It has been over two years since amendments to the South African Income Tax Act (Act) came into effect, exempting domestic shipping companies from normal tax, capital gains tax, dividends tax as well as cross-border withholding tax on interest. The purpose of the tax exemptions was to attract merchant ships back to the South African register, yet only three ships have opted to register in South Africa. One of the reasons could be that the legislation is unclear as to who qualifies for the exemption.

The relevant section in the Act refers to “international shipping companies” engaged in “international shipping”. An “international shipping company” is defined as, “a company that is a resident that holds a share or shares in one or more South African ships that are utilised in international shipping” while “international shipping” is defined as, “the conveyance for compensation of passengers or goods by means of the operation of a South African ship mainly engaged in international traffic”.

The core issue is what is meant by the term to be “engaged in international traffic”. Commonly, vessels are sub-chartered (or sub-leased) and a typical charterparty chain might include the registered owner, head charterer, several sub-charterers and an end charterer (who contracts with the shipper). Would a charterer or registered owner or both be engaged in “international traffic”, as defined the Income Tax Act? It may seem that evidently all parties in a charterparty chain are engaged in “international traffic”, but closer analysis of the cumbersome wording of the section soon leaves room for doubt.

The phrase “operation of a South African ship” in the definition of “international shipping” is restrictively qualified by the aforegoing phrase, viz “the conveyance for compensation of … goods”. This seems to contemplate that the end charterer contracted to convey the goods would qualify for the exemption; but any parties higher up the charterparty chain would possibly not do so, as these profits would be derived from the business of chartering (rather than from directly conveying goods).

Accordingly, a possible interpretation by the South African Revenue Service (SARS) is that a shipping company can derive the tax benefit if it is operating the ship under a charter, where it is the charterer and carrying goods, but not if it is the owner/ disponent owner in a charterparty chain. If it were owner, it could of course derive benefit if it carried the goods for its own account.

If the legislation does not exempt head charterers from taxation, it is a small wonder that the legislation has not attracted shipping companies to the register. Since chartering is a large component of the shipping industry, ship-owners would certainly not choose to register their ships in a jurisdiction with uncompetitive taxation rates on chartering income.

However, if the definitions are read in context, the section is capable of interpretation in such a way so as to hold true to its purpose of attracting vessels to the South African registry. The proper reading of definitions together with the relevant sections of the Income Tax Act provide that South African ships utilised in or engaged in international shipping qualify for the exemption.

In other words, it is not necessary for the ship-owning company to utilise the ships to meet the requirements of section, but rather, the ships must be utilised in the manner prescribed. In short, the better interpretation is that a South African ship-owner can still enjoy the benefits of the tax exemptions where a third party (e.g. a sub-charterer) utilises the ships, provided that the third party does so for the purpose of conveying goods by means of the operation of a South African ship mainly engaged in international traffic.

It is hoped that SARS will issue a directive providing further clarity on the interpretation of the relevant section, failing which South Africa’s aspirations to develop a merchant fleet may be stalled.

Written by Norma Wheeler, associate in Bowman Gilfillan Africa Group's Shipping & Logistics Practice