DEPARTMENT OF THE TREASURY

TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN 

THE UNITED STATES OF AMERICA

AND

THE REPUBLIC OF SOUTH AFRICA

FOR THE AVOIDANCE OF DOUBLE TAXATION

AND THE PREVENTION OF FISCAL EVASION

WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS

INTRODUCTION

This document is a technical explanation of the Convention between the United States and

South Africa which was signed on February 17, 1997 (the "Convention"). References in this

Explanation to the "U.S. Model" are to the United States Model Income Tax Convention,

published on September 30, 1996. References to the "OECD Model" are to the Model Tax

Convention on Income and on Capital, published by the OECD in 1992, as subsequently

amended. References to the "U.N. Model" are to the United Nations Model Double Taxation

Convention between Developed and Developing Countries, published in 1980.

The Technical Explanation is an official guide to the Convention. It reflects the policies

behind particular Convention provisions, as well as understandings reached with respect to the

application and interpretation of the Convention.

Technical Explanation - Article 1 (General Scope)

Paragraph 1

Paragraph 1 of Article 1 provides that the Convention applies to residents of the United

States or South Africa, except where the terms of the Convention provide otherwise. Under

Article 4 (Residence) a person is generally treated as a resident of a Contracting State under the

circumstances set forth in paragraph 1 thereof. If, however, a person is considered a resident of

both Contracting States, a single state of residence is assigned under Article 4. This definition

governs for all purposes of the Convention.

Certain provisions are applicable to persons who may not be residents of either

Contracting State. For example, Article 19 (Government Service) may apply to an employee of a
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Contracting State who is resident in neither State. Paragraph 1 of Article 24 (Non-discrimination)

applies to nationals of the Contracting States. Under Article 26 (Exchange of Information and

Administrative Assistance), information may be exchanged with respect to residents of third

states.

Paragraph 2

Paragraph 2 states the generally accepted relationship both between the Convention and

domestic law and between the Convention and other agreements between the Contracting States

(i.e., that no provision in the Convention may restrict any exclusion, exemption, deduction, credit

or other benefit accorded by the tax laws of the Contracting States, or by any other agreement

between the Contracting States). For example, if a deduction would be allowed under the U.S.

Internal Revenue Code (the "Code") in computing the U.S. taxable income of a resident of South

Africa, the deduction also is allowed to that person in computing taxable income under the

Convention. Paragraph 2 also means that the Convention may not increase the tax burden on a

resident of a Contracting States beyond the burden determined under domestic law. Thus, a right

to tax given by the Convention cannot be exercised unless that right also exists under internal law. 

The relationship between the non-discrimination provisions of the

Convention and other agreements is not addressed in paragraph 2

but in paragraph 3.

It follows that under the principle of paragraph 2 a taxpayer's liability to U.S. tax need not

be determined under the Convention if the Code would produce a more favorable result. A

taxpayer may not, however, choose among the provisions of the Code and the Convention in an

inconsistent manner in order to minimize tax. For example, assume that a resident of South

Africa has three separate businesses in the United States. One is a profitable permanent

establishment and the other two are trades or businesses that would earn taxable income under the

Code but that do not meet the permanent establishment threshold tests of the Convention. One is

profitable and the other incurs a loss. Under the Convention, the income of the permanent

establishment is taxable, and both the profit and loss of the other two businesses are ignored. 

Under the Code, all three would be subject to tax, but the loss would be offset against the profits

of the two profitable ventures. The taxpayer may not invoke the Convention to exclude the

profits of the profitable trade or business and invoke the Code to claim the loss of the loss trade

or business against the profit of the permanent establishment. (See Rev. Rul. 84-17, 1984-1 C.B.

308.) If, however, the taxpayer invokes the Code for the taxation of all three ventures, he would

not be precluded from invoking the Convention with respect, for example, to any dividend income

he may receive from the United States that is not effectively connected with any of his business

activities in the United States.

Similarly, nothing in the Convention can be used to deny any benefit granted by any other

agreement between the United States and South Africa. For example, if certain benefits are

provided for military personnel or military contractors under a Status of Forces Agreement

between the United States and South Africa, those benefits or protections will be available to
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residents of the Contracting States regardless of any provisions to the contrary (or silence) in the

Convention.

Paragraph 3

Paragraph 3 specifically relates to non-discrimination obligations of the Contracting States

under other agreements. The provisions of paragraph 3 are an exception to the rule provided in

paragraph 2 of this Article under which the Convention shall not restrict in any manner any benefit

now or hereafter accorded by any other agreement between the Contracting States.

Subparagraph (a) of paragraph 3 provides that, notwithstanding any other agreement to

which the Contracting States may be parties, a dispute concerning whether a measure is within the

scope of this Convention shall be considered only by the competent authorities of the Contracting

States, and the procedures under this Convention exclusively shall apply to the dispute. Thus,

procedures for dealing with disputes that may be incorporated into trade, investment, or other

agreements between the Contracting States shall not apply for the purpose of determining the

scope of the Convention.

Subparagraph (b) of paragraph 3 provides that, unless the competent authorities determine

that a taxation measure is not within the scope of this Convention, the non-discrimination

obligations of this Convention exclusively shall apply with respect to that measure, except for

such national treatment or most-favored-nation ("MFN”) obligations as may apply to trade in

goods under the General Agreement on Tariffs and Trade ("GATT"). No national treatment or

MFN obligation under any other agreement shall apply with respect to that measure. Thus, unless

the competent authorities agree otherwise, any national treatment and MFN obligations

undertaken by the Contracting States under agreements other than the Convention shall not apply

to a taxation measure, with the exception of GATT as applicable to trade in goods.

Subparagraph (c) of paragraph 3 defines a "measure" broadly. It would include, for

example, a law, regulation, rule, procedure, decision, administrative action or guidance, or any

other form of measure.

Paragraph 4

Paragraph 4 contains the traditional saving clause found in all U.S. treaties. In this

Convention, the saving clause applies unilaterally only to the United States, because South Africa

elected not to have it apply for purposes of its tax. The United States reserves its rights under

this paragraph, except as provided in paragraph 5, to tax its residents and citizens as provided in

its internal law, notwithstanding any provisions of the Convention to the contrary. For example, if

a resident of South Africa performs independent personal services in the United States and the

income from the services is not attributable to a fixed base in the United States, Article 14

(Independent Personal Services) would normally prevent the United States from taxing the

income. If, however, the resident of South Africa is also a citizen of the United States, the saving
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clause permits the United States to include the remuneration in the worldwide income of the

citizen and subject it to tax under the normal Code rules (i.e., without regard to Code section

894(a)). For special foreign tax credit rules applicable to the U.S. taxation of certain U.S. income

of its citizens resident in South Africa, see paragraph 2 of Article 23 (Elimination of Double

Taxation).

For purposes of the saving clause, "residence" is determined under Article 4 (Residence). 

Thus, if an individual who is not a U.S. citizen is a resident of the United States under the Code,

and is also a resident of South Africa under its law, and that individual has a permanent home

available to him in South Africa and not in the United States, he would be treated as a resident of

South Africa under Article 4 and for purposes of the saving clause. The United States would not

be permitted to apply its statutory rules to that person if they are inconsistent with the treaty. 

Thus, an individual who is a U.S. resident under the Internal Revenue Code but who is deemed to

be a resident of South Africa under the tie-breaker rules of Article 4 (Residence) would be subject

to U.S. tax only to the extent permitted by the Convention. However, the person would be

treated as a U.S. resident for U.S. tax purposes other than determining the individual's U.S. tax

liability. For example, in determining under Code section 957 whether a foreign corporation is a

controlled foreign corporation, shares in that corporation held by the individual would be

considered to be held by a U.S. resident. As a result, other U.S. citizens or residents might be

deemed to be United States shareholders of a controlled foreign corporation subject to current

inclusion of Subpart F income recognized by the corporation. See Treas. Reg. section

301.7701(b)7(a)(3).

Under paragraph 4 the United States also reserves its right to tax former citizens and longterm residents whose loss of citizenship or long-term residence had as one of its principal

purposes the avoidance of tax. The United States treats an individual as having a principal

purpose to avoid tax if (a) the average annual net income tax of such individual for the period of 5

taxable years ending before the date of the loss of status is greater than $100,000, or (b) the net

worth of such individual as of such date is $500,000 or more. The United States defines "longterm resident" as an individual (other than a U.S. citizen) who is a lawful permanent resident of

the United States in at least 8 of the prior 15 taxable years. An individual shall not be treated as a

lawful permanent resident for any taxable year if such individual is treated as a resident of a

foreign country under the provisions of a tax treaty between the United States and the foreign

country and the individual does not waive the benefits of such treaty applicable to residents of the

foreign country. In the United States, such a former citizen or long-term resident is taxable in

accordance with the provisions of section 877 of the Code.

Paragraph 5

Some provisions are intended to provide benefits to citizens and residents that do not exist

under internal law. Paragraph 5 sets forth certain exceptions to the saving clause that preserve

these benefits for citizens and residents of the United States. Subparagraph (a) lists certain

provisions of the Convention that are applicable to all citizens and residents of the United States,
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despite the general saving clause rule of paragraph 4: (1) Paragraph 2 of Article 9 (Associated

Enterprises) grants the right to a correlative adjustment with respect to income tax due on profits

reallocated under Article 9. (2) Paragraphs 2, 4, 5, 6 and 7 of Article 18 (Pensions and Annuities)

deal with social security benefits, alimony, child support payments, and crossborder pension

contributions, respectively. The inclusion of paragraph 2 in the exceptions to the saving clause

means that the grant of exclusive taxing right of social security benefits to the paying country

applies to deny, for example, to the United States the right to tax its citizens and residents on

social security benefits paid by South Africa. The inclusion of paragraph 4 means that alimony

payments made by a resident of South Africa to a U.S. resident, which are not deductible in South

Africa, will be exempt in both States, whether or not the payment may be taxable in the United

States under the Code. The inclusion of paragraph 5, which exempts child support payments that

are not dealt with in paragraph 4 from taxation by both Contracting States, means that if a

resident of South Africa pays child support to a citizen or resident of the United States, the

United States may not tax the recipient. The inclusion of paragraph 6, which allows deductions

for cross-border contributions to pension funds if certain conditions are met, means that if a U.S.

resident is contributing to a South African pension fund, and the conditions specified in the

paragraph are met, a deduction will be allowed to the resident in calculating his income for U.S.

tax purposes for the contribution, even if that deduction would not be allowed under the Code. 

