Double taxation risks in international divorces

Which piper do you pay if you divorce a spouse overseas?

Setting aside the emotional upheaval, divorce is a complicated financial transaction. If one spouse lives overseas or the couple owns assets in more than one country, there are additional levels of complexity, especially when it comes to tax. One of the main financial risks in an international divorce is double taxation, where the same income, settlement, or asset transfer is taxed in two jurisdictions.

Double taxation usually arises when:

• A South African resident pays spousal or child maintenance to an ex-spouse living overseas
• The divorce settlement included offshore property, shares, or investments
• Pension benefits are earned abroad but paid out in South Africa
• Assets trigger capital gains tax in both South Africa and the foreign country

For example, if a South African spouse pays maintenance to an ex in the UK, South Africa may tax the payer on their worldwide income, while the UK taxes the recipient on the money they receive. In effect, the same payment has been taxed twice.

Double taxation agreements

South Africa has signed double taxation agreements (DTAs) with many countries. These treaties are meant to prevent the same income being taxed twice, and they determine which country has the “first right” to tax certain types of income.

For divorces, DTAs are especially relevant for:

• Maintenance payments: It may be taxed by the payer’s country or the recipient’s. If the treaty is not applied correctly, both parties could pay tax on the same transaction.
• Pensions: The treaty normally states whether tax is due where the pension originates or where the beneficiary lives.
• Capital gains: Often the country where the property or investment is located is entitled to the tax revenue, but South Africa may still tax worldwide income. In that case, SARS can issue, on application, a credit for the tax already paid overseas.

In theory, DTAs should solve double taxation. In practice, it’s not always that simple. SARS requires full disclosure of foreign assets and income, even if tax has already been paid elsewhere. To qualify for relief, SARS usually demands proof of the foreign tax paid.

South Africa has signed DTAs with more than 70 countries. Some key DTAs relevant to divorce include:

• United Kingdom – The SA–UK DTA covers pensions, maintenance and capital gains. Typically, pensions paid from the UK are taxable there, not in South Africa, but the details matter.
• Germany – Under the SA–Germany DTA, maintenance payments are usually taxable where the recipient lives, not where the payer lives.
• United States – The SA–US treaty contains specific provisions on pensions and annuities. A South African resident receiving pension income from the US may only pay tax in South Africa, but credits may be needed if US withholding tax is applied.
• Mauritius – Often relevant for property owners, the treaty gives taxation rights on property to Mauritius, but SARS requires disclosure and may expect capital gains reporting.
• Australia – The SA–Australia treaty helps to prevent taxation of pensions and retirement benefits by both countries, which can be a major issue in expat divorces.

Check the small print

Each treaty has its own wording, and even small differences can change the outcome in a divorce settlement. You must check the exact DTA that applies to your situation.

International divorces bring a mix of legal and financial challenges, and tax is often overlooked. Double taxation can drastically reduce what your final settlement. The good news is that, with the right planning, much of this can be managed or avoided.

Cape Town family lawyer can help

SD Law & Associates, based in Cape Town, Johannesburg and Durban, are experts in divorce and family law and have particular expertise in international divorce. If you have questions about taxation or any aspect of international divorce, contact Simon on +27 86 099 5146 or email sdippenaar@sdlaw.co.za.

SD Law – Simon Dippenaar & Associates Inc.

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