SARS Interpretation Note 131: Exemption of income relating to South African ships used in international shipping (source: https://www.sars.gov.za/legal-intr-in-131-exemption-of-income-relating-to-south-african-ships-used-in-international-shipping/)
INTERPRETATION NOTE 131
DATE: 29 April 2024
ACT : INCOME TAX ACT 58 OF 1962
SECTION : SECTION 12Q
SUBJECT : EXEMPTION OF INCOME RELATING TO SOUTH AFRICAN SHIPS
USED IN INTERNATIONAL SHIPPING
Contents
Preamble .............................................................................................................................. 2
1. Purpose ..................................................................................................................... 2
2. Background ............................................................................................................... 3
3. The law...................................................................................................................... 3
4. Application of the law................................................................................................. 4
4.1 Definitions [section 12Q(1)] ....................................................................................... 4
4.1.1 South African ship ..................................................................................................... 4
(a) Ships registered in accordance with Part 1 of Chapter 4 of the Ship Registration
Act (paragraph (a) of the definition of “South African ship”) ....................................... 4
(b) Ship used temporarily in lieu of a South African-registered ship by virtue of that
ship being subject to repair or maintenance (paragraph (b) of the definition of
“South African ship”) .................................................................................................. 6
4.1.2 International shipping ................................................................................................ 9
4.1.3 International shipping company ............................................................................... 11
4.1.4 International shipping income .................................................................................. 12
4.2 Exemption from normal tax of any international shipping income received by or
accrued to any international shipping company [section 12Q(2)(a)] ......................... 15
4.3 Capital gain or capital loss of any international shipping company in respect of a
South African ship engaged in international shipping [paragraphs 6 and 7 of the
Eighth Schedule and section 12Q(2)(b)] .................................................................. 18
4.4 Dividends paid by an international shipping company [sections 64D to 64N and
section 12Q(3)] ........................................................................................................ 19
4.5 Interest paid by an international shipping company [sections 50A to 50H
and section 12Q(4)] ................................................................................................. 21
5. Conclusion .............................................................................................................. 22
Preamble
In this Note unless the context indicates otherwise –
• “international shipping” means “international shipping” as defined in
section 12Q(1);1
• “international shipping company” means “international shipping company”
as defined in section 12Q(1);2
• “international shipping income” means “international shipping income” as
defined in section 12Q(1);3
• “section” means a section of the Act;
• “Ship Registration Act” means the Ship Registration Act 58 of 1998;
• “South African-registered ship” means a ship registered in South Africa
under the Ship Registration Act as contemplated in paragraph (a) of the
definition of “South African ship” in section 12Q(1);
• “South African ship” means a “South African ship” as defined in
section 12Q(1) and includes a “South African-registered ship” and a “temporary
replacement ship”;4
• “TA Act” means the Tax Administration Act 28 of 2011;
• “temporary replacement ship” means another ship used temporarily as a
result of a South African-registered ship being subject to repair or maintenance
as contemplated in paragraph (b) of the definition of “South African ship” in
section 12Q(1);
• “the Act” means the Income Tax Act 58 of 1962; and
• any other word or expression bears the meaning ascribed to it in the Act.
All guides and interpretation notes referred to in this Note are available on the SARS
documents should be consulted.
1. Purpose
This Note provides guidance on the interpretation and application of section 12Q,
which provides for an exemption from normal tax, capital gains tax, dividends tax and
withholding tax on interest for an international shipping company meeting the
requirements of the section.5
1 See 4.1.2.
2 See 4.1.3.
3 See 4.1.4.
4 See 4.1.1.
5 The content of the Merchant Shipping Bill, 2020 has not been considered for purposes of this Note.
2. Background
As part of the National Transport Policy,6 government aims to promote the
development of an efficient and productive South African maritime industry capable of
competing internationally and to encourage ships to carry the South African flag.
To give effect to this strategic objective, section 12Q was inserted with effect from
1 April 2014 and applies to years of assessment commencing on or after that date,7
providing certain tax relief for qualifying international shipping companies. Since the
introduction of the section, amendments were effected to some of the definitions
fundamental to the application of section 12Q.8
The issue of double taxation and the application of various double tax treaties is not
dealt with in this Note as double taxation relief measures vary from treaty to treaty.
3. The law
Section 12Q
12Q. Exemption of income in respect of ships used in international shipping.—
(1) For the purposes of this section—
“international shipping” means the conveyance for compensation of passengers or
goods by means of the operation of a South African ship mainly engaged in international traffic;
“international shipping company” means a company that is a resident that operates
one or more South African ships that are utilised in international shipping;
“international shipping income” means the receipts and accruals of a person derived
from international shipping mainly from the operation of one or more ships contemplated in
paragraph (a) of the definition of “South African ship”;
“South African ship” means a ship—
(a) which is registered in the Republic in accordance with Part 1 of Chapter 4 of
the Ship Registration Act, 1998 (Act No. 58 of 1998); or
(b) another ship or ships used temporarily in lieu of the ship contemplated in
paragraph (a) by virtue of that ship being subject to repair or maintenance.
(2) (a) There must be exempt from normal tax any international shipping income of
any international shipping company.
(b) Any capital gain or capital loss in respect of any year of assessment of any
international shipping company determined in respect of a South African ship
engaged in international shipping must be disregarded in determining the
aggregate capital gain or aggregate capital loss of that international shipping
company.
(3) The rate of dividends tax contemplated in section 64E that is paid by an international
shipping company on the amount of any dividend derived from international shipping income
must not exceed zero per cent of the amount of that dividend.
6 The White Paper on the National Transport Policy, 1996.
7 Inserted by section 41(1) of the Taxation Laws Amendment Act 31 of 2013.
8 See amendments effected by the Taxation Laws Amendment Act 17 of 2017, and the Taxation
Laws Amendment Act 23 of 2018.
