Tax Guide for US Expats Living and Working in Lesotho
Who Is Liable For Income Taxes in Lesotho
Citizen residents and permanent residents are taxable on Lesotho-source income and on income brought into Lesotho. Tax-resident expatriates are taxed on income from all sources to the extent that the income is brought into or received in Lesotho.
Income subject to tax
Employment income. All compensation from sources within or deemed to be within Lesotho is taxable. Compensation includes salaries, wages, overtime or leave pay, commissions, directors’ fees, bonuses, gratuities, benefits in cash or in kind, allowances, gifts, pensions and retirement benefits. Compensation does not include fringe benefits, but employers are subject to tax on them.
War and disability pension benefits and amounts received from agricultural activities are tax-exempt.
Self-employment and business income. Any individual who earns self-employment or business income from a source within Lesotho or a source deemed to be within Lesotho is subject to tax in the year the income is earned.
To be taxable, self-employment or business income must arise from a source in Lesotho or a source deemed to be within Lesotho. Business income is defined as all profits or gains arising from a business, including capital gains. Business income is calculated by subtracting exempt income and allowable deductions from gross income. If a taxpayer’s gross income is less than M 150,000, the cash basis of accounting may be used to determine business income.
Investment income. Resident shareholders are not subject to tax on dividends.
In general, interest is taxed with other income at the rates. The following interest income is exempt:
- Up to M 500 received by a resident individual from a single savings account
- Interest received by a resident individual on which a 10% withholding tax is imposed
Other investment income, including the profit or loss on the sale of an investment asset, is taxed with other income at the rates described in Rates.
Capital gains and losses. Gains or losses derived from the sale of business and investment assets are included in the normal taxable income of an individual. Gains or losses derived from the sale of personal assets are not included in taxable income.
Deductions
Deductible expenses. Expenses directly related to employment are deductible, but personal expenses, including clothing and commuting, are not.
Personal deductions and allowances. A personal tax credit of M 5,000 may be deducted from tax liability.
Business deductions. In general, expenses incurred in earning taxable income are deductible, except for expenses of a capital nature.
Relief for losses. Losses may be carried forward and offset against income of a similar nature in subsequent years.
B. Other taxes
Lesotho does not impose net worth, estate or gift taxes.
C. Social security
Lesotho does not impose any social security taxes.
Double tax relief and tax treaties
Double tax relief in the form of a tax credit is available in the absence of an applicable double tax treaty. Lesotho has negotiated double tax treaties with South Africa and the United Kingdom, but these treaties have not yet been ratified.
We have been preparing US income tax returns for US Citizens and permanent residents living in Lesotho for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Lesotho and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Lesotho.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a consultation by phone, skype or email