2025
• International Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 29 February 2026.

Question: 

A South African company is proposed to act as an Employer of Record (EOR) for a South African individual employed by a foreign company (e.g. one based in the UK). The arrangement is structured to preserve the individual’s contractual rights, including participation in the overseas share option scheme. The primary concern is whether this arrangement can be implemented without adverse tax or legal consequences — particularly in relation to share schemes, PAYE withholding, exchange control compliance, and potential VAT implications.

Answer:

The Problem / Facts

A South African company is proposed to act as an Employer of Record (EOR) for a South African individual employed by a foreign company (e.g. one based in the UK). The arrangement is structured to preserve the individual’s contractual rights, including participation in the overseas share option scheme. The primary concern is whether this arrangement can be implemented without adverse tax or legal consequences — particularly in relation to share schemes, PAYE withholding, exchange control compliance, and potential VAT implications.

Analysis of the Tax Issues Identified in the Question

• Taxation of Share Schemes: Participation in a foreign employer’s share option scheme triggers income tax on vesting. The EOR may be responsible for withholding PAYE on the taxable benefit arising from the share scheme.
• Exchange Control and Tax Compliance: The acquisition of foreign shares must comply with South African Reserve Bank (SARB) limits and any required approvals. There are also tax reporting obligations relating to foreign transactions.
• EOR Income Tax Obligations: The EOR is required to withhold PAYE on all remuneration paid to the employee and ensure full compliance with South African tax legislation.
• VAT Implications: The services rendered by the EOR to the foreign entity may qualify as ‘exported services’, which could be subject to a zero VAT rating, provided sufficient substantiation is available.

List of Tax Issues with the Relevant Legislative References

• Taxation of Employee Share Schemes: Section 8C of the Income Tax Act 58 of 1962.
• Exchange Control and Tax Compliance: Section 9 of the Income Tax Act 58 of 1962 and the relevant guidelines published by SARS (www.sars.gov.za).
• Income Tax Implications for EOR Arrangement: Section 23H of the Income Tax Act 58 of 1962 and Section 7 of the Tax Administration Act 28 of 2011.
• VAT Implications: Section 11(2)(l) of the VAT Act 89 of 1991.

List of Tax Issues with the Relevant Legislative References

• Taxation of Employee Share Schemes: Section 8C of the Income Tax Act 58 of 1962.
• Exchange Control and Tax Compliance: Section 9 of the Income Tax Act 58 of 1962 and the relevant guidelines published by SARS (www.sars.gov.za).
• Income Tax Implications for EOR Arrangement: Section 23H of the Income Tax Act 58 of 1962 and Section 7 of the Tax Administration Act 28 of 2011.
• VAT Implications: Section 11(2)(l) of the VAT Act 89 of 1991.

Application of the Law to the Facts

The South African company acting as EOR must fulfil its payroll obligations in terms of Section 23H of the Income Tax Act, including the withholding of PAYE on the individual’s remuneration. As the legal employer in South Africa, the EOR is also responsible for accurate tax reporting and submission to SARS.

A foreign company may appoint a South African payroll services provider to act as EOR, ensuring compliance with local tax and labour laws. In this arrangement, the South African employee is effectively co-employed by the foreign employer and the EOR. The EOR assumes responsibility for payroll and compliance, while the foreign company retains functional control over the employee’s day-to-day duties.

This structure allows the foreign employer to avoid registering a subsidiary or branch in South Africa, providing an efficient mechanism for employment compliance.

In the unreported case of AB LLC and BD Holdings LLC v Commissioner of SARS (heard in February 2015), the Tax Court considered whether an American company, acting as an advisory group to the South African airline industry, had created a permanent establishment (PE) in South Africa. The Court interpreted Article 5(2)(k) of the Double Tax Agreement (DTA) between South Africa and the United States. It held that a PE was established as the foreign company’s employees were present in South Africa for more than 183 days and had exclusive use of a boardroom at the South African client’s premises.

This case illustrates that a foreign entity may establish a PE in South Africa if it has a fixed base or if its employees render services in the country for over 183 days in a 12-month period, depending on the terms of the applicable DTA.

An EOR arrangement may help a foreign company minimise the risk of creating a PE in South Africa by acting as the formal employer of local staff and distancing the foreign entity from direct employment relationships in the country. However, according to the Companies Act, simply entering into employment contracts does not necessarily require registration as an external company, nor does it automatically result in PE status. That said, a foreign company could still be considered to be ‘carrying on business’ in South Africa based on the extent and continuity of its activities.

Specifically, a foreign company will be regarded as carrying on business in South Africa if:

• It is party to one or more employment contracts locally, or
• It engages in a consistent pattern of conduct or activities over a period of six months or more that would lead a reasonable person to conclude the company intends to continue doing business or non-profit activities in South Africa.

While using an EOR may be sufficient to insulate the foreign company from direct tax and legal exposure, this is not guaranteed. Whether a PE exists or a company is considered to be carrying on business depends on the totality of the facts and substance of its presence and activities in South Africa.

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