(4) There must be exempt from the withholding tax on interest any amount of interest if
that amount is paid to any foreign person, as defined in section 50A, by an international
shipping company in respect of debt utilised to fund the acquisition, construction or
improvement of a South African ship utilised for international shipping.
4. Application of the law
4.1 Definitions [section 12Q(1)]
In order to qualify for the tax relief under section 12Q, a company must be a resident
and operate one or more South African ships that are mainly engaged in international
traffic for international conveyance of passengers or goods for compensation. The
various definitions in section 12Q(1) form the basis for the application of section 12Q.
4.1.1 South African ship
The term “South African ship” is defined in section 12Q(1) as –
• a ship registered in South Africa in accordance with Part 1 of Chapter 4 of the
Ship Registration Act; or
• another ship or ships used temporarily in lieu of the ship contemplated above
by virtue of that ship being subject to repair or maintenance.
The two categories of a South African ship for purposes of section 12Q(1) are
examined below.
(a) Ships registered in accordance with Part 1 of Chapter 4 of the Ship
Registration Act (paragraph (a) of the definition of “South African ship”)
The Ship Registration Act provides for the registration of ships in South Africa. Part 1
of Chapter 4 of the Ship Registration Act, which encompasses sections 15 to 19 of that
Act, dictates the requirements of registering a ship as a South African ship,9 the refusal
of registration10 and prohibition of dual registration.11
Section 15 of the Ship Registration Act provides that for purposes of the registration of
a ship –
• the property in a ship is divided into 64 shares;
• the number of persons registered as owners of a ship may not at any time
exceed 64 and when a share in a ship is jointly owned or two or more shares
in a ship are jointly owned by the same persons, the joint owners of that share
or of those shares, as the case may be, must be regarded as one person;
• any number of persons not exceeding five may be registered as joint owners
of a ship or of one or more shares in a ship;
• a joint owner of a ship or of one or more shares in a ship may not dispose of
that joint owner’s interest separately;
• a person may not be registered as the owner of a fractional part of a share in a
ship;
9 Sections 15, 16 and 17 of the Ship Registration Act.
10 Section 18 of the Ship Registration Act.
11 Section 19 of the Ship Registration Act.
• a body corporate is registered as an owner by its corporate name; and
• a trust is registered as an owner in the name of the trust.
Under section 16 of the Ship Registration Act the following ships are entitled to be
registered:
• South African-owned ships.
• Small vessels,12 other than fishing vessels,13 that are—
➢ wholly owned by South African residents or South African residents and
South African nationals;14 or
➢ operated solely by South African residents or South African nationals
or both such residents and such nationals.
• Ships on bareboat charter15 to South African nationals.
The definition of “South African resident” for purposes of the Ship Registration Act
differs from the definition of “resident” in section 1(1). Section 1(1) of the Ship
Registration Act defines “South African resident” as –
“(a) a natural person whose permanent place of abode is in the Republic,
whether or not he or she is from time to time temporarily absent from
the Republic;
(b) a natural person whose domicile is in the Republic, unless his or her
permanent place of abode is outside the Republic;
(c) a body corporate, wherever incorporated, that has its principal place of
business in the Republic; and
(d) a trust in which—
(i) the majority of trustees having the controlling power at any given
time are South African residents referred to in paragraphs (a), (b)
and (c); and
(ii) a majority of the beneficial interests are held by such South African
residents;”.
Section 1(1) of the Ship Registration Act defines “South African national” as –
“(a) a South African citizen in terms of the South African Citizenship Act,
1995 (Act No. 88 of 1995);
(b) a body corporate established in terms of a law of the Republic with a
place of business in the Republic;
12 The term “small vessel” is defined in section 1(1) of the Ship Registration Act as “a vessel of less
then (sic) 25 gross tons and of more than three metres in length”.
13 The term “fishing vessel” is defined in section 1(1) of the Ship Registration Act as “a fishing vessel
as defined in section 1 of the Marine Living Resources Act, 1998 (Act No. 18 of 1998)”. That Act
defines it as “any vessel, boat, ship or other craft which is used for, equipped to be used for or of a
type that is normally used for fishing or related activities, and includes all gear, equipment, stores,
cargo and fuel on board the vessel”.
14 The terms “South African resident” and “South African national” are defined in section 1(1) of the
Ship Registration Act.
15 The term “bareboat charter” is defined in section 1(1) of the Ship Registration Act.
(c) a trust in which—
(i) the majority of trustees having the controlling power at any given
time are South African nationals referred to in paragraphs (a) and
(b); and
(ii) a majority of the beneficial interests are held by such South African
nationals; and
(d) the Government of the Republic;”.
Section 1(1) of the Ship Registration Act defines “bareboat charter” of a ship to mean
“the charter of the ship for a fixed period on terms that give the charterer possession
and control of the ship, including the right to appoint the master and crew”. Thus, a
ship that is on bareboat charter to a South African national may be registered as a
South African ship in accordance with Part 1 of Chapter 4 of the Ship Registration Act
despite the fact that the ship is not owned by the South African national.
Section 18 of the Ship Registration Act provides for a number of circumstances in
which a ship may be denied registration under that Act, amongst others, when there is
a concern with regards to the safety, health and welfare of persons employed or
engaged on the ship.
Under section 19 of the Ship Registration Act, a ship may not be registered under that
Act if the ship is registered under the law of another state. However, some exceptions
and requirements are provided for under that section.
(b) Ship used temporarily in lieu of a South African-registered ship by
virtue of that ship being subject to repair or maintenance (paragraph (b)
of the definition of “South African ship”)
The second category under the definition of “South African ship” is another ship used
temporarily while the South African-registered ship is undergoing repair or
maintenance.
This second category was included effective for years of assessment commencing on
or after 1 April 2019.16 The amendment to the definition of “South African ship” was in
conjunction with an amendment to the definition of “international shipping income”
(see 4.1.4).
The amendments to the two definitions were necessary because the limitation of the
relief to the operation of South African-registered ships in order to prevent abuse of
the tax relief, created unintended consequences. Often a temporary replacement ship
has to be brought into use temporarily as a replacement ship owing to the South
African-registered ship being unavailable while undergoing repair or maintenance.
