Since our readmission to the international community South Africa has set about developing one of the largest networks of double tax treaties in the world. In recent months three new treaties have been gazetted to swell the list of comprehensive treaties; the 1971 agreement with Swaziland has been revised, while agreements with Ukraine and Bulgaria have been concluded.
The 34 year-old treaty with Swaziland, entered into when the political and economic circumstances of both countries were very different from what they are today, has been replaced with a treaty reflecting the current situation. The treaty with Bulgaria came into operation on 22 April 2005. Like the treaty with Ukraine, which was gazetted on 10 January 2005, an agreement between the two countries would have been unthinkable a mere 15 years ago, when South Africa was a pariah apartheid state and Bulgaria was a Soviet vassal, while Ukraine, as part of the Soviet Union, was not even recognised as a separate country.
All three treaties are based on the OECD model, but each has differences that reflect special interests or the particular relationships between South Africa and the respective other countries.
The Swaziland treaty covers taxes imposed under the Income Tax Order of Swaziland. The Bulgaria treaty covers the personal and corporate taxes of Bulgaria, while the Ukraine treaty covers the Ukrainian taxes on profits of enterprises and individual income. The South African taxes covered are the normal tax (which includes tax on capital gains), the secondary tax on companies and the withholding tax on royalties, the last mentioned being the only withholding tax imposed by South Africa.
"Resident" And "Permanent Establishment"
The meaning of "resident" is the same as in the OECD model and requires no comment. However, in common with recent treaties, the meaning of "permanent establishment" has been extended to include two categories of services, which no doubt reflects the fact that the world economy is becoming increasingly knowledge based:
- the furnishing of services, including consultancy services, through employees or other personnel, but only where the activities continue for an aggregate of more than 90 days in any 12 month period in the case of Swaziland, 183 days in the case of Bulgaria, and six months for Ukraine; and
- the performance of professional services or other activities of an independent character by an individual, with the same requirements per 12 month period.
Immovable Property And Business Profits
Income from immovable property situated in one State may be taxed in the other State, as contemplated in the OECD model.
Business profits are taxable only in the State where the enterprise is situated unless the business is carried on in the other State through a permanent establishment, in which case profits attributable to the permanent establishment may be taxed where it is situated. Profits from shipping and air transport are taxable only in the State of residence of the business. However, in the case of Swaziland the provisions relating to international transport have been extended beyond the provisions of the OECD model to include profits derived from the rental of ships and aircraft, the use or rental of containers, and the rental of rail or road transport. The need for Swaziland to provide for profits for shipping activities is not immediately obvious.
Dividends, Interest And Royalties
Dividends may be taxed both in the State of origin and the State where the recipient is resident. However, where the owner of the shares holds at least 25% of the capital (20% in the case of Ukraine), the State of origin may not charge a rate greater than 10% in the case of Swaziland and Ukraine and 5% for Bulgaria. In other cases the rate may not exceed 15%. In the case of interest the OECD model has been followed for Swaziland and Ukraine, permitting the State of origin to impose tax at not more than 10% and no limit on the rate in the State of residence, while for Bulgaria the limit is 5%.
As for royalties, while the OECD model contemplates that they should be taxable only in the State of residence of the beneficial owner, the Swaziland and Ukraine treaties provide that both States may impose tax but, in the case of the State of origin the rate may not exceed 10%. In the case of Ukraine the rate may not exceed 5% on copyright royalties in respect of cultural, dramatic, musical or other artistic work, including motion pictures, while royalties on other property may go up to 10%.
The OECD model does not provide for such income, but in the Swaziland treaty Article 13 has been introduced to deal with technical fees, described as payments of any kind, other than remuneration to employees, in consideration for services of a technical, managerial or consultancy nature. Such fees may be taxed in both States, but the rate in the State where the fees arose may not exceed 10%. This seems to be intended as an incentive to South African residents to provide such services in Swaziland, because the need in South Africa for services available from Swaziland is likely to be limited.
Capital gains from the alienation of immovable property may be taxed in both States, as may gains from the alienation of shares in a company the assets of which consist principally of immovable property. Capital gains from the alienation of movable property forming part of a permanent establishment may be taxed in the State where it is situated. However, gains from the alienation of ships or aircraft are taxable only in the State from which the enterprise is effectively managed. Gains from disposal of other property are taxable only in the State of residence.
Salaries, Wages, Directors’ Fees, Pensions And Annuities
Salaries and wages are taxable only in the State where the employee is resident. Tax may be levied by the State in which the employee is not a resident to the extent that his earnings are derived from his work there. The State where the income arises may only impose tax on such income if the recipient was present in that State for more than 183 days in any 12 month period.
Directors’ fees may be taxed in the State where they arise, as may income derived from the personal activities of entertainers and sportspersons. Pensions and annuities may be taxed in the State where they arise as well as the State of residence of the recipient, although in the cases of Bulgaria and Ukraine social security pensions are taxable only in the State in which they arise. Other items of income may be taxed in both States.
Prof Peter Surtees, Special Tax Consultant, Deneys Reitz Inc - Cape Town office.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.