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An overview from ENS, Taxand South Africa
A recent draft 2026 tax legislation introduces an important clarification to PAYE rules for non-resident employers with a South African permanent establishment. Under the proposal, PAYE withholding will only apply where an employee is “effectively connected” to the South African permanent establishment, addressing concerns that the current rules could capture employees with little or no real link to the country.
The change is particularly relevant as remote and hybrid working arrangements blur traditional jurisdictional boundaries. Multinational employers will need to assess not only whether a South African permanent establishment exists, but also whether employees, including those participating in offshore incentive arrangements such as share schemes, are sufficiently connected to it for PAYE withholding obligations to arise.
While the amendment provides welcome certainty, businesses should be aware that other payroll taxes, including UIF and SDL, continue to operate under different tests. As a result, multinational groups with employees in South Africa may need to revisit the payroll treatment of offshore incentive plans and reassess their broader compliance obligations.
Robert Gad, Jenny Klein and Barry Knoetze from our South African member firm, ENS provide further details of the implications of the draft legislation for multinational groups with employees in South Africa below:
Draft tax legislation published in July 2026 proposes an important refinement to the PAYE obligations of non-resident employers with a permanent establishment (PE) in South Africa.
A 2023 amendment extended the withholding obligation to non-resident employers conducting business through a South African PE. Read literally, however, the provision could require a non-resident employer with a South African PE to withhold PAYE in respect of employees who have no real connection with South Africa.
The 2026 Bill addresses this by requiring the employee to be “effectively connected” to the South African PE before the withholding obligation arises.
This is particularly relevant as remote and hybrid working arrangements increasingly create less obvious connections between employees, employers and particular jurisdictions. The presence of an employee working remotely in South Africa may raise a PE question. If a PE exists, it is then necessary to determine whether the employee is effectively connected to it.
The amendment also has an important consequence for offshore incentive arrangements.
Equity incentives, share schemes, phantom shares and similar arrangements may already give rise to taxable income in South Africa where they relate to services rendered here. The fact that a plan is established, funded or administered offshore does not alter that underlying tax position.
The proposed amendment affects a different question: the potential withholding obligation of the non-resident employer.
Where an employee is effectively connected to a South African PE, amounts arising under an offshore incentive arrangement may fall within the PE’s withholding obligation. This may include gains arising on vesting or exercise. Where the employee has rendered services both in South Africa and elsewhere, the amount subject to withholding may need to be apportioned between the relevant service periods.
For multinational groups, the distinction is significant. An incentive may always have been taxable in the employee’s hands in South Africa, while the associated PAYE withholding obligation may now need to be considered at the level of the non-resident employer and its South African PE.
There is a further complication. The proposed amendment addresses PAYE, but the UIF and SDL regimes use broader tests and are not aligned with the PAYE position. It is therefore possible for an employee to fall outside the PAYE withholding requirement while the employer remains liable for UIF or SDL.
The amendment is a useful correction to the 2023 provision. It also provides a reason for multinational groups with employees in South Africa to reconsider the payroll treatment of offshore incentive arrangements, even where the South African tax treatment of the underlying benefit is already well understood.
Robert Gad
Executive | Tax
Jenny Klein
Principal Associate | Tax
Barry Knoetze
Consultant | Tax
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