This restriction resulted in the international shipping company not qualifying for the tax
relief under section 12Q.
The amendment to the definition of “South African ship” caters for an exception to the
policy intent to attract ships to be flagged under the South African register and
therefore provides relief only if the replacement ship is used temporarily while repair
or maintenance is effected to a South African-registered ship.
16 Definition of “South African ship” substituted by section 31(1)(b) of the Taxation Laws Amendment
Act 23 of 2018.
Since the words “temporarily”, “repair” and “maintenance” are not defined in the Act,
they should be interpreted according to their ordinary meaning as applied to the subject
matter with regard to which they are used, unless there is something which obliges
them to be read in a sense that is not in their ordinary sense in the English language
as so applied.17
In Dictionary.com “temporarily” is defined as –18
“only for a while or for the time being; not permanently.”
No specific timeframe such as a number of months can be prescribed for purposes of
determining what is meant by “temporarily” under paragraph (b) of the definition of
“South African ship”. However, the use of the temporary replacement ship should be
for a limited period of time and not permanent. The time that the temporary
replacement ship is used should correspond with the duration of the repairs to or
maintenance of the affected South African-registered ship which could include waiting
times for parts or supplies necessary for the repair or maintenance. The nature and
extent of the repair or maintenance will in each case dictate the period of time that the
receipts and accruals from the use of the temporary replacement ship will be eligible
for the tax relief. The repair or maintenance must, however, be completed as soon as
reasonably possible and should not unduly be delayed.19 Once the repairs to or
maintenance of the affected South African-registered ship are completed the
requirements of a temporary replacement ship will no longer be met.
The Cambridge Dictionary20 defines “repair” as –
“to put something that is damaged, broken or not working correctly, back into good
condition, or make it work again”.
In ITC 617 the court considered the meaning of “repair” and examined various court
cases from which the following principles were extracted:21
• Repair is restoration by renewal or replacement of subsidiary parts of the
whole. Renewal as distinguished from repair is reconstruction of the entirety,
meaning by the entirety not necessarily the whole but substantially the whole
subject matter under discussion.
• In the case of repairs effected by renewal, it is not necessary that the materials
used should be identical with the materials replaced.
• Repairs are to be distinguished from improvements. The test for this purpose
is, has a new asset been created resulting in an increase in the income-earning
capacity or does the work undertaken merely represent the cost of restoring
the asset to a state in which it will continue to earn income as before?
These principles are intended to provide some basic guidance to the taxpayer in
determining what constitutes a “repair”. Each matter must, however, be considered on
the facts of the case.
17 See Kellaway, E. A. (1995). Principles of Legal Interpretation of Statutes, Contracts and Wills at
224. Butterworths, citing Lion Insurance Association v Tucker (1883) 12 QB 176 at 186.
18 www.dictionary.com/browse/temporarily [Accessed 29 April 2024].
19 Under section 102 of the TA Act the onus is on the taxpayer to prove the need for the use of the
temporary replacement ship.
20 www.dictionary.cambridge.org/dictionary/english/repair [Accessed 29 April 2024].
21 (1946) 14 SATC 474 (U) at 476.
Owners of ships are often legally required to effect certain changes to the ship to
maintain registration or be allowed to operate. Expenditure incurred to effect the
compulsory changes is generally considered to constitute a repair or maintenance and
not an improvement. By making the compulsory changes to the ship, the owner is not
creating a new asset resulting in an increase in the income-earning capacity, but rather
undertaking repairs to allow the ship to continue earning income.
The distinction between a “repair” and an “improvement” is not always clear. The South
African courts have developed a number of tests for distinguishing between repairs
and improvements, which are considered in Interpretation Note 74 “Deduction and
Recoupment of Expenditure Incurred on Repairs” but ultimately the facts and
circumstances of each case must be taken into account when making the distinction.
The Cambridge Dictionary defines “maintenance” as –22
“the work needed to keep a road, building, machine, etc. in good condition”.
A South African-registered ship undergoing improvement will not be considered as
being subject to repair or maintenance, since “improvement” does not constitute
“repair” or “maintenance” in the ordinary meaning of the words. Work done to a South
African-registered ship having the effect of bringing a new ship into existence or which
results in the ship having an increased income-earning capacity will constitute an
improvement and not repair or maintenance. For example, an improvement would
arise if more passenger cabins were added to a passenger ship, or a tanker vessel is
converted to a bulk carrier.
If the ship is being restored to its original state to generate income, the work completed
will constitute repairs or maintenance. In the case of a South African-registered ship
undergoing repair or maintenance and simultaneously undergoing improvements, the
taxpayer must determine the period for which the South African-registered ship
undergoes repair or maintenance and during such period the use of a temporary
replacement ship may qualify under paragraph (b) of the definition of “South African
ship”. If the period for which the South African-registered ship undergoes
improvements exceeds the period for repair or maintenance, the temporary
replacement ship will not qualify under paragraph (b) of the definition of “South African
ship” for the period that the South African-registered ship undergoes improvements.
During periods of economic downturn, it is common for owners of ships to layup their
vessels, that is, the temporary cessation of the use of a ship. A layup can be any period
between a few weeks to a couple of years. If a temporary replacement ship is used as
replacement for a laid-up South African-registered ship, the replacement ship will not
qualify as a South African ship since the reason for replacing the ship is not for repair
or maintenance.
The second category of the definition of “South African ship” has strict requirements
and each case will be determined on the facts and circumstances.
22 www.dictionary.cambridge.org/dictionary/english/maintenance [Accessed 29 April 2024].
4.1.2 International shipping
Section 12Q(1) defines “international shipping” as the conveyance for compensation
of passengers or goods by means of the operation of a South African ship mainly
engaged in international traffic. Ownership by the international shipping company of
the South African ship is not a requirement. The ship can therefore be operated by a
lessee. The international shipping company could, for example, enter into a time
charter, voyage charter23 or bareboat charter agreement with the owner of another ship
and use that ship for purposes of carrying on international shipping.
