South Africa

Tax-deferred employer plans

South African employer-sponsored retirement funds come in two main forms:

Pension funds: Traditional defined benefit or defined contribution plans where the employer and employee contribute. At retirement, a minimum portion must be taken as a monthly annuity. These funds hold segregated assets in trust and are foreign trusts for U.S. purposes.

Provident funds: Similar to pension funds but historically allowed the full benefit to be taken as a lump sum at retirement (since 1 March 2021 provident funds are subject to the same one-third/two-thirds annuitisation rules as pension funds, with balances accrued before that date, and members aged 55 or older on that date, protected). Provident funds also hold segregated trust assets and are foreign trusts.

Form 3520-A and Form 3520 must be filed annually for the part of each fund your own contributions pay for, once your own contributions to it exceed the employer’s, counted as the note at the end of this section explains (Treas. Reg. §1.402(b)-1(b)(6)), or for any part you otherwise own, unless Rev. Proc. 2020-17 applies (see below).

For a plan an employer contributes to, a trust holding it is generally a nonexempt employees’ trust described in §402(b). §6048(a)(3)(B)(ii) excepts transfers to §402(b), §404(a)(4), and §404A trusts from Part I, the participant’s own contributions included, and §679 does not make the participant the owner (see the Reporting Guide’s employer-plan section). Payouts the participant reports as compensation income are excepted from Part III. If the participant’s own contributions ever exceed the employer’s, the participant is treated as the owner of the part those contributions fund (Treas. Reg. §1.402(b)-1(b)(6)), reports it on Part II and Form 3520-A each year it is owned, and is taxed on its income each year. In that count, what the participant chose to put in, salary sacrifice included, is the participant’s, and anything the plan’s rules required taken from pay is the employer’s, as the IRS chief counsel read a national retirement fund in 1997. The rest is taxed when it vests and, after that, when paid out (§402(b)(1), (2)).

Tax-deferred individual plans

Retirement annuities (RAs) are voluntary individual retirement savings vehicles. The individual contracts with a life insurance company or fund manager. RAs hold segregated assets and are foreign trusts for U.S. purposes.

§301.7701-7 classification: Foreign trust. Segregated assets under South African law, supervised by the FSCA. Failing either the court test or the control test makes a trust foreign; South African retirement funds fail both.

Rev. Proc. 2020-17 analysis: Rev. Proc. 2020-17 does not require a treaty: any foreign retirement trust can qualify if it meets all Section 5.03 conditions (tax-favored, contribution caps, withdrawal restrictions, nondiscriminatory employer plans, etc.). Employer pension funds and provident funds are strong candidates. For individual RAs, §5.03(6) does not apply; they need only satisfy §5.03(1)–(5). Whether each RA meets all conditions requires plan-specific analysis: key questions include contribution limits (condition 4) and whether the new two-pot savings-component withdrawals affect condition (5). The exemption is available only to an ‘eligible individual’ under §5.02: someone who is compliant (or comes into compliance) with U.S. income-tax filing and has reported the plan’s contributions, earnings, and distributions as income to the extent U.S. law requires; a participant who never reported plan earnings cannot rely on it until they do.

3520/3520-A treatment: Full reporting required. File Form 3520-A and Form 3520 Part II annually.

Since the two-pot retirement system (2024), members can access a savings component before retirement. Withdrawals are reported on Part III.

If the RA invests in non-U.S. unit trusts, PFIC rules may apply to them; we do not determine PFIC status or whether Form 8621 is due.

Preservation funds

When a member leaves an employer, they can transfer their pension or provident fund benefit to a preservation fund rather than taking a cash withdrawal. Preservation funds hold the transferred assets until retirement.

Preservation funds are trust structures and are foreign trusts for U.S. purposes. The same 3520-A and 3520 filing obligations apply. The transfer from the employer fund to the preservation fund is not a taxable event in South Africa, but for U.S. purposes the 3520-A reporting shifts from the old fund to the preservation fund.

Gifts and inheritances

If a U.S. person receives more than $100,000 in gifts or bequests in a year from one nonresident alien individual or foreign estate in South Africa (adding together gifts from donors related to each other), Form 3520 Part IV reporting is required. Gifts from foreign corporations or foreign partnerships exceeding $20,573 (for 2026, indexed for inflation) are also reportable.

South Africa imposes estate duty at 20% on the dutiable estate above a R3.5 million abatement (25% on the portion above R30 million) and donations tax on the donor at 20% (25% on cumulative donations above R30 million), with the first R150,000 a year exempt for individuals. These are South African obligations and do not affect the U.S. reporting requirement.

Common scenarios include inheritance of South African property, transfer of family farm land, and gifts from family members in South Africa.

Penalties and practical notes

Failure to file Forms 3520/3520-A carries penalties under §6677: the greater of $10,000 or 35% of the gross reportable amount for certain Form 3520 failures (§6677(a)); 5% or $10,000 for Part II and 3520-A (§6677(b)).

The South African tax year for individuals runs March 1 – February 28/29, so calendar-year conversion is needed for the Form 3520-A.

South African retirement fund administrators issue annual benefit statements showing contributions, investment returns, and balances. These can be used to prepare the 3520-A.

Convert South African rand at the rate prevailing when each amount is received, paid, or accrued; the IRS has no official exchange rate and generally accepts any posted rate used consistently, so its published yearly average rate is a common choice for amounts arising evenly across the year. The ZAR can be volatile.

The U.S.–South Africa income tax treaty (signed 1997, effective from 1 January 1998) has no provision deferring tax on income accruing inside a retirement fund. Article 18(1) lets South Africa tax fund distributions paid to a U.S. resident who was employed in South Africa for at least two of the ten years before the pension became due and for at least ten years in total (Art. 18(1)(b)), and Article 1(4) lets the U.S. tax its citizens as if the treaty did not exist, so a U.S. citizen reports the fund's earnings annually if it is a foreign trust and takes a foreign tax credit for South African tax on distributions.

Exchange control regulations in South Africa may limit the ability to transfer large sums out of the country, but this does not affect the U.S. reporting obligation.