Finally, paragraph 7 provides a source rule for pensions. Its inclusion among the exceptions to

the saving clause means that if the treaty rule provides a different result from the Code rule, the

treaty rule will apply in determining the source of income under the treaty even with respect to a

U.S. citizen or resident. (3) Article 23 (Elimination of Double Taxation) confirms the benefit of a

credit to U.S. citizens and residents for income taxes paid to South Africa. (4) Article 24 (Nondiscrimination) requires one Contracting State to grant national treatment to residents and citizens

of the other Contracting State in certain circumstances. Excepting this Article from the saving

clause requires, for example, that the United States give such benefits to a resident or citizen of

South Africa even if that person is a citizen of the United States. (5) Article 25 (Mutual

Agreement Procedure) may confer benefits on citizens and residents of the Contracting States. 

For example, the statute of limitations may be waived for refunds and the competent authorities

are permitted to use a definition of a term that differs from the internal law definition. As with the

foreign tax credit, these benefits are intended to be granted by a Contracting State to its citizens

and residents.

Subparagraph (b) of paragraph 5 provides a different set of exceptions to the saving

clause. The benefits referred to are all intended to be granted to temporary U.S. residents (e.g.,

holders of non-immigrant visas), but not to citizens or to persons who have acquired permanent

residence in that State. If beneficiaries of these provisions travel from one of the Contracting

States to the other, and remain in the other long enough to become residents under its internal

law, but do not acquire permanent residence status (e.g., holders of non-immigrant U.S. visas)

and are not citizens of the United States, the United States will continue to grant these benefits

even if they conflict with the statutory rules. The benefits preserved by this paragraph are the

U.S. exemptions for the following items of income: government service salaries and pensions

under Article 19 (Government Service); certain income of visiting students and trainees under
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Article 20 (Students, Apprentices and Business Trainees); and the income of diplomatic agents

and consular officers under Article 27 (Diplomatic Agents and Consular Officers).

Article 2 (Taxes Covered)

This Article specifies the U.S. taxes and the taxes of South Africa to which the

Convention applies. Unlike Article 2 in the OECD Model, this Article does not contain a general

description of the types of taxes that are covered (i.e., income taxes), but only a listing of the

specific taxes covered for both of the Contracting States. With two exceptions, the taxes

specified in Article 2 are the covered taxes for all purposes of the Convention. A broader

coverage applies, however, for purposes of Articles 24 (Non-discrimination) and 26 (Exchange of

Information and Administrative Assistance). Article 24 (Non-discrimination) applies with respect

to all taxes, including those imposed by state and local governments. Article 26 (Exchange of

Information and Administrative Assistance) applies with respect to all taxes administered by the

competent authorities, excluding customs duties. 

Paragraph 1

Paragraph 1 identifies the covered taxes of the two Contracting States for all purposes of

the Convention except for Articles 24 (Non-discrimination) and 26 (Exchange of Information and

Administrative Assistance).

Subparagraph 1(a) provides that the United States covered taxes are the Federal income

taxes imposed by the Code, together with the excise taxes imposed with respect to private

foundations 

(Code sections 4940 through 4948). Although they may be regarded as income taxes, social

security taxes (Code sections 1401, 3101, 3111 and 3301) are specifically excluded from

coverage. It is expected that social security taxes will be dealt with in bilateral Social Security

Totalization Agreements, which are negotiated and administered by the Social Security

Administration. Except with respect to Article 24 (Non-discrimination), state and local taxes in

the United States are not covered by the Convention. Each U.S. covered tax is referred to in the

Convention as a "United States tax".

In this Convention, the Accumulated Earnings Tax and the Personal Holding Companies

Tax are covered taxes because they are income taxes and they are not otherwise excluded from

coverage. Under the Code, these taxes will not apply to most foreign corporations because of a

statutory exclusion or the corporation's failure to meet a statutory requirement. In the few cases

where the taxes may apply to a foreign corporation, the tax due is likely to be insignificant. 

Treaty coverage therefore confers little if any benefit on such corporations.
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Subparagraph 1(b) specifies the existing taxes of South Africa that are covered by the

Convention. They are the normal tax and the secondary tax on companies. Each is referred to in

the Convention as a "South African tax."

Paragraph 2

Under paragraph 2, the Convention will apply to any taxes that are identical, or

substantially similar, to those enumerated in paragraph 1, and which are imposed in addition to, or

in place of, the existing taxes after the date of signature of the Convention. The paragraph also

provides that the competent authorities of the Contracting States will notify each other of

significant changes in their taxation laws or of other laws that affect their obligations under the

Convention. The use of the term "significant" means that changes must be reported that are of

significance to the operation of the Convention. Other laws that may affect a Contracting State's

obligations under the Convention may include, for example, laws affecting bank secrecy.

The competent authorities are also obligated to notify each other of official published

materials concerning the application of the Convention. This requirement encompasses materials

such as technical explanations, regulations, rulings and judicial decisions relating to the

Convention.

Article 3 (General Definitions)

Paragraph 1 defines a number of basic terms used in the Convention. Certain others are

defined in other articles of the Convention. For example, the term "resident of a Contracting

State,, is defined in Article 4 (Residence). The term "permanent establishment" is defined in

Article 5 (Permanent Establishment). The terms "dividends," "interest" and "royalties" are defined

in Articles 10, 11 and 12, respectively. The introduction to paragraph 1 makes clear that all of

these definitions apply for all purposes of the Convention, unless the Convention states otherwise

or the context requires otherwise. This latter condition allows flexibility in the interpretation of

the treaty in order to avoid results not intended by the treaty's negotiators. Terms that are not

defined in the Convention are dealt with in paragraph 2.

Paragraph 1

The term "United States" is defined in subparagraph 1(a) to mean the United States of

America. When the term is used in a geographical sense the term means the states and the

District of Columbia. It is understood that the term does not include Puerto Rico, the Virgin

Islands, Guam or any other U.S. possession or territory. The geographic meaning of the term

United States also includes the territorial sea of the United States and, for certain purposes, the

definition is extended to include the sea bed and subsoil of undersea areas adjacent to the

territorial sea of the United States. This extension applies to the extent that the United States

exercises sovereignty in accordance with international law for the purpose of natural resource
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exploration and exploitation of such areas. This extension of the definition applies, however, only

if the person, property or activity to which the Convention is being applied is connected with such

natural resource exploration or exploitation. Thus, it would not include any activity involving the

sea floor of an area over which the United States exercised sovereignty for natural resource

purposes if that activity was unrelated to the exploration and exploitation of natural resources.

The term "South Africa" is defined in subparagraph 1(b). The term means the Republic of

South Africa, including certain territories that were formerly subject to special tax regimes, but

now are subject to the same tax laws as the rest of South Africa. When the term is used in a

geographical sense it also includes the territorial sea of South Africa, and areas outside the

territorial sea which are designated, under both South African and international law, as areas

within which South Africa may exercise sovereign rights with regard to the exploration or

exploitation of natural resources. 

Subparagraph 1(c) defines the term "person" to include an individual, a trust, a

partnership, a company and any other body of persons. The definition is significant for a variety

of reasons. For example, under Article 4, only a "person" can be a "resident" and therefore

eligible for most benefits under the treaty. Also, all "persons" are eligible to claim relief under

Article 25 (Mutual Agreement Procedure).

The term "company" is defined in subparagraph 1(d) as a body corporate or an entity

treated as a body corporate for tax purposes in the State where it is organized.

The terms "enterprise of a Contracting State" and "enterprise of the other Contracting

State" are defined in subparagraph 1(e) as an enterprise carried on by a resident of a Contracting

State and an enterprise carried on by a resident of the other Contracting State. The term

"enterprise" is not defined in the Convention, nor is it defined in the OECD Model or its

Commentaries. Despite the absence of a clear, generally accepted meaning for the term

"enterprise," the term is understood to refer to any activity or set of activities that constitute a

trade or business. The term also includes an enterprise conducted through an entity (such as a

partnership) that is treated as fiscally transparent in the Contracting State where the entity's owner

is resident.

An enterprise of a Contracting State need not be carried on in that State. It may be

carried on in the other Contracting State or a third state (e.g., a U.S. corporation doing all of its

business in South Africa would still be a U.S. enterprise).

The term "nationals," as it relates to the United States and South Africa, is defined in

subparagraph 1(f). This term is relevant for purposes of Articles 19 (Government Service) and 24

(Non-discrimination). A national of one of the Contracting

States is (1) an individual who is a citizen of that State, and (2) any legal person, partnership,

association or other entity deriving its status, as such, from the law in force in the State where it is

established.
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Subparagraphs 1(g)(i) and (ii) define the term "competent authority" for the United States

and South Africa, respectively. The U.S. competent authority is the Secretary of the Treasury or

his delegate. The Secretary of the Treasury has delegated the competent authority function to the

Commissioner of Internal Revenue, who in turn has delegated the authority to the Assistant

Commissioner (International). With respect to interpretative issues, the Assistant Commissioner

acts with the concurrence of the Associate Chief Counsel (International) of the Internal Revenue

Service. The competent authority for South Africa is the Commissioner for Inland Revenue or his

authorized representative.

Subparagraph 1(h) defines the term "international traffic." The term means any transport

by a ship or aircraft except when the vessel is operated solely between places within a Contracting

State. This definition is applicable principally in the context of Article 8 (Shipping and Air

Transport). Unlike the definition in the OECD Model, this definition does not require the ship or

aircraft to be operated by a resident of a Contracting State. As a result, under paragraphs 2 and 3

of Article 8, income from the rental of ships, aircraft or containers is exempt from tax by the

source State whether it is earned by lessors that are operators of ships and aircraft or by lessors

that are not such operators (e.g., banks or container leasing companies), so long as the lessors are

residents of a Contracting State, provided that the ships, aircraft or containers are operated or

used in international traffic.