The conveyance of passengers or goods must be for compensation, otherwise this
requirement of the definition of “international shipping” will not be met. Should the type
of operation of a ship change under which it is no longer used for the conveyance of
passengers or goods for compensation, the ship will from that period onwards not
qualify as being used for the purposes of international shipping.
An international shipping company that time charters (lets) its South African-registered
ship to another company will not meet the definition of “international shipping” in
respect of that ship if the specific terms of the time charter renders it to be a lease
since it will not be used by that company for the “conveyance for compensation of
passengers or goods”.
In the context of the definition of “international shipping”, “mainly” is interpreted to mean
“more than 50%”.24 Therefore, a South African ship must be engaged in international
traffic more than 50% of the time.25
The implication of the words “mainly engaged in international traffic” is that if a taxpayer
operates in international and domestic traffic, the domestic traffic portion will be
incidental to the international traffic on the condition that the South African ship is
engaged in international traffic more than 50% of the time.
The term “international traffic” is not defined in the Act and should be interpreted
according to its ordinary meaning as applied to the subject matter with regard to which
it is used, unless there is something which obliges it to be read in a sense which is not
its ordinary sense in the English language as so applied.26
23 See Glossary of Maritime Terms available at https://africaports.co.za/glossary/ which defines
“time charter” as “a form of charter party wherein owner lets or leases his vessel and crew to the
charterer for a stipulated period of time. The charterer pays for the bunkers and port charges in
addition to the charter hire.”. The term “voyage charter” is defined as “a contract whereby the
shipowner places the vessel at the disposal of the charterer for one or more voyages, the shipowner
being responsible for the operation of the vessel.”.
24 SBI v Lourens Erasmus (Edms) Bpk 1966 (4) SA 434(A), 28 SATC 233.
25 See also Interpretation Note 96 “Exemption from Income Tax: Remuneration derived by a person
as an officer or crew member of a South African ship”.
26 See Kellaway, E. A. (1995). Principles of Legal Interpretation of Statutes, Contracts and Wills at
224. Butterworths, citing Lion Insurance Association v Tucker (1883) 12 QB 176 at 186.
The ordinary meaning of –
• “international” as an adjective is “between or among nations; involving two or
more nations”;27 and
• “traffic” is “the movement of ships, trains, or aircraft between one place and
another”. Traffic also refers to the people and goods that are being
transported”.28
In order to determine whether the South African ship is involved in international traffic,
regard must be had to the definition of “Republic” in section 1(1). The term “Republic”
means the Republic of South Africa and in a geographical sense –
“includes the territorial sea thereof as well as any area outside the territorial sea which
has been or may be designated, under international law and the laws of South Africa,
as areas within which South Africa may exercise sovereign rights or jurisdiction with
regard to the exploration or exploitation of natural resources”.
Under section 4 of the Maritime Zones Act 15 of 1994 (the MZA) “territorial waters”
means the sea within a distance of 12 nautical miles from the baselines.29
An area that has been designated as an area within South Africa is the Prince Edward
Islands, consisting of Marion Island and Prince Edward Island. These islands form part
of the territory of South Africa and traffic between the South African mainland and these
islands is not regarded as international traffic.
The definition of “Republic” also includes areas beyond the territorial sea which have
been designated under international or domestic law as areas where South Africa may
exercise sovereign rights in respect of the exploration or exploitation of natural
resources.
Under section 7 of the MZA, the exclusive economic zone (EEZ) is a distance of
200 nautical miles from the baselines. Subject to any other domestic law, the EEZ has,
in respect of all natural resources in the EEZ, the same rights and powers as it has in
respect of its territorial waters.
A South African ship trafficking between a South African port and an area in the EEZ,
even though for the purpose of conveying passengers or goods for compensation, will
not be involved in international traffic since the EEZ is part of the extended
geographical area of South Africa.
Accordingly, “international traffic” in the context of section 12Q is limited to the
movement of a South African ship between –
• a South Africa port and a port in a foreign nation;
• ports in two different foreign nations; and
• two different ports of the same foreign nation.
27 www.dictionary.com/browse/international [Accessed 29 April 2024].
28 www.collinsdictionary.com/dictionary/english/traffic [Accessed 29 April 2024].
29 This definition is aligned with what constitutes a State’s territorial sea under international law,
specifically Articles 2 and 3 of the United Nations Convention on the Law of the Sea (UNCLOS),
signed by the Republic of South Africa on 5 December 1984 and ratified on 23 December 1997.
A South African ship used mainly for domestic purposes will not be engaged in
international shipping when it sails between two different ports within South Africa or
sails from and returns to the same port in South Africa, even if during that journey the
ship sails outside South African territorial waters.30
Not all South African ships undertaking international traffic carry on international
shipping, for example, fishing vessels operating in international waters. The South
African ship engaged in international traffic must be conveying passengers or goods
for compensation in order to qualify under the definition of “international shipping”.
Example 1 – International shipping
Facts:
Company A, a resident in South Africa, operates a South African ship, a cruise liner,
for the conveyance of passengers for compensation. Passengers board the cruise liner
at the Durban port. The South African ship then sets sail for international waters and
does not stop at any ports. The South African ship returns to the Durban port after
2 days. Company A neither operates nor owns any other South African ship.
Result:
The conveyance of passengers is not between two or more nations and as a result,
there is no international traffic as required by the definition of “international shipping”.
Company A therefore does not qualify for the exemption under section 12Q.
4.1.3 International shipping company
Section 12Q(1) defines “international shipping company” as a company that is a
resident that operates one or more South African ships that are used in international
shipping.
The term “resident” is defined in section 1(1). For purposes of section 12Q, the part of
the definition relating to a natural person is irrelevant, since the definition of
“international shipping company” deals only with a company.
