South African taxation of international shipping entities

The South African Government has abandoned the previously proposed tonnage tax in favour of an outright exemption for South African ship owners. The new shipping tax regime will exempt qualifying ship owners from income tax, capital gains tax, dividend tax, and the withholding tax on interest for years of assessment beginning on or after 1 April 2014. The proposals, once promulgated, will also allow a qualifying shipping company to utilise a currency other than the South African Rand as the company’s functional currency. An international shipping company will furthermore not be subject to currency gains and losses. Further proposals will allow for officers and crew of domestically flagged ships designed for international traffic to be wholly exempt from South African tax on their salaries.

The over-riding objective of the Department of Transport is to develop South Africa into one of the world’s top 35 maritime nations. This bold goal is set out in the Draft South African Maritime Transport Policy of 10 August 2010. The South African Maritime Safety Authority incessantly comments on the need for a national shipping fleet to carry the ever-increasing quantity of cargo moving out of this country. The policy aims to increase the number of vessels flagged under the South African flag and to create employment in the maritime transport sector.

At present South African ship owners are subject to the general taxation laws of South Africa. The current corporate income tax is 28 %, with a further dividend tax of 15 % payable on dividends paid by a company. A ship owner may also be subject to a capital gains tax on the disposal of a ship. The only tax incentives for international shipping which currently exist pertain to depreciation allowances for capital investment in shipping transport.

From reading the Taxation Laws Amendment Bill, 2013, it is evident that the Government appreciates that it will have to compete with other countries if it wants to attract ships to the South African Ship Register. It is perhaps, because of this drive to compete that the Government has decided to lower the barrier. A policy that promotes a complete tax exemption is more attractive to a ship owner than a tonnage tax regime.

A qualifying ship owner must be a company that is resident in South Africa and holds at least one or more vessels flagged in South Africa, in terms of the Ship Registration Act, and designed for international transport of goods or passengers for reward.

Registration of ships in South Africa is governed by the Ship Registration Act. Only ships that have a South African nationality or are bareboat chartered by a South African national may be registered. A South African national may be a citizen or a body corporate established and with a place of business in South Africa. A South African-owned ship is one which is wholly owned by South African nationals, is owned as an undivided whole by three or more joint owners of whom the majority are South African nationals, or has a majority of its 64 shares owned by South African nationals as part-owners (or co-owners) in ‘common’.