The exclusion from international traffic of transport solely between places within a

Contracting State means, for example, that carriage of goods or passengers solely between New

York and Chicago would not be treated as international traffic, whether carried by a U.S. or a

foreign carrier. Therefore, the substantive taxing rules of the Convention relating to the taxation

of income from transport, principally Article 8 (Shipping and Air Transport), would not apply to

income from such carriage. Thus, if the carrier engaged in internal U.S. traffic were a resident of

South Africa (assuming that were possible under U.S. law), the United States would not be

required to exempt the income from that transport under Article 8. The income would, however,

be treated as business profits under Article 7 (Business Profits), and therefore would be taxable in

the United States only if attributable to a U.S. permanent establishment of the South African

carrier, and then only on a net basis. The gross basis U.S. tax imposed by section 887 would

never apply under the circumstances described. If, however, goods or passengers are carried by a

South African carrier from Cape Town to, for example, New York, and some of the goods or

passengers continue on to Chicago, the entire transport, including the internal U.S. portion, would

be international traffic. This would be true if the international carrier transferred the goods at the

U.S. port of entry from a ship to a land vehicle, from a ship to a lighter, or even if the overland

portion of the trip in the United States was handled by an independent carrier under contract with

the original international carrier, so long as both parts of the trip were reflected in original bills of

lading. For this reason, the Convention language differs from the OECD Model language. In the

definition of "international traffic," the OECD Model excludes transport when the “ship or aircraft

is operated” solely between places in the other Contracting State. The Convention excludes ship

or aircraft transport when “such transport” is solely between places in a Contracting State. The

Convention language is intended to make clear that, as in the above example, even if the goods
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are carried on a different aircraft for the internal portion of the international voyage than is used

for the overseas portion of the trip, the definition applies to that internal portion as well as the

external portion.

Finally, a "cruise to nowhere," i.e., a cruise beginning and ending in a port in the same

Contracting State with no stops in a foreign port, would not constitute international traffic.

Paragraph 2

Paragraph 2 provides that in the application of the Convention, any term used but not

defined in the Convention will have the meaning that it has under the law of the Contracting State

whose tax is being applied, unless the context requires otherwise. The paragraph makes clear that

if the term is defined under both the tax and non-tax laws of a Contracting State, the definition in

the tax law will take precedence over the

definition in the non-tax laws. Finally, there also may be cases where the tax laws of a State

contain multiple definitions of the same term. In such a case, the definition used for purposes of

the particular provision at issue, if any, should be used.

If the meaning of a term cannot be readily determined under the law of a Contracting

State, or if there is a conflict in meaning under the laws of the two States that creates difficulties

in the application of the Convention, the competent authorities, as indicated in paragraph 5(f) of

Article 25 (Mutual Agreement Procedure), may establish a common meaning in order to prevent

double taxation or to further any other purpose of the Convention. This common meaning need

not conform to the meaning of the term under the laws of either Contracting State.

The language of the paragraph makes clear that the reference in paragraph 2 to the internal

law of a Contracting State means the law in effect at the time the treaty is being applied, not the

law as in effect at the time the treaty was signed. This use of "ambulatory definitions", however,

may lead to results that are at variance with the intentions of the negotiators and of the

Contracting States when the treaty was negotiated and ratified. The reference in both paragraphs

1 and 2 to the "context otherwise requiring" a definition different from the treaty definition, in

paragraph 1, or from the internal law definition of the Contracting State whose tax is being

imposed, under paragraph 2, refers to a circumstance where the result intended by the Contracting

States is different from the result that would obtain under either the paragraph 1 definition or the

statutory definition. 

Article 4 (Residence)

This Article sets forth rules for determining whether a person is a resident of a Contracting

State for purposes of the Convention. As a general matter only residents of the Contracting

States may claim the benefits of the Convention. The treaty definition of residence is to be used

only for purposes of the Convention. The fact that a person is determined to be a resident of a
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Contracting State under Article 4 does not necessarily entitle that person to the benefits of the

Convention. In addition to being a resident that is the beneficial owner of income, a person also

must qualify for benefits under Article 22 (Limitation on Benefits) in order to receive benefits

conferred on residents of a Contracting State.

The determination of residence for treaty purposes looks first to a person's liability to tax

as a resident under the respective taxation laws of the Contracting States. As a general matter, a

person who, under those laws, is a resident of one Contracting State and not of the other need

look no further. For purposes of the Convention, that person is a resident of the State in which he

is resident under internal law. If, however, a person is resident in both Contracting States under

their respective taxation laws, the Article proceeds, through the use of tie-breaker rules, to assign

to such a person, where possible, a single State of residence for purposes of the Convention.

Paragraph 1

The term "resident of a Contracting State" is defined in paragraph 1. The definition of a

U.S. resident is consistent with that of the U.S. model and the definition of a South African

resident is intended to include only those over which South Africa exerts its broadest taxing

jurisdiction. 

Residents of the United States are defined in subparagraph (a)(i) to include a person who,

under United States law, is subject to tax there by reason of that person's domicile, residence,

citizenship, place of management, place of incorporation or any other similar criterion. The term

also includes aliens who are considered U.S. residents under Code section 7701(b).

Subparagraph (a)(i) also provides that a person who is liable to tax in the United States

only in respect of income from U.S. sources will not be treated as a resident of the United States

for purposes of the Convention. Thus, a consular official of South Africa who is posted in the

United States, who may be subject to U.S. tax on U.S. source investment income, but is not

taxable in the United States on non-U.S. source income, would not be considered a resident of

the United States for purposes of the Convention. (See Code section 7701(b)(5)(B)). Similarly, a

South African enterprise with a permanent establishment in the United States is not, by virtue of

that permanent establishment, a resident of the United States. The enterprise generally is subject

to U.S. tax only with respect to its income that is attributable to the U.S. permanent

establishment, not with respect to its worldwide income, as it would be if it were a U.S. resident.

Certain entities that are nominally subject to tax but that in practice rarely pay tax also

would generally be treated as residents and therefore accorded treaty benefits. For example,

RICs, REITs and REMICs are all residents of the United States for purposes of the treaty. 

Although the income earned by these entities normally is not subject to U.S. tax in the hands of

the entity, they are taxable to the extent that they do not currently distribute their profits, and

therefore may be regarded as "liable to tax." They also must satisfy a number of requirements

under the Code in order to be entitled to special tax treatment.
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Subparagraph (a)(ii) provides that certain tax-exempt entities such as pension funds and

charitable organizations will be regarded as U.S. residents regardless of whether they are

generally liable for income tax in the United States. An entity will be described in this

subparagraph if it is generally exempt from tax by reason of the fact that it is organized and

operated exclusively to perform a charitable or similar purpose or to provide pension or similar

benefits to employees. The reference to "similar benefits" is intended to encompass employee

benefits such as health and disability benefits.

The inclusion of this provision is intended to clarify the generally accepted practice of

treating an entity that would be liable for tax as a resident under the internal law of a state but for

a specific exemption from tax (either complete or partial) as a resident of that state for purposes

of paragraph 1. The reference to a general exemption is intended to reflect the fact that under

U.S. law, certain organizations that generally are considered to be tax-exempt entities may be

subject to certain excise taxes or to income tax on their unrelated business income. Thus, a U.S.

pension trust, or an exempt section 501(c) organization (such as a U.S. charity) that is generally

exempt from tax under U.S. law is considered a resident of the United States for all purposes of

the treaty.

Subparagraph (b) identifies the basic criteria for a person to be a resident of South Africa for

purposes of the Convention. Under this subparagraph, an individual who is ordinarily resident in

South Africa and a legal person that is incorporated in South Africa, or that has its place of effective

management there, are residents of South Africa.

Subparagraph (c) makes clear that a resident of a Contracting State also includes the

Government of that state as well as any political subdivisions or local authorities of that State.

Subparagraph (d) addresses special issues presented by fiscally transparent entities such as

partnerships and certain estates and trusts. In general, subparagraph (d) relates to entities that are

not subject to tax at the entity level, as distinct from entities that are subject to tax, but with

respect to which tax may be relieved under an integrated system. This subparagraph applies to

any resident of a Contracting State who is entitled to income derived through an entity that is

treated as fiscally transparent under the laws of either Contracting State. Entities falling under

this description in the United States would include partnerships, common investment trusts under

section 584 and grantor trusts. This paragraph also applies to U.S. limited liability companies

(“LLC”s) that are treated as partnerships for U.S. tax purposes.

Subparagraph (d) provides that an item of income derived by such a fiscally transparent

entity will be considered to be derived by a resident of a Contracting State if the resident is treated

under the taxation laws of the State where he is resident as deriving the item of income. For

example, if a South African corporation distributes a dividend to an entity that is treated as fiscally

transparent for U.S. tax purposes, the dividend will be considered derived by a resident of the

United States only to the extent that the taxation laws of the United States treat one or more U.S.

residents (whose status as U.S. residents is determined, for this purpose, under U.S. tax laws) as
-13-

deriving the dividend income for U.S. tax purposes. In the case of a partnership, the persons who

are, under U.S. tax laws, treated as partners of the entity would normally be the persons whom

the U.S. tax laws would treat as deriving the dividend income through the partnership. Thus, it

also follows that persons whom the U.S. treats as partners but who are not U.S. residents for U.S.

tax purposes may not claim a benefit for the dividend paid to the entity under the U.S.-South

African Convention. Although these partners are treated as deriving the income for U.S. tax

purposes, they are not residents of the United States for purposes of the treaty. If, however, they

are treated as residents of a third country under the provisions of an income tax convention which

that country has with South Africa, they may be entitled to claim a benefit under that convention. 

In contrast, if an entity is organized under U.S. laws and is classified as a corporation for U.S. tax

purposes, dividends paid by a South African corporation to the U.S. entity will be considered

derived by a resident of the United States since the U.S. corporation is treated under U.S.

taxation laws as a resident of the United States and as deriving the income. 

These results would obtain even if the entity were viewed differently under the tax laws of

South Africa (e.g., as not fiscally transparent in the first example above where the entity is treated

as a partnership for U.S. tax purposes or as fiscally transparent in the second example where the

entity is viewed as not fiscally transparent for U.S. tax purposes). These results also follow

regardless of where the entity is organized, i.e., in the United States, in South Africa, or in a third

country. For example, income from South African sources received by an entity organized under

the laws of South Africa, which is treated for U.S. tax purposes as a corporation and is owned by

a U.S. shareholder who is a U.S. resident for U.S. tax purposes, is not considered derived by the

shareholder of that corporation even if, under the tax laws of South Africa, the entity is treated as

fiscally transparent. Rather, for purposes of the treaty, the income is treated as derived by the

South African entity. These results also follow regardless of whether the entity is disregarded as a

separate entity under the laws of one jurisdiction but not the other, such as a single owner entity

that is viewed as a branch for U.S. tax purposes and as a corporation for South African tax

purposes.

The taxation laws of a Contracting State may treat an item of income, profit or gain as

income, profit or gain of a resident of that State even if, under the taxation laws of that State, the

resident is not subject to tax on that particular item of income, profit or gain. For example, if a

Contracting State has a participation exemption for certain foreign-source dividends and capital

gains, such income or gains would be regarded as income or gain of a resident of that State who

otherwise derived the income or gain, despite the fact that the resident could be exempt from tax

in that State on the income or gain.