The term “company” is defined in section 1(1) and includes, amongst others,
companies incorporated under the Companies Act 71 of 2008 and companies
incorporated, formed or established under the laws of a country other than South
Africa.
A person other than a natural person will be a “resident” if it –
• is incorporated, established or formed in South Africa; or
• has its place of effective management in South Africa.
The definition of “resident” excludes any person that is deemed to be exclusively a
resident of another country for purposes of the application of any tax treaty.
30 Section 4 of the Maritime Zones Act 15 of 1994. This definition is aligned with what constitutes a
state’s territorial sea under international law, specifically Articles 2 and 3 of the United Nations
Convention on the Law of the Sea, signed by South Africa on 5 December 1984 and ratified on
23 December 1997.
A company incorporated in South Africa is a “resident” as defined before considering
the application of an applicable tax treaty. For companies not incorporated, established
or formed in South Africa, their place of effective management is relevant in
determining whether they are resident in South Africa.
Generally, a company’s place of effective management is the place where key
management and commercial decisions for the business are made. There are no
definitive rules to determine the place of effective management, and, as such, all the
relevant facts and circumstances of each case must be considered. For a detailed
commentary on “resident” and “place of effective management”, see Interpretation
Note 6 “Resident – Place of effective management (Companies)”.
An international shipping company is thus a company that is a resident, operating one
or more South African ships, mainly engaged in international traffic, that are used in
the conveyance for compensation of passengers or goods.
4.1.4 International shipping income
The exemption under section 12Q was previously limited to international shipping
companies that derived income from the operation of South African-registered ships
for purposes of international traffic. As stated in 4.1.1, this limitation created unintended
consequences in situations when a temporary replacement ship (non-flagged ship)
was brought into use temporarily by an international shipping company as a
replacement ship because a South African-registered ship was unavailable while
undergoing repair or maintenance. Since the replacement ship is not a South African-
registered ship, the international shipping company did not qualify for the exemption
from normal tax as a result of temporarily making use of a replacement ship.
In order to address the above concerns, amendments were made to the definitions of
“South African ship” and “international shipping income” in section 12Q(1) to take into
account income derived by a qualifying international shipping company that
temporarily makes use of a replacement ship for purposes of international traffic during
the period that the South African-registered ship is unavailable owing to it undergoing
repair or maintenance.
The amended section 12Q(1)31 defines “international shipping income” as the receipts
and accruals of a person derived from international shipping mainly from the operation
of one or more South African-registered ships as contemplated in paragraph (a) of the
definition of “South African ship”.
The terms “received by” and “accrued to” have been considered in numerous cases
and are briefly considered for purposes of this Note.
In Geldenhuys v CIR Steyn J stated that “received by” means –32
“received by the taxpayer on his own behalf for his own benefit”.
31 The amendments to section 12Q effected by section 31 of the Taxation Laws Amendment Act 23
of 2018 came into operation on 1 April 2019 and apply to years of assessment commencing on or
after that date.
32 1947 (3) SA 256 (C), 14 SATC 419 at 430.
Schreiner JA stated the following in CIR v Genn & Co (Pty) Ltd:33
“It certainly is not every obtaining of physical control over money or money’s worth that
constitutes a receipt for the purposes of these provisions. If, for instance, money is
obtained and banked by someone as agent or trustee for another, the former has not
received it as his income.”
These cases confirm that amounts received by a taxpayer on the taxpayer’s own behalf
and for the taxpayer’s own benefit are “received by” the taxpayer for purposes of
international shipping income and that an amount received on behalf of a third party
must not be included in the taxpayer’s international shipping income, since it was
received on behalf of another party.
In WH Lategan v CIR34 it was held by Watermeyer JA (as he then was) that “accrued
to” means “to which he has become entitled”.
The meaning of “entitled to” was extended to “unconditionally entitled to” in Ochberg v
CIR35 and Mooi v SIR.36
Accordingly, if the right to an amount is subject to specified conditions which have not
been fulfilled, the taxpayer will not be unconditionally entitled to it and it will not have
accrued to the taxpayer.
In Western Platinum Ltd v C: SARS37 the Supreme Court of Appeal had to decide under
what circumstances interest may be characterised as “income derived from mining
operations”. The court confirmed the finding of the court a quo that in order to qualify
as mining income, the income had to be directly connected to the mining source.
The same test should be applied to determine whether income derived by an
international shipping company is directly from international shipping and therefore
“international shipping income”.
The definition of “international shipping income” refers to “mainly”. Therefore, the
receipts or accruals of a person derived from international shipping must be more than
50% from the operation of one or more ships as contemplated in paragraph (a) of the
definition of “South African ship”. If, for example, an international shipping company
derives income from the carrying on of international shipping, 55% with a South
African-registered ship and 45% with a temporary replacement ship, the entire income
will be exempt, since it is derived mainly from the operation of a ship contemplated in
paragraph (a) of the definition of “South African ship”.
33 1955 (3) SA 293 (A), 20 SATC 113 at 123.
34 1926 CPD 203, 2 SATC 16 at 20. The entitlement principle was confirmed in CIR v People’s Stores
(Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9 at 19.
35 1933 CPD 256, 6 SATC 1.
36 1972 (1) SA 675 (A), 34 SATC 1.
37 [2004] 4 All SA 611 (SCA), 67 SATC 1.
The income of an international shipping company that derives more than 50% of its
receipts and accruals from the operation of one or more temporary replacement ships
(contemplated in paragraph (b) of the definition of “South African ship”), will not meet
the definition of “international shipping income” since this will not be a ship
contemplated in paragraph (a) of the definition of “South African ship”. The reference
in the definition of “international shipping income” to a ship contemplated in
paragraph (a) of the definition of “South African ship” is to give effect to the policy intent
to attract ships to be flagged under the South African register and limit the use of
replacement ships to a short duration.
The chartering of a ship may occur under a bareboat, time or voyage charter basis. If
the specific terms of the chartering renders it to be a lease, the shipping company will
not use that ship for the “conveyance for compensation of passengers or goods”.
Amounts received by or accrued to a shipping company other than that contemplated
in section 12Q will be subject to normal tax.
Example 2 – International shipping income
Facts:
Company B, an international shipping company, operates two South African-registered
ships, Ship A and Ship B, which are used to transport goods for compensation
between South Africa and India. Company B has a year of assessment ending
28 February. During the 2023 year of assessment, Ship A was not operational for
eight months while it underwent repairs. Thus Company B made use of a temporary
replacement ship, Ship C (Panamanian-registered), during the period in question.
During the 2023 year of assessment, Company B also operated a South African-
registered ship, Ship D, which was used to transport goods between the ports of
Durban and Gqeberha.
The receipts and accruals from these ships for the 2023 year of assessment were as
follows:
R
Ship A 1 500 000
Ship B 3 500 000
Ship C 3 000 000
Ship D 500 000
8 500 000
Result:
The compensation received by Company B met the definition of “international shipping
income”, since the receipts and accruals from international shipping for the 2023 year
of assessment were mainly from the operation of one or more South African-registered
ships (Ship A [R1,5 million] + Ship B [R3,5 million] = R5 million). The total receipts and
accruals derived from Ship A and Ship B was more than 50% of the total receipts and
accruals from international shipping [(R5 million / R8,5 million) × 100 = 58,82%]. The
receipts and accruals derived from Ship C had to be excluded from the numerator,
since Ship C was a temporary replacement ship and does not fall under paragraph (a)
of the definition of “South African ship”. Since Company B’s receipts and accruals from
international shipping for the 2023 year of assessment were mainly from the operation
of South African-registered ships, the total amount of R8,5 million was subject to the
exemption under section 12Q(2)(a) (see 4.2).
Example 3 – International shipping income
Facts:
Company C, an international shipping company, operates only one South African ship,
Ship E, which is used to transport passengers for compensation between South Africa
and Madagascar. Company C has a year of assessment ending 28 February. During
the 2023 year of assessment, Ship E was not operational for seven months while it
underwent repairs. During that time, Company C made use of a temporary
replacement ship, Ship F (Liberian-registered).
The receipts and accruals derived from these ships for the 2023 year of assessment
were as follows:
R
Ship E 2 000 000
Ship F 3 000 000
5 000 000
Result:
The receipts and accruals derived by Company C did not meet the definition of
“international shipping income”, since the receipts and accruals from international
shipping were not mainly from the operation of one or more South African-registered
ships. More specifically, Company C did not derive income mainly from the operation
of a ship contemplated in paragraph (a) of the definition of “South African ship”. The
receipts and accruals from Ship E were less than 50% of the total receipts and accruals
from international shipping [(R2 million / R5 million) × 100 = 40%]. The compensation
received for Ship F had to be excluded from the numerator, since Ship F was a
temporary replacement ship. Consequently, the total receipts and accruals of
R5 million was not subject to the exemption under section 12Q(2)(a) (see 4.2) and
therefore taxable.
4.2 Exemption from normal tax of any international shipping income received by or
accrued to any international shipping company [section 12Q(2)(a)]
Section 12Q(2)(a) provides that any international shipping income of any international
shipping company must be exempt from normal tax.
The above requirement for exemption can be expanded by substituting the contents of
the definitions of “international shipping income” and “international shipping company”
for those defined terms. Thus, under section 12Q(2)(a), –
• the receipts and accruals of a person derived from international shipping mainly
from the operation of one or more South African-registered ships,
• of a company that is a resident that operates one or more South African ships
that are utilised in international shipping,
must be exempt from normal tax.
Example 4 – Exemption from normal tax of any international shipping income
received by or accrued to any international shipping company
Facts:
Company D is a resident and operates a South African-registered ship, Ship G, which
transports goods for compensation between South Africa and Australia. Company D
also operates for compensation a South African-registered ship, Ship H, a cruise liner,
which departs from Durban and arrives at Port Louis, Mauritius after three days.
Company D also operates a South African-registered ship, Ship I, which transports
goods for compensation between the ports of Cape Town and Durban. Company D
has a year of assessment ending 31 January.
The three ships spent the following number of days carrying out their respective
voyages:
Days
Ship G 280
Ship H 245
Ship I 180
The compensation received in respect of these ships for the 2023 year of assessment
was as follows:
R
Ship G 4 500 000
Ship H 6 000 000
Ship I 1 500 000
12 000 000
Result:
The compensation received by Company D meets the definition of “international
shipping income”, since the receipts and accruals from international shipping are
mainly from the operation of one or more ships contemplated in paragraph (a) of the
definition of “South African ship” (Ship G, Ship H and Ship I).
Company D also meets the definition of “international shipping company” since the
company is a resident and conveys by means of a South African ship for compensation
both passengers (with Ship G) and goods (with Ship H and Ship I) and its ships are
mainly engaged in international traffic [(280 days + 245 days) / 705 × 100 = 74,47%].
Thus, the international shipping income of R12 million received by Company D is
exempt from normal tax.
International shipping companies often use a currency more suitable to an international
environment than the local currency of residence. Section 25D(1) provides that,
subject to subsections (2), (3) and (4), any amount received by or accrued to, or
expenditure or loss incurred by, a person during any year of assessment in foreign
currency must be translated to rand at the spot rate38 on the date on which the amount
38 The term “spot rate” is defined in section 1(1) and means “the appropriate quoted exchange rate at
a specific time by any authorised dealer in foreign exchange for the delivery of currency”.
was received or accrued or the expenditure or loss was incurred.39 Section 25D(6) and
(7) provide relief from section 25D(1) when an international shipping company uses a
currency other than the rand as its functional currency.40 An international shipping
company must determine taxable income in its functional currency and translate that
amount to rand using the average exchange rate for the year of assessment.41 When
amounts are received or accrued or expenditure is incurred in a currency other than
the company’s functional currency, those amounts must be translated to the
company’s functional currency and translated to rand using the average exchange
rate.42 Section 25D(6) does not state how the translation to the international shipping
company’s functional currency must be performed. As a practical matter, it will be
acceptable to SARS if the spot rate or average exchange rate is used.