Where income is derived through an entity organized in a third state that has owners

resident in one of the Contracting States, the characterization of the entity in that third state is

irrelevant for purposes of determining whether the resident is entitled to treaty benefits with

respect to income derived by the entity.
-14-

These principles also apply to trusts to the extent that they are fiscally transparent in either

Contracting State. For example, if X, a resident of South Africa, creates a revocable trust and

names persons resident in a third country as the beneficiaries of the trust, X would be treated as

the beneficial owner of income derived from the United States under the Code's rules. If South

Africa has no rules comparable to those in sections 671 through 679 then it is possible that under

South African law neither X nor the trust would be taxed on the income derived from the United

States. In these cases subparagraph (d) provides that the trust's income would be regarded as

being derived by a resident of South Africa only to the extent that the laws of South Africa treat

South African residents as deriving the income for tax purposes.

Paragraph 2

If, under the laws of the two Contracting States, and, thus, under paragraph 1, an

individual is deemed to be a resident of both Contracting States, a series of tie-breaker rules are

provided in paragraph 2 to determine a single State of residence for that individual. These tests

are to be applied in the order in which they are stated. The first test is based on where the

individual has a permanent home. If that test is inconclusive because the individual has a

permanent home available to him in both States, he will be considered to be a resident of the

Contracting State where his personal and economic relations are closest e.g., the location of his

“centre of vital interests"). If that test is also inconclusive, or if he does not have a permanent

home available to him in either State, he will be treated as a resident of the Contracting State

where he maintains an habitual abode. If he has an habitual abode in both States or in neither of

them, he will be treated as a resident of his Contracting State of citizenship. If he is a citizen of

both States or of neither, the matter will be considered by the competent authorities, who will

assign a single State of residence.

Paragraph 3

Paragraph 3 seeks to settle dual-residence issues for companies. A company is treated as

resident in the United States if it is created or organized under the laws of the United States or a

political subdivision. A company is treated as a resident of South Africa if it is either incorporated

or has its place of effective management there. Dual residence can arise, therefore, in the case of

a U.S. company that has its place of effective management in South Africa. Under paragraph 3,

the residence of such a company will be in the Contracting State under the laws of which it is

created or organized (i.e., the United States, in the example).

Paragraph 4

Dual residents other than individuals or companies (such as trusts or estates) are

addressed by paragraph 4. If such a person is, under the rules of paragraph 1, resident in both

Contracting States, the competent authorities shall seek to determine a single State of residence

for that person for purposes of the Convention.
-15-

Article 5 (Permanent Establishment)

This Article defines the term "permanent establishment," a term that is significant for

several articles of the Convention. The existence of a permanent establishment in a Contracting

State is necessary under Article 7 (Business Profits) for the taxation by that State of the business

profits of a resident of the other Contracting State. Since the term "fixed base" in Article 14

(Independent Personal Services) is understood by reference to the definition of "permanent

establishment," this Article is also relevant for purposes of Article 14. Articles 10, 11 and 12

(dealing with dividends, interest, and royalties, respectively) provide for reduced rates of tax at

source on payments of these items of income to a resident of the other State only when the

income is not attributable to a permanent establishment or fixed base that the recipient has in the

source State. The concept is also relevant in determining which Contracting State may tax certain

gains under Article 13 (Capital Gains) and certain "other income" under Article 21 (Other

Income).

Paragraph 1

The basic definition of the term "permanent establishment" is contained in paragraph 1. 

As used in the Convention, the term means a fixed place of business through which the business of

an enterprise is wholly or partly carried on.

Paragraph 2

Paragraph 2 lists a number of types of fixed places of business that constitute a permanent

establishment. This list is illustrative and non-exclusive. According to paragraph 2, the term

permanent establishment includes a place of management, a branch, an office, a factory, a

workshop, a mine, oil or gas well, quarry or other place of extraction of natural resources, a

warehouse, in relation to the provision of storage facilities for others, and a store or other

premises used as a sales outlet. The paragraph also specifies, in subparagraph (k), that the

furnishing of services in a Contracting State by an enterprise either through employees or others

engaged for that purpose will constitute a permanent establishment, so long as the activities

continue in that State for a period or periods aggregating more than 183 days in a twelve-month

period that begins or ends in the taxable year concerned. 

Paragraph 2 also deals, in subparagraphs (i) and (j), with building or construction sites and

offshore drilling sites which under the U.S. Model are dealt with in a separate paragraph 3. These

paragraphs provide rules to determine whether a building site or a construction, assembly or

installation project, or a drilling rig or ship used for the exploration or exploitation of natural

resources constitutes a permanent establishment for the contractor, driller, etc. An activity is

merely preparatory and does not create a permanent establishment under paragraph 3(e) unless

the site, project, etc. lasts or continues for more than twelve months. Thus, a drilling rig does not

constitute a permanent establishment if a well is drilled in only six months, but if production
-16-

begins in the following month the well becomes a permanent establishment as of that date under

the provisions of subparagraph (f).

The twelve-month test of subparagraphs (i) and (j) applies separately to each site or

project. The twelve-month period begins when work (including preparatory work carried on by

the enterprise) physically begins in a Contracting State. A series of contracts or projects by a

contractor that are interdependent both commercially and geographically are to be treated as a

single project for purposes of applying the twelve-month threshold test. For example, the

construction of a housing development would be considered as a single project even if each house

were constructed for a different purchaser. Several drilling rigs operated by a drilling contractor

in the same sector of the continental shelf also normally would be treated as a single project.

If the twelve-month threshold is exceeded, the site or project constitutes a permanent

establishment from the first day of activity. In applying these subparagraphs, time spent by a subcontractor on a building site is counted as time spent by the general contractor at the site for

purposes of determining whether the general contractor has a permanent establishment. 

However, for the sub-contractor itself to be treated as having a permanent establishment, the subcontractor's activities at the site must last for more than 12 months. If a sub-contractor is on a

site intermittently, then, for purposes of applying the twelve-month rule, time is measured from

the first day the sub-contractor is on the site until the last such day (i.e., intervening days that the

sub-contractor is not on the site are counted).

These interpretations of subparagraphs (i) and (j) are based on the Commentary to

paragraph 3 of Article 5 of the OECD Model, which contains language substantially the same as

that in the Convention (except for the absence in the OECD Model of a rule for drilling rigs). 

These interpretations are consistent with the generally accepted international interpretation of the

relevant language.

As indicated in the OECD Commentaries (see paragraphs 4 through 8), a general principle

to be observed in determining whether a permanent establishment exists (except with respect to

the furnishing of services under subparagraph (k) is that the place of business must be "fixed" in

the sense that a particular building or physical location is used by the enterprise for the conduct of

its business, and that it must be foreseeable that the enterprise's use of this building or other

physical location will be more than temporary.

Paragraph 3

This paragraph contains exceptions to the general rule of paragraph 1, listing a number of

activities that may be carried on through a fixed place of business, but which nevertheless do not

create a permanent establishment. The use of facilities solely to store, display or deliver

merchandise belonging to an enterprise does not constitute a permanent establishment of that

enterprise. The maintenance of a stock of goods belonging to an enterprise solely for the purpose
-17-

of storage, display or delivery, or solely for the purpose of processing by another enterprise does

not give rise to a permanent establishment of the first-mentioned enterprise. The maintenance of a

fixed place of business solely for the purpose of purchasing goods or merchandise, or for

collecting information, for the enterprise, or for other activities that have a preparatory or

auxiliary character for the enterprise, such as advertising, or the supply of information does not

constitute a permanent establishment of the enterprise. Thus, as explained in paragraph 22 of the

OECD Commentaries, an employee of a news organization engaged merely in gathering

information would not constitute a permanent establishment of the news organization.

Further, under subparagraph (f) the maintenance of a fixed place of business for a

combination of the activities listed in subparagraphs (a) through (e) does not give rise to a

permanent establishment. Unlike the OECD Model, subparagraph (f) does not specify that the

overall combination of activities must be of a preparatory or auxiliary character. The United

States position is that a combination of activities that are each preparatory or auxiliary always will

result in an overall activity that is also preparatory or auxiliary.

Paragraph 4

Paragraphs 4 and 5 specify when activities carried on by an agent on behalf of an

enterprise create a permanent establishment of that enterprise. Under paragraph 4, a dependent

agent of an enterprise is deemed to be a permanent establishment of the enterprise if the agent has

and habitually exercises an authority to conclude contracts in the name of the enterprise. If,

however, for example, the agent's activities are limited to those activities specified in paragraph 4

which would not constitute a permanent establishment if carried on by the enterprise through a

fixed place of business, the agent is not a permanent establishment of the enterprise.

The U.S. Model uses the term "binding on the enterprise" rather than "in the name of the

enterprise." The U.S. Model language is intended to be a clarification rather than a substantive

difference. As indicated in paragraph 32 to the OECD Commentaries on Article 5, paragraph 5 of

the Article, which tracks the language used in Article 5, paragraph 4 of this Convention, is

intended to encompass persons who have "sufficient authority to bind the enterprise's participation

in the business activity in the State concerned."

The contracts referred to in paragraph 4 are those relating to the essential business

operations of the enterprise, rather than ancillary activities. For example, if the agent has no

authority to conclude contracts in the name of the enterprise with its customers for, say, the sale

of the goods produced by the enterprise, but it can enter into service contracts in the name of the

enterprise for the enterprise's business equipment used in the agent's office, this contracting

authority would not fall within the scope of the paragraph, even if exercised regularly.

Paragraph 5
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Under paragraph 5, an enterprise is not deemed to have a permanent establishment in a

Contracting State merely because it carries on business in that State through an independent

agent, including a broker or general commission agent, if the agent is acting in the ordinary course

of his business as an independent agent. Thus, there are two conditions that must be satisfied: the

agent must be both legally and economically independent of the enterprise, and the agent must be

acting in the ordinary course of its business in carrying out activities on behalf of the enterprise

Whether the agent and the enterprise are independent is a factual determination. Among

the questions to be considered are the extent to which the agent operates on the basis of instructions from the enterprise. An agent that is subject to detailed instructions regarding the conduct

of its operations or comprehensive control by the enterprise is not legally independent.

In determining whether the agent is economically independent, a relevant factor is the

extent to which the agent bears business risk. Business risk refers primarily to risk of loss. An

independent agent typically bears risk of loss from its own activities. In the absence of other

factors that would establish dependence, an agent that shares business risk with the enterprise, or

has its own business risk, is economically independent because its business activities are not

integrated with those of the principal. Conversely, an agent that bears little or no risk from the

activities it performs is not economically independent and therefore is not described in

paragraph 5.

Another relevant factor in determining whether an agent is

economically independent is whether the agent has an exclusive or

nearly exclusive relationship with the principal. Such a relationship may indicate that the principal

has economic control over the agent. A number of principals acting in concert also may have

economic control over an agent. The limited scope of the agent's activities and the agent's

dependence on a single source of income may indicate that the agent lacks economic

independence. It should be borne in mind, however, that exclusivity is not in itself a conclusive

test: an agent may be economically independent notwithstanding an exclusive relationship with the

principal if it has the capacity to diversify and acquire other clients without substantial

modifications to its current business and without substantial harm to its business profits. Thus,

exclusivity should be viewed merely as a pointer to further investigation of the relationship

between the principal and the agent. Each case must be addressed on the basis of its own facts

and circumstances.

Paragraph 6

This paragraph clarifies that a company that is a resident of a Contracting State is not

deemed to have a permanent establishment in the other Contracting State merely because it controls, or is controlled by, a company that is a resident of that other Contracting State, or that

carries on business in that other Contracting State. The determination whether a permanent

establishment exists is made solely on the basis of the factors described in paragraphs 1 through 6
-19-

of the Article. Whether a company is a permanent establishment of a related company, therefore,

is based solely on those factors and not on the ownership or control relationship between the

companies.

Article 6 (Income from Immovable Property (Real Property))

This Article deals with the taxation of income from immovable, or real, property. Those

two terms should be understood to have the same meaning.

Paragraph 1

The first paragraph of Article 6 states the general rule that income of a resident of a

Contracting State derived from real property situated in the other Contracting State may be taxed

in the Contracting State in which the property is situated. The paragraph specifies that income

from real property includes income from agriculture and forestry. Income from agriculture and

forestry are dealt with in Article 6 rather than in Article 7 (Business Profits). Given the

availability of the net taxation of real property income under the laws of both Contracting States,

taxpayers generally should be able to obtain the same tax treatment in the situs country regardless

of whether the income is treated as business profits or real property income. Paragraph 3 clarifies

that the income referred to in paragraph 1 also means income from any use of real property,

including, but not limited to, income from direct use by the owner (in which case income may be

imputed to the owner for tax purposes) and rental income from the letting of real property.

This Article does not grant an exclusive taxing right to the situs State; the situs State is

merely given the primary right to tax. The Article does not impose any limitation in terms of rate

or form of tax on the situs State. It is understood, however, as noted above, that both States

either allow or require the taxpayer to be taxed on a net basis.

Paragraph 2

The term "immovable property (real property)" is defined in paragraph 2 mainly by

reference to the internal law definition in the situs State. In the case of the United States, the term

has the meaning given to it by Reg. § 1.897-1(b). In addition to the statutory definitions in the

two Contracting States, the paragraph specifies certain additional classes of property that,

regardless of internal law definitions, are to be included within the meaning of the term for

purposes of the Convention. This expanded definition conforms to that in the OECD Model. The

definition of "Immovable property (real property)" for purposes of Article 6 is more limited than

the expansive definition of "real property situated in the Other Contracting State" in paragraph 2

of Article 13 (Capital Gains). The Article 13 term includes not only immovable property as

defined in Article 6 but certain other interests in real property.

Paragraph 3
-20-

Paragraph 3 makes clear that all forms of income derived from the exploitation of real

property are taxable in the Contracting State in which the property is situated. In the case of a net

lease of real property, if a net taxation election has not been made, the gross rental payment

(before deductible expenses incurred by the lessee) is treated as income from the property. 

Income from the disposition of an interest in real property, however, is not considered "derived"

from real property and is not dealt with in this Article. The taxation of that income is addressed in

Article 13 (Capital Gains). Also, the interest paid on a mortgage on real property and

distributions by a U.S. Real Estate Investment Trust are not dealt with in Article 6. Such

payments would fall under Articles 10 (Dividends), 11 (Interest) or 13 (Capital Gains). Finally,

dividends paid by a United States Real Property Holding Corporation are not considered to be

income from the exploitation of real property: such payments would fall under Article 10

(Dividends) or 13(Gains).

Paragraph 4

This paragraph specifies that the basic rule of paragraph 1 (as elaborated in paragraph 3)

applies to income from real property of an enterprise and to income from real property used for

the performance of independent personal services. This clarifies that the situs country may tax the

real property income (including rental income) of a resident of the other Contracting State in the

absence of attribution to a permanent establishment or fixed base in the situs State. This provision

represents an exception to the general rule under Articles 7 (Business Profits) and 14

(Independent Personal Services) that income must be attributable to a permanent establishment or

fixed base, respectively, in order to be taxable in the situs State.

Article 7 (Business Profits)

This Article provides rules for the taxation by a Contracting State of the business profits

of an enterprise of the other Contracting State.

Paragraph 1

Paragraph 1 states the general rule that business profits of an enterprise of one

Contracting State may not be taxed by the other Contracting State unless the enterprise carries on

business in that other Contracting State through a permanent establishment (as defined in Article

5 (Permanent Establishment)) situated there. When that condition is met, the State in which the

permanent establishment is situated may tax the enterprise, but only on a net basis and only on the

income that is attributable to the permanent establishment.

Unlike the U.S. Model, but consistent with the OECD Model, the term "business profits"

is not defined in the Convention. It is generally understood to mean income derived from any

trade or business. In accordance with this broad understanding, the term "business profits"

includes income attributable to notional principal contracts and other financial instruments to the
-21-

extent that the income is attributable to a trade or business of dealing in such instruments, or is

otherwise related to a trade or business (as in the case of a notional principal contract entered into

for the purpose of hedging currency risk arising from an active trade or business). Any other

income derived from such instruments is, unless specifically covered in another article, dealt with

under Article 21 (Other Income).

It is also understood that income earned by an enterprise from the furnishing of personal

services is business profits. Thus, a consulting firm resident in one State whose employees

perform services in the other State through a permanent establishment may be taxed in that other

State on a net basis under Article 7, and not under Article 14 (Independent Personal Services),

which applies only to individuals. The salaries of the employees would be subject to the rules of

Article 15 (Dependent Personal Services).

It is further understood that the term "business profits" includes income derived by an

enterprise from the rental of tangible personal property. The inclusion of income derived by an

enterprise from the rental of tangible personal property in business profits means that such income

earned by a resident of a Contracting State can be taxed by the other Contracting State only if the

income is attributable to a permanent establishment maintained by the resident in that other State,

and, if the income is taxable, it can be taxed only on a net basis. Income from the rental of

tangible personal property that is not derived in connection with a trade or business is dealt with

in Article 21 (Other Income).

As is indicated in Article 12 (Royalties), income from motion pictures, audio and video

tapes, etc., is treated as royalties and not business profits, except as provided in paragraph 3 of

Article 12.

Paragraph 2

Paragraph 2 provides rules for the attribution of business profits to a permanent

establishment. The Contracting States will attribute to a permanent establishment the profits that

it would have earned had it been an independent enterprise engaged in the same or similar

activities under the same or similar circumstances. This language incorporates the arm's-length

standard for purposes of determining the profits attributable to a permanent establishment. The

computation of business profits attributable to a permanent establishment under this paragraph is

subject to the rules of paragraph 3 for the allowance of expenses incurred for the purposes of

earning the profits.

The "attributable to" concept of paragraph 2 is analogous but not entirely equivalent to the

"effectively connected" concept in Code section 864(c). The profits attributable to a permanent

establishment may be from sources within or without a Contracting State.

It is understood that the business profits attributed to a permanent establishment include

only those profits derived from that permanent establishment's assets or activities. This rule is
-22-

consistent with the "asset-use" and "business activities" test of Code section 864(c)(2). Thus, the

limited force of attraction rule of Code section 864(c)(3) is not incorporated into paragraph 2.

This Article does not contain a provision corresponding to paragraph 4 of Article 7 of the

OECD Model. That paragraph provides that a Contracting State in certain circumstances may

determine the profits attributable to a permanent establishment on the basis of an apportionment

of the total profits of the enterprise. The inclusion of such a paragraph is unnecessary. The

OECD Commentaries to paragraphs 2 and 3 of Article 7 authorize the use of such approaches

independently of paragraph 4 of Article 7 of the OECD Model. Any such approach, however,

must be designed to approximate an arm's length result.

Paragraph 3

Paragraph 3 provides that in determining the business profits of a permanent

establishment, deductions shall be allowed for the expenses incurred for the purposes of the

permanent establishment, ensuring that business profits will be taxed on a net basis. This rule is

not limited to expenses incurred exclusively for the purposes of the permanent establishment, but

includes a reasonable allocation of expenses incurred for the purposes of the enterprise as a

whole, or that part of the enterprise that includes the permanent establishment. Deductions are to

be allowed regardless of which accounting unit of the enterprise books the expenses, so long as

they are incurred for the purposes of the permanent establishment. For example, a portion of the

interest expense recorded on the books of the home office in one State may be deducted by a

permanent establishment in the other if properly allocable thereto.

The paragraph specifies that the expenses that may be considered to be incurred for the

purposes of the permanent establishment are expenses for research and development, interest and

other similar expenses, as well as a reasonable amount of executive and general administrative

expenses. This rule permits (but does not require) each Contracting State to apply the type of

expense allocation rules provided by U.S. law (such as in Treas. Reg. sections 1.861-8 and 1.882-

5).

Paragraph 3 denies a deduction for payments charged to a permanent establishment by

another unit of the enterprise, other than for reimbursement of actual expenses. Thus, a

permanent establishment may not deduct a royalty deemed paid to the head office. It may,

however, deduct a reimbursement to its head office for costs incurred in developing the intangible

generating the royalty. Similarly, a permanent establishment may not increase its business profits

by the amount of any notional fees for ancillary services performed for another unit of the

enterprise, but it may include in income a reimbursement from the other unit for costs incurred in

providing such services. 

Paragraph 4
-23-

Paragraph 4 provides that no business profits can be attributed to a permanent

establishment with respect to its activities of purchasing goods or merchandise for the enterprise

of which it is a part. This rule applies only to an office that performs functions for the enterprise

in addition to purchasing. The income attribution issue does not arise if the sole activity of the

permanent establishment is the purchase of goods or merchandise because such activity does not

give rise to a permanent establishment under Article 5 (Permanent Establishment). A common

situation in which paragraph 4 is relevant is one in which, for example, a South African permanent

establishment purchases raw materials for its U.S. home office's manufacturing operation and also

sells the manufactured product. While business profits may be attributable to the permanent

establishment with respect to its sales activities, no profits are attributable to it with respect to its

purchasing activities.

Paragraph 5

Paragraph 5 coordinates the provisions of Article 7 and other provisions of the

Convention. Under this paragraph, when business profits include items of income that are dealt

with separately under other articles of the Convention, the provisions of those articles will, except

when they specifically provide to the contrary, take precedence over the provisions of Article 7.

For example, the taxation of dividends will be determined by the rules of Article 10 (Dividends),

and not by Article 7, except where, as provided in paragraph 4 of Article 10, the dividend is

attributable to a permanent establishment or fixed base. In the latter case the provisions of

Articles 7 or 14 (Independent Personal Services) apply. Thus, an enterprise of one State deriving

dividends from the other State may not rely on Article 7 to exempt those dividends from tax at

source if they are not attributable to a permanent establishment of the enterprise in the other

State. By the same token, if the dividends are attributable to a permanent establishment in the

other State, the dividends may be taxed on a net income basis at the source State's full corporate

tax rate, rather than on a gross basis under Article 10 (Dividends).

As provided in Article 8 (Shipping and Air Transport), income derived from shipping and

air transport activities in international traffic described in that Article is taxable only in the country

of residence of the enterprise regardless of whether it is attributable to a permanent establishment

situated in the source State.

Paragraph 6

This paragraph provides that profits shall be determined by the same method of accounting

each year, unless there is good reason to change the method used. This rule assures consistent tax

treatment over time for permanent establishments. It limits the ability of both the Contracting

State and the enterprise to change accounting methods to be applied to the permanent

establishment. It does not, however, restrict a Contracting State from imposing additional

requirements, such as the rules under Code section 481, to prevent amounts from being

duplicated or omitted following a change in accounting method.
-24-

Paragraph 7

Paragraph 7 incorporates into the Convention the rule of Code section 864(c)(6). Like

the Code section on which it is based, paragraph 7 provides that any income or gain attributable

to a permanent establishment or a fixed base during its existence is taxable in the Contracting

State where the permanent establishment or fixed base is situated, even if the payment of that

income or gain is deferred until after the permanent establishment or fixed base ceases to exist. 

This rule applies with respect to paragraphs 1 and 2 of Article 7 (Business Profits), paragraphs 4

and 6 of Article 10 (Dividends), paragraph 3 of Articles 11 (Interest), 12 (Royalties) and 13

(Capital Gains), Article 14 (Independent Personal Services) and paragraph 2 of Article 21 (Other

Income).

The effect of this rule can be illustrated by the following example. Assume a company that

is a resident of South Africa and that maintains a permanent establishment in the United States

winds up the permanent establishment's business and sells the permanent establishment's inventory

and assets to a U.S. buyer at the end of year 1 in exchange for an interest-bearing installment

obligation payable in full at the end of year 3. Despite the fact that Article 13's threshold

requirement for U.S. taxation is not met in year 3 because the company has no permanent

establishment in the United States, the United States may tax the deferred income payment

recognized by the company in year 3.

Relation to Other Articles

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). 

Thus, if a citizen of the United States who is a resident of South Africa under the treaty derives

business profits from the United States that are not attributable to a permanent establishment in

the United States, the United States may, subject to the special foreign tax credit rules of

paragraph 2 of Article 23 (Elimination of Double Taxation), tax those profits, notwithstanding the

provision of paragraph 1 of this Article which would exempt the income from U.S. tax.

The benefits of this Article are also subject to Article 22 (Limitation on Benefits). Thus,

an enterprise of South Africa that derives income effectively connected with a U.S. trade or

business may not claim the benefits of Article 7 unless the resident carrying on the enterprise

qualifies for such benefits under Article 22.

Article 8 (Shipping and Air Transport)

This Article governs the taxation of profits from the operation of ships and aircraft in

international traffic. The term "international traffic" is defined in subparagraph 1(h) of Article 3

(General Definitions).

Paragraph 1
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Paragraph 1 provides that profits derived by an enterprise of a Contracting State from the

operation in international traffic of ships or aircraft are taxable only in that Contracting State. 

Because paragraph 5 of Article 7 (Business Profits) defers to Article 8 with respect to shipping

income, such income derived by a resident of one of the Contracting States may not be taxed in

the other State even if the enterprise has a permanent establishment in that other State. Thus, if a

U.S. airline has a ticket office in South Africa, South Africa may not tax the airline's profits

attributable to that office under Article 7.

Paragraph 2

The income from the operation of ships or aircraft in international traffic that is exempt

from tax under paragraph 1 is defined in paragraph 2. In addition to income derived directly from

the operation of ships and aircraft in international traffic, this definition also includes certain items

of rental income that are closely related to those activities. First, income of an enterprise of a

Contracting State from the rental of ships or aircraft on a full basis (i.e., with crew) when such

ships or aircraft are used in international traffic is income of the lessor from the operation of ships

and aircraft in international traffic and, therefore, is exempt from tax in the other Contracting

State under paragraph 1. Although such "full-basis" rentals are not specified in paragraph 2, the

OECD Commentaries to paragraph 1 of Article 8 makes clear that such rental income is

understood to be part of "profits from the operation of ships or aircraft in international traffic". In

addition, under paragraph 2, profits from the operation of ships or aircraft in international traffic

includes income from the lease of ships or aircraft on a bareboat basis (i.e., without crew), either

when the ships or aircraft are operated in international traffic by the lessee, or when the income is

incidental to other income of the lessor from the operation of ships or aircraft in international

traffic. Rental income would be incidental to income from the operation of ships and aircraft in

international traffic if, for example, during off season, a U.S. international airline has aircraft that

it is not using and leases those aircraft to a South African airline.

It is understood, though not specified in paragraph 2, that, consistent with the

Commentary to Article 8 of the OECD Model, income earned by an enterprise from the inland

transport of property or passengers within either Contracting State falls within Article 8 if the

transport is undertaken as part of the international transport of property or passengers by the

enterprise. Thus, if a U.S. airline contracts to carry property from South Africa to a U.S. city

and, as part of that contract, it transports the property by truck from its point of origin in South

Africa to the Johannesburg airport (or it contracts with a trucking company to carry the property

to the airport) the income earned by the U.S. airline from the overland leg of the journey in South

Africa would be taxable only in the United States. Similarly, Article 8 also would apply to income

from lighterage undertaken as part of the international transport of goods.

Finally, certain non-transport activities that are an integral part of the services performed

by a transport company are understood to be covered in paragraph 1, though they are not

specified in paragraph 2. These include, for example, the performance of some maintenance or

catering services by one airline for another airline, if these services are incidental to the provision
-26-

of those services by the airline for itself. Income earned by concessionaires, however, is not

covered by Article 8.

Paragraph 3

Under this paragraph, profits of an enterprise of a Contracting State from the use or rental

of containers (including equipment for their transport) that are used for the transport of goods in

international traffic are exempt from tax in the other Contracting State. This result obtains under

paragraph 3 regardless of whether the recipient of the income is engaged in the operation of ships

or aircraft in international traffic, and regardless of whether the enterprise has a permanent

establishment in the other Contracting State, provided that containers so used or rented are used

in international traffic. By contrast, Article 8 of the OECD Model covers only income from the

use or rental of containers that is incidental to other income from international traffic.

Paragraph 4

This paragraph clarifies that the provisions of paragraphs 1 and 3 also apply to profits

derived by an enterprise of a Contracting State from participation in a pool, joint business or

international operating agency. This refers to various arrangements for international cooperation

by carriers in shipping and air transport. For example, airlines from the United States and South

Africa may agree to share the transport of passengers between the two countries. They each will

fly the same number of flights per week and share the revenues from that route equally, regardless

of the number of passengers that each airline actually transports. Paragraph 4 makes clear that

with respect to each carrier the income dealt with in the Article is that carrier's share of the total

transport, not the income derived from the passengers actually carried by the airline.

Relation to Other Articles

The taxation of gains from the alienation of ships, aircraft or containers is not dealt with in

this Article but in paragraph 4 of Article 13 (Capital Gains).

As with other benefits of the Convention, the benefit of exclusive residence country

taxation under Article 8 is available to an enterprise only if it is entitled to benefits under Article

22 (Limitation on Benefits).

This Article also is subject to the saving clause of paragraph 4 of Article 1 (General

Scope). Thus, if a citizen of the United States who is a resident of South Africa derives profits

from the operation of ships or aircraft in international traffic, notwithstanding the exclusive

residence country taxation in paragraph 1 of Article 8, the United States may, subject to the

special foreign tax credit rules of paragraph 2 of Article 23 (Elimination of Double Taxation), tax

those profits as part of the worldwide income of the citizen. (This is an unlikely situation,

however, because non-tax considerations (e.g., insurance) generally result in shipping activities

being carried on in corporate form.)
-27-

Article 9 (Associated Enterprises)

This Article incorporates in the Convention the arm's-length principle reflected in the U.S.

domestic transfer pricing provisions, particularly Code section 482. It provides that when related

enterprises engage in a transaction on terms that are not arm's-length, the Contracting States may

make appropriate adjustments to the taxable income and tax liability of such related enterprises to

reflect what the income and tax of these enterprises with respect to the transaction would have

been had there been an arm's-length relationship between them.

Paragraph 1

This paragraph addresses the situation where an enterprise of a Contracting State is

related to an enterprise of the other Contracting State, and there are arrangements or conditions

imposed between the enterprises in their commercial or financial relations that are different from

those that would have existed in the absence of the relationship. Under these circumstances, the

Contracting States may adjust the income (or loss) of the enterprise to reflect what it would have

been in the absence of such a relationship.

The paragraph identifies the relationships between enterprises that serve as a prerequisite

to application of the Article. As the Commentary to the OECD Model makes clear, the necessary

element in these relationships is effective control, which is also the standard for purposes of

section 482. Thus, the Article applies if an enterprise of one State participates directly or

indirectly in the management, control, or capital of the enterprise of the other State. Also, the

Article applies if any third person or persons participate directly or indirectly in the management,

control, or capital of enterprises of the Contracting States. For this purpose, all types of control

are included, i.e., whether or not legally enforceable and however exercised or exercisable.

The fact that a transaction is entered into between such related enterprises does not, in and

of itself, mean that a Contracting State may adjust the income (or loss) of one or both of the

enterprises under the provisions of this Article. If the conditions of the transaction are consistent

with those that would be made between independent persons, the income arising from that

transaction should not be subject to adjustment under this Article.