The provisions of section 9D for determining foreign business establishment relief for
international shipping companies were too narrow, and this gave rise to inadvertent
controlled foreign company income. It was not intended for international shipping
companies to lose the benefit of this relief merely because of occasional visits to South
Africa. As a result, the definition of “foreign business establishment” in section 9D(1)
includes a South African ship engaged in international shipping.43
Expenditure relating to exempt income
In determining a person’s taxable income derived from carrying on any trade,
section 11(a) allows a deduction against the income so derived for expenditure and
losses actually incurred in the production of the income, provided such expenditure
and losses are not of a capital nature.
Section 23(f) provides that no deduction shall be made if an expense is incurred that
relates to an amount received or accrued which does not constitute “income” as
defined in section 1(1).
The term “income” is defined in section 1(1) and means –
“the amount remaining of the gross income of any person for any year or period of
assessment after deducting therefrom any amounts exempt from normal tax under
Part I of Chapter II”.
The expenditure incurred by the international shipping company relating to the income
exempted under section 12Q(2)(a) will therefore be prohibited as a deduction under
section 23(f). This treatment is of relevance since an international shipping company
may have both non-exempt income and exempt income.
Expenditure paid as a single amount relating to non-exempt income and exempt
income must be apportioned pro rata between these two categories. The basis of
apportioning an expense will depend on the nature of the expense.
39 For guidance on section 25D, see Interpretation Note 63 “Rules for the Translation of Amounts
Measured in Foreign Currencies other than Exchange Differences governed by Section 24I and the
Eighth Schedule”.
40 The term “functional currency” is defined in section 1(1).
41 Section 25D(7). The average exchange rates are available on the SARS website.
42 Section 25D(6).
43 See paragraph (f) of the definition of “foreign business establishment” in section 9D(1).
General expenditure incurred not specifically relating to a particular source of income,
but which can be attributed to various sources, must be apportioned on a pro rata basis
by applying the ratio that a particular source of receipts and accruals bears to the total
receipts and accruals derived by the international shipping company.44 Examples of
such expenses are bank charges and accounting fees.
South African-registered ships engaged in international traffic of the conveyance for
compensation of passengers or goods as contemplated in section 12Q(1) do not
qualify for capital allowances. A ship other than a South African ship contemplated in
section 12Q(1) potentially qualifies for capital allowances over five years of
assessment at the rate of 20% a year, starting with the year of assessment in which
the ship is brought into use.45
4.3 Capital gain or capital loss of any international shipping company in respect of
a South African ship engaged in international shipping [paragraphs 6 and 7 of
the Eighth Schedule and section 12Q(2)(b)]
Under section 12Q(2)(b) any capital gain or capital loss in respect of any year of
assessment of any international shipping company determined in respect of a South
African ship engaged in international shipping must be disregarded in determining the
aggregate capital gain or aggregate capital loss of that international shipping
company.46
The terms “aggregate capital gain” and “aggregate capital loss” are defined in
section 1(1) to mean an amount determined under paragraphs 6 and 7 of the Eighth
Schedule, respectively.
Paragraphs 6 and 7 of the Eighth Schedule provide that a person’s aggregate capital
gain or aggregate capital loss for a year of assessment is the aggregate of all capital
gains and capital losses for that year of assessment. Any other capital gains required
to be taken into account in the determination of the aggregate capital gain or aggregate
capital loss of a person must also be included, for example, a capital gain of another
person which is attributed to that person.
Example 5 – Capital loss in respect of a South African ship engaged in
international shipping
Facts:
Company E is an international shipping company operating a cruise liner. The cruise
liner is a South African ship that conveys passengers for compensation from Durban
to Port Louis in Mauritius.
44 See C: SARS v Mobile Telephone Networks Holdings (Pty) Ltd 2014 (5) SA 366 (SCA), 76 SATC
205.
45 See section 12C(1)(g) and the Explanatory Memorandum on the Taxation Laws Amendment Bill,
2013.
46 For more information see the Comprehensive Guide to Capital Gains Tax.
Company E has a year of assessment ending 28 February. During the 2023 year of
assessment, Company E sold the South African ship and a building, and derived the
following capital gains and capital losses:
R
South African ship (10 750 000)
Building 1 500 000
Result:
South African ship [Disregarded under section 12Q(1)(b)] Nil
Building 1 500 000
Aggregate capital gain (para 6) 1 500 000
Under section 12Q(2)(b) the capital loss of R10 750 000 on disposal of the South
African ship must be disregarded in determining the aggregate capital gain or
aggregate capital loss of Company E.
4.4 Dividends paid by an international shipping company [sections 64D to 64N and
section 12Q(3)]
Section 64E(1) provides that dividends tax is levied on dividends paid by companies
(other than headquarter companies).47
Under section 64E(1), dividends tax must be levied at the rate of 20%48 of the amount
of the dividend paid. In some instances, a reduced rate49 is levied or the dividend may
be exempt from dividends tax.50
Section 12Q(3) provides that the rate of dividends tax51 that is paid by an international
shipping company on the amount of any dividend derived from international shipping
income must not exceed 0% of the amount of that dividend.
The terms “international shipping income” and “international shipping company” are
considered extensively in 4.1.4 and 4.1.3. respectively. These definitions and the
respective commentaries must be considered to determine whether the reduced rate
of dividends tax of 0% under section 12Q(3) applies.
The reduced rate of dividends tax of 0% under section 12Q(3) applies only to dividends
derived from international shipping income and accordingly the amount of any dividend
derived from other income of an international shipping company is potentially liable
to dividends tax at the rate of 20% under section 64E(1).
A dividend that is paid by an international shipping company out of international
shipping income and other income not directly connected to the international shipping
source must be apportioned to determine the amount of the dividend that is subject to
dividends tax at the rate of 0% and 20%.
47 For more information, see the Comprehensive Guide to Dividends Tax.
48 This rate increased from 15% to 20% for dividends paid on or after 22 February 2017.
49 For example, paragraph 3(1) of the Tenth Schedule provides that the rate of dividends tax
contemplated in section 64E paid by an oil and gas company on the amount of any dividend derived
from oil and gas income must not exceed 0% of the amount of that dividend.
50 For more information see the Comprehensive Guide to Dividends Tax.
51 Under section 64E(1).
To calculate the amount of a dividend that is paid out of international shipping income,
the following formula must be used:
Total amount of dividend paid by International shipping income net of expenses
×
international shipping company Total income net of expenses
To calculate the amount of a dividend that is paid out of other income not directly
connected to international shipping income, the following formula must be used:
Total amount of dividend paid by Other income52 net of expenses
×
international shipping company Total income net of expenses
Example 6 – Dividend paid by an international shipping company
Facts:
Company F is an international shipping company that derived net income from
international shipping of R150 million net of expenses and interest of R25 million net
of expenses, not directly connected to its international shipping activities, during its
2023 year of assessment ending on 30 June. Company F paid a dividend of R7 million
on 30 June 2023 to holders of its shares who are all residents and natural persons.
Result:
Under section 12Q(3) the amount of the dividend paid by Company F from net income
from international shipping is subject to dividends tax at a rate of 0% and is calculated
as follows:
‘Total amount of dividend paid by international shipping company × net income
from international shipping / total income net of expenses’
R7 million × R150 million / R175 million = R6 million.
Dividends tax at 0% = nil.
The amount of the dividend paid by Company F from interest income is subject to
dividends tax at the rate of 20% under section 64E(1) and is calculated as follows:
‘Total amount of dividend paid by international shipping company × interest income
/ total income net of expenses’
R7 million × R25 million / R175 million = R1 million.
Dividends tax at 20% = R200 000.
52 Other income not derived from international shipping income net of expenses.
4.5 Interest paid by an international shipping company [sections 50A to 50H
and section 12Q(4)]
Section 50B(1) imposes withholding tax on interest53 at the rate of 15% of the amount
of interest that is paid by any person to or for the benefit of a foreign person54 to the
extent that the amount is regarded as having been received or accrued from a source
within South Africa under section 9(2)(b). A foreign person to whom an amount of
interest is paid is liable for the withholding tax on interest.55
The withholding tax on interest must generally be withheld by the person making the
payment to or for the benefit of the foreign person and be paid over to the
Commissioner.56
Interest paid to a non-resident may be exempt from withholding tax on interest provided
the requirements of section 50D are met.
Section 12Q(4) applies to interest received or accrued from a source within South
Africa under section 9(2)(b) on or after 1 January 201557 and provides for an exemption
from the withholding tax on interest on any interest paid by an international shipping
company to any foreign person in respect of debt used to fund the acquisition,
construction or improvement of a South African ship utilised for international shipping.
The words “acquisition”, “construction” and “improvement” are not defined in the Act.
The ordinary meanings of these words are considered below.
Dictionary.com defines “acquisition” as –58
“1. the act of acquiring or gaining possession”.
Dictionary.com defines “construction” as –59
“3. something that is constructed; a structure”.
Whether the debt was used to fund the construction60 of a South African ship will
depend on the exact facts and circumstances.
In the Concise Oxford English Dictionary “improvement” is defined as follows:61
“An addition or alteration which increases the quality or value of something.”
An “improvement” must be distinguished from a “repair”. For commentary on the
distinction between repairs and improvements see 4.1.1(b).
53 The applicable legislation is contained in Part IVB of Chapter II of the Act and applies to interest
that is paid or becomes due and payable on or after 1 March 2015. For more information see
Interpretation Note 115 “Withholding Tax on Interest”.
54 The term “foreign person” is defined in section 50A(1) and means any person that is not a resident.
55 Section 50C(1).
56 Section 50E.
57 Inserted by section 42(1) of the Taxation Laws Amendment Act 31 of 2013.
58 www.dictionary.com/browse/acquisition [Accessed 29 April 2024].
59 www.dictionary.com/browse/construction [Accessed 29 April 2024].
60 Reference can also be made to the International Convention for the Safety of Life at Sea, 1974
(commonly referred to as SOLAS) contained in the Second Schedule to the Merchant Shipping
Act 57 of 1951.
61 (2006). 11 ed. Oxford University Press.
Section 12Q(4) would, accordingly, apply to an international shipping company that
pays interest to a foreign person in respect of a debt, for example, a loan or financing
arrangement, for the acquisition, construction or improvement of a South African ship
that is used for international shipping.
Example 7 – Interest paid by an international shipping company
Facts:
Company G is an international shipping company that acquired a new container ship
from Company H for $150 million in July 2022. The new container ship is registered as
a South African ship mainly engaged in international traffic and used for conveyance
of goods for compensation.
To finance the purchase of the container ship, Company G entered into a loan
agreement of $120 million with XYZ Bank in July 2022, a bank resident in Germany.
Company G paid interest of R2 million on 30 June 2023 to XYZ Bank in respect of the
loan agreement with XYZ Bank. Company G has a year of assessment ending on
30 June.
Result:
Under section 12Q(4) the interest of R2 million paid by Company G to XYZ Bank is
exempt from the withholding tax on interest, since the interest is paid to a foreign
person on debt used to fund the acquisition of a South African ship used for
international shipping.
5. Conclusion
Section 12Q provides for an exemption from normal tax, capital gains tax, dividends
tax and withholding tax on interest for international shipping companies if the
requirements of the section are met. In determining whether an international shipping
company qualifies for these exemptions, the definitions of “South African ship”,
“international shipping”, “international shipping company” and “international shipping
income” should be considered and applied to the relevant tax under section 12Q.
Leveraged Legal Products
SOUTH AFRICAN REVENUE SERVICE
Diamond Export Levy Act, 2007