Similarly, the fact that associated enterprises may have concluded arrangements, such as

cost sharing arrangements or general services agreements, is not in itself an indication that the two

enterprises have entered into a non-arm's-length transaction that should give rise to an adjustment

under paragraph 1. Both related and unrelated parties enter into such arrangements (e.g., joint

venturers may share some development costs). As with any other kind of transaction, when

related parties enter into an arrangement, the specific arrangement must be examined to see

whether or not it meets the arm's-length standard. In the event that it does not, an appropriate

adjustment may be made, which may include modifying the terms of the agreement or recharacterizing the transaction to reflect its substance.
-28-

It is understood that the "commensurate with income" standard for determining

appropriate transfer prices for intangibles, added to Code section 482 by the Tax Reform Act of

1986, was designed to operate consistently with the arm's-length standard. The implementation

of this standard in the section 482 regulations is in accordance with the general principles of

paragraph 1 of Article 9 of the Convention, as interpreted by the OECD Transfer Pricing

Guidelines.

It is understood, though not explicitly stated, that the adjustments to income provided for

in paragraph 1 do not replace, but complement, the adjustments provided for under the internal

laws of the Contracting States. The Contracting States preserve their rights to apply internal law

provisions relating to adjustments between related parties. They also reserve the right to make

adjustments in cases involving tax evasion or fraud. Such adjustments -- the distribution,

apportionment, or allocation of income, deductions, credits or allowances -- are permitted even if

they are different from, or go beyond, those authorized by paragraph 1 of the Article, as long as

they accord with the general principles of paragraph 1, i.e., that the adjustment reflects what

would have transpired had the related parties been acting at arm's length. For example, while

paragraph 1 explicitly allows adjustments of deductions in computing

taxable income, it does not deal with adjustments to tax credits. It does not, however, preclude

such adjustments if they can be made under internal law. The OECD Model reaches the same

result. See paragraph 4 of the Commentaries to Article 9.

This Article also permits tax authorities to deal with thin capitalization issues. They may,

in the context of Article 9, scrutinize more than the rate of interest charged on a loan between

related persons. They also may examine the capital structure of an enterprise, whether a payment

in respect of that loan should be treated as interest, and, if it is treated as interest, under what

circumstances interest deductions should be allowed to the payor. Paragraph 2 of the

Commentaries to Article 9 of the OECD Model, together with the U.S. observation set forth in

paragraph 15 thereof, sets forth a similar understanding of the scope of Article 9 in the context of

thin capitalization.

Paragraph 2

When a Contracting State has made an adjustment that is consistent with the provisions of

paragraph 1, and the other Contracting State agrees that the adjustment was appropriate to reflect

arm's-length conditions, that other Contracting State is obligated to make a correlative adjustment

(sometimes referred to as a "corresponding adjustment") to the tax liability of the related person

in that other Contracting State.

Article 9 leaves the treatment of "secondary adjustments" to the laws of the Contracting

States. When an adjustment under Article 9 has been made, one of the parties will have in its

possession funds that it would not have had at arm's length. The question arises as to how to

treat these funds. In the United States the general practice is to treat such funds as a dividend or

contribution to capital, depending on the relationship between the parties. Under certain
-29-

circumstances, the parties may be permitted to restore the funds to the party that would have the

funds at arm's length, and to establish an account payable pending restoration of the funds. See

Rev. Proc. 65-17, 1965-1 C.B. 833. 

The Contracting State making a secondary adjustment will

take the other provisions of the Convention, where relevant, into account. For example, if the

effect of a secondary adjustment is to treat a U.S. corporation as having made a distribution of

profits to its parent corporation in South Africa, the provisions of Article 10 (Dividends) will

apply, and the United States may impose a 5 percent withholding tax on the dividend. Also, if

under Article 23 South Africa would generally give a credit for taxes paid with respect to such

dividends, it would also be required to do so in this case.

The competent authorities are authorized by paragraph 2 to consult, if necessary, to

resolve any differences in the application of these provisions. For example, there may be a

disagreement over whether an adjustment made by a Contracting State under paragraph 1 was

appropriate.

If a correlative adjustment is made under paragraph 2, it is to be implemented, pursuant to

paragraph 2 of Article 25 (Mutual Agreement Procedure), notwithstanding any time limits or

other procedural limitations in the law of the Contracting State making the adjustment. If a

taxpayer has entered a closing agreement (or other written settlement) with the United States

prior to bringing a case to the competent authorities, the U.S. competent authority will endeavor

only to obtain a correlative adjustment from the South African competent authority and will not

take any actions that will otherwise change such agreements. See Rev. Proc. 96-13, 1996-13

I.R.B. 31, Section 7.05.

Relationship to Other Articles

The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to

paragraph 2 of Article 9 by virtue of the exceptions to the saving clause in paragraph 5(a) of

Article 1. Thus, even if the statute of limitations has run, a refund of tax can be made in order to

implement a correlative adjustment. Statutory or procedural limitations, however, cannot be

overridden to impose additional tax, because paragraph 2 of Article 1 provides that the

Convention cannot restrict any statutory benefit.

Article 10 (Dividends)

Article 10 provides rules for the taxation of dividends paid by a resident of one

Contracting State to a beneficial owner that is a resident of the other Contracting State. The

article provides for full residence country taxation of such dividends and a limited source-State

right to tax. Article 10 also provides rules for the imposition of a tax on branch profits by the

State of source.
-30-

Paragraph 1

The right of a shareholder's country of residence to tax dividends arising in the other

country is preserved by paragraph 1, which permits a Contracting State to tax its residents on

dividends paid to them by a resident of the other Contracting State. For dividends from any other

source paid to a resident, Article 21 (Other Income) grants the residence country exclusive taxing

jurisdiction (other than for dividends attributable to a permanent establishment or fixed base in the

other State).

Paragraph 2

The State of source may also tax dividends beneficially owned by a resident of the other

State, subject to the limitations in paragraph 2. Generally, the source State's tax is limited to 15

percent of the gross amount of the dividend paid. If, however, the beneficial owner of the

dividends is a company resident in the other State that holds at least 10 percent of the voting

stock of the company paying the dividend, then the source State's tax is limited to 5 percent of the

gross amount of the dividend. Indirect ownership of voting shares (through tiers of corporations)

and direct ownership of non-voting shares are not taken into account for purposes of determining

eligibility for the 5 percent direct dividend rate. Shares are considered voting shares if they

provide the power to elect, appoint or replace any person vested with the powers ordinarily

exercised by the board of directors of a U.S. corporation. 

The benefits of paragraph 2 may be granted at the time of payment by means of reduced

withholding at source. It also is consistent with the paragraph for tax to be withheld at the time

of payment at full statutory rates, and the treaty benefit to be granted by means of a subsequent

refund.

Paragraph 2 does not affect the taxation of the profits out of which the dividends are paid. 

The taxation by a Contracting State of the income of its resident companies is governed by the

internal law of the Contracting State, subject to the provisions of paragraph 3 of Article 24 (Nondiscrimination).

The "beneficial owner" of a dividend is understood generally to refer to any person

resident in a Contracting State to whom that State attributes the dividend for purposes of its tax. 

Paragraph 1(d) of Article 4 (Residence) makes this point explicitly with regard to income derived

by fiscally transparent persons. Further, in accordance with paragraph 12 of the OECD

Commentaries to Article 10, the source State may disregard as beneficial owner certain persons

that nominally may receive a dividend but in substance do not control it. See also, paragraph 24

of the OECD Commentaries to Article 1 (General Scope).

Companies holding shares through fiscally transparent entities such as partnerships are

considered for purposes of this paragraph to hold their proportionate interest in the shares held by

the intermediate entity. As a result, companies holding shares through such entities may be able
-31-

to claim the benefits of subparagraph (a) under certain circumstances. The lower rate applies

when the company's proportionate share of the shares held by the intermediate entity meets the 10

percent voting stock threshold. Whether this ownership threshold is satisfied may be difficult to

determine and often will require an analysis of the agreements involved.

Paragraph 2 also provides rules that modify the maximum rates of tax at source provided

in subparagraphs (a) and (b) in particular cases. These rules deny the lower direct investment

withholding rate of paragraph 2(a) for dividends paid by a U.S. Regulated Investment Company

(RIC) or a U.S. Real Estate Investment Trust (REIT). They also deny the benefits of

subparagraph (b) to dividends paid by REITs in certain circumstances, allowing them to be taxed

at the U.S. statutory rate (30 percent). The United States limits the source tax on dividends paid

by a REIT to the 15 percent rate when the beneficial owner of the dividend is an individual

resident of South Africa that owns a less than 10 percent interest in the REIT.

The denial of the 5 percent withholding rate at source to all RIC and REIT shareholders,

and the denial of the 15 percent rate to all but small individual shareholders of REITs is intended

to prevent the use of these entities to gain unjustifiable source taxation benefits for certain

shareholders resident in the other Contracting State. For example, a corporation resident in South

Africa that wishes to hold a diversified portfolio of U.S. corporate shares may hold the portfolio

directly and pay a U.S. withholding tax of 15 percent on all of the dividends that it receives. 

Alternatively, it may acquire a diversified portfolio by purchasing shares in a RIC. Since the RIC

may be a pure conduit, there may be no U.S. tax costs to interposing the RIC in the chain of

ownership. Absent the special rule in paragraph 2, use of the RIC could transform portfolio

dividends, taxable in the United States under the Convention at 15 percent, into direct investment

dividends taxable only at 5 percent.

Similarly, a resident of South Africa directly holding U.S. real property would pay U.S.

tax either at a 30 percent rate on the gross income or at graduated rates on the net income. As in

the preceding example, by placing the real property in a REIT, the investor could transform real

estate income into dividend income, taxable at the rates provided in Article 10, significantly

reducing the U.S. tax burden that otherwise would be imposed. To prevent this circumvention of

U.S. rules applicable to real property, most REIT shareholders are subject to 30 percent tax at

source. However, since a relatively small individual investor might be subject to a U.S. tax of 15

percent of the net income even if he earned the real estate income directly, individuals who hold

less than a 10 percent interest in the REIT remain taxable at source at a 15 percent rate.

The withholding limitations in paragraph 2 apply, at the time of signature of the

Convention, only with respect to United States taxation, since South Africa does not impose a

withholding tax on dividends. If, however, at some time in the future South Africa introduces a

withholding tax on dividends paid to foreign shareholders, the restrictions in paragraph 2 will

apply to that tax.

Paragraph 3
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Paragraph 3 defines the term "dividends" broadly and flexibly. The definition is intended

to cover all arrangements that yield a return on an equity investment in a corporation as

determined under the tax law of the State of source, as well as arrangements that might be

developed in the future.

The term dividends includes income from shares, or other rights that are not treated as

debt under the law of the source State, that participate in the profits of the company. The term

also includes income that is subjected to the same tax treatment as income from shares by the law

of the State of source. Thus, a constructive dividend that results from a non-arm's length

transaction between a corporation and a related party is a dividend. In the case of the United

States the term dividend includes amounts treated as a dividend under U.S. law upon the sale or

redemption of shares or upon a transfer of shares in a reorganization. See e.g., Rev. Rul. 92-85,

1992-2 C.B. 69 (sale of foreign subsidiary's stock to U.S. sister company is a deemed dividend

from the U.S. sister company to extent of subsidiary's and sister's earnings and profits). Further, a

distribution from a U.S. publicly traded limited partnership, which is taxed as a corporation under

U.S. law, is a dividend for purposes of Article 10. However, a distribution by a limited liability

company is not characterized by the United States as a dividend and, therefore, is not a dividend

for purposes of Article 10, provided the limited liability company is not characterized as an

association taxable as a corporation under U.S. law. Finally, a payment denominated as interest

that is made by a thinly capitalized corporation may be treated as a dividend to the extent that the

debt is recharacterized as equity under the laws of the source State.

Paragraph 4

Paragraph 4 excludes from the general source country limitations under paragraph 2

dividends paid with respect to holdings that form part of the business property of a permanent

establishment or a fixed base. Such dividends will be taxed on a net basis using the rates and rules

of taxation generally applicable to residents of the State in which the permanent establishment or

fixed base is located, as modified by the Convention. An example of dividends paid with respect

to the business property of a permanent establishment would be dividends derived by a dealer in

stock or securities from stock or securities that the dealer held for sale to customers.

Paragraph 5

A State's right to tax dividends paid by a company that is a resident of the other State is

restricted by paragraph 5 to cases in which the dividends are paid to a resident of that State or are

attributable to a permanent establishment or fixed base in that State. Thus, a State may not

impose a "secondary" withholding tax on dividends paid by a nonresident company out of

earnings and profits from that State. In the case of the United States, paragraph 5, therefore,

overrides the taxes imposed by sections 871 and 882(a) on dividends paid by foreign corporations

that have a U.S. source under section 861(a)(2)(B).
-33-

The paragraph does not restrict a State's right to tax its resident shareholders on

undistributed earnings of a corporation resident in the other State. Thus, the U.S. authority to

impose the foreign personal holding company tax, its taxes on subpart F income and on an

increase in earnings invested in U.S. property, and its tax on income of a Passive Foreign

Investment Company that is a Qualified Electing Fund is in no way restricted by this provision.

Paragraph 6

Paragraph 6 permits a State to impose a branch profits tax on a company resident in the

other State. The tax is in addition to other taxes permitted by the Convention. The term

"company" is defined in subparagraph (d) of paragraph 1 of Article 3 (General Definitions).

A State may impose a branch profits tax on a company resident in the other State if the

company has income attributable to a permanent establishment in that State, derives income from

real property in that State that is taxed on a net basis under Article 6, or realizes gains taxable in

that State under paragraph 1 of Article 13. The tax is limited, however, in the case of the United

States to the aforementioned items of income that are included in the "dividend equivalent

amount." That term is defined in paragraph 7.

Paragraph 6 permits the United States generally to impose its branch profits tax on the

dividend equivalent amount of a corporation resident in South Africa, in addition to the tax on the

profits of the corporation, at a rate not to exceed 5 percent of the amount of the corporation's

profits that represents the dividend equivalent amount of the corporation.

The South African tax that may be imposed under the provisions of paragraph 6 may be

imposed on the profits of a U.S. corporation at a rate that does not exceed the normal rate of

corporate tax by more than 5 percentage points. That tax is imposed in lieu of, and not in

addition to, the normal corporate tax and the secondary tax on companies.

Paragraph 7

The term "dividend equivalent amount" as used in paragraph 6 is defined in paragraph 7. 

The term has the same meaning that it has under section 884 of the Code, as amended from time

to time, provided the amendments are consistent with the purpose of the branch profits tax. 

Generally, the dividend equivalent amount for a particular year is the income described above that

is included in the corporation's effectively connected earnings and profits for that year, after

payment of the corporate tax under Articles 6, 7 or 13, reduced for any increase in the branch's

U.S. net equity during the year and increased for any reduction in its U.S. net equity during the

year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg. section 1.884-1. The

dividend equivalent amount for any year approximates the dividend that a U.S. branch office

would have paid during the year if the branch had been operated as a separate U.S. subsidiary

company.
-34-

Paragraph 8

Paragraph 8 provides for exemption from tax in the State of source for dividends

beneficially owned by certain governmental entities resident in the other State. The exemption

provided in paragraph 8 is analogous to that provided to foreign governments under section 892

of the Code. Paragraph 8 makes that exemption reciprocal. The governmental entities that

qualify for this exemption include the Contracting States themselves and political subdivisions and

local authorities of those States. It also includes a pension plan of the Government described in

the preceding sentence that is operated exclusively to provide pension benefits described in

paragraph 2 of Article 19 (Government Service).

Relation to Other Articles

Notwithstanding the foregoing limitations on source country taxation of dividends, the

saving clause of paragraph 3 of Article 1 permits the United States to tax dividends received by its

residents and citizens, subject to the special foreign tax credit rules of paragraph 2 of Article 23

(Elimination of Double Taxation), as if the Convention had not come into effect.

The benefits of this Article are also subject to the provisions of Article 22 (Limitation on

Benefits). Thus, if a resident of South Africa is the beneficial owner of dividends paid by a U.S.

corporation, the shareholder must qualify for treaty benefits under at least one of the tests of

Article 22 in order to receive the benefits of this Article.

Article 11 (Interest)

Article 11 specifies the taxing jurisdictions over interest income of the States of source

and residence and defines the terms necessary to apply the Article.

Paragraph 1

This paragraph grants to the State of residence the exclusive right, subject to exceptions

provided in paragraphs 3 and 5, to tax interest beneficially owned by its residents and arising in

the other Contracting State. The "beneficial owner" of a payment of interest is understood

generally to refer to any person resident in a Contracting State to whom that State attributes the

payment for purposes of its tax. Paragraph 1(d) of Article 4 (Residence) makes this point

explicitly with regard to income derived by fiscally transparent persons. Further, in accordance

with paragraph 8 of the OECD Commentaries to Article 11, the source State may disregard as

beneficial owner certain persons that nominally may receive an interest payment but in substance

do not control it. See also, paragraph 24 of the OECD Commentaries to Article 1 (General

Scope).

Paragraph 2
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The term "interest" as used in Article 11 is defined in Paragraph 2 to include, inter alia,

income from debt claims of every kind, whether or not secured by a mortgage. Penalty charges

for late payment are excluded from the definition of interest. Interest that is paid or accrued

subject to a contingency is within the ambit of Article 11. This includes income from a debt

obligation carrying the right to participate in profits. The term does not, however, include

amounts, that are treated as dividends under Article 10 (Dividends).

The term interest also includes amounts subject to the same tax treatment as income from

money lent under the law of the State in which the income arises. Thus, for purposes of the

Convention, amounts that the United States will treat as interest include the difference between

the issue price and the stated redemption price at maturity of a debt instrument, i.e., original issue

discount (OID), which may be wholly or partially realized on the disposition of a debt instrument

(section 1273), (ii) amounts that are imputed interest on a deferred sales contract (section 483), 

(iii) amounts treated as OID under the stripped bond rules (section 1286), (iv) amounts treated as

interest or original issue discount under the below-market interest rate rules (section 7872), (v) a

partner's distributive share of a partnership's interest income (section 702), (vi) the interest portion

of periodic payments made under a "finance lease" or similar contractual arrangement that in

substance is a borrowing by the nominal lessee to finance the acquisition of property, (vii)

amounts included in the income of a holder of a residual interest in a REMIC (section 860E),

because these amounts generally are subject to the same taxation treatment as interest under U.S.

tax law, and (viii) embedded interest with respect to notional principal contracts. 

Paragraph 3

Paragraph 3 provides an exception to the exclusive residence taxation rule of paragraph 1

in cases where the beneficial owner of the interest carries on business through a permanent establishment in the State of source or performs independent personal services from a fixed base

situated in that State and the interest is attributable to that permanent establishment or fixed base. 

In such cases the provisions of Article 7 (Business Profits) or Article 14 (Independent Personal

Services) will apply and the State of source will retain the right to impose tax on such interest

income.

In the case of a permanent establishment or fixed base that once existed in the State but

that no longer exists, the provisions of paragraph 3 also apply, by virtue of paragraph 7 of Article

7 (Business Profits), to interest that would be attributable to such a permanent establishment or

fixed base if it did exist in the year of payment or accrual. See the Technical Explanation of

paragraph 7 of Article 7.

Paragraph 4

Paragraph 4 provides that in cases involving special relationships between persons, Article

11 applies only to that portion of the total interest payments that would have been made absent

such special relationships (i.e., an arm's-length interest payment). Any excess amount of interest
-36-

paid remains taxable according to the laws of the United States and South Africa, respectively,

with due regard to the other provisions of the Convention. Thus, if the excess amount would be

treated under the source country's law as a distribution of profits by a corporation, such amount

could be taxed as a dividend rather than as interest, but the tax would be subject, if appropriate, to

the rate limitations of paragraph 2 of Article 10 (Dividends).

The term "special relationship" is not defined in the Convention. In applying this

paragraph the United States considers the term to include the relationships described in Article 9,

which in turn correspond to the definition of "control" for purposes of section 482 of the Code.

This paragraph does not address cases where, owing to a special relationship between the

payor and the beneficial owner or between both of them and some other person, the amount of

the interest is less than an arm's-length amount. In those cases a transaction may be characterized

to reflect its substance and interest may be imputed consistent with the definition of interest in

paragraph 2. The United States would apply section 482 or 7872 of the Code to determine the

amount of imputed interest in those cases.

Paragraph 5

Paragraph 5 provides anti-abuse exceptions to the sourcecountry exemption in paragraph 1 for two classes of interest payments.

The first exception, in subparagraph (a) of paragraph 5, deals with so-called "contingent

interest." Under this provision interest arising in one of the Contracting States that is determined

by reference to the receipts, sales, income, profits or other cash flow of the debtor or a related

person, to any change in the value of any property of the debtor or a related person or

to any dividend, partnership distribution or similar payment made by the debtor or a related

person, and paid to a resident of the other State also may be taxed in the Contracting State in

which it arises, and according to the laws of that State, but if the beneficial owner is a resident of

the other Contracting State, the gross amount of the interest may be taxed at a rate not exceeding

the 15 percent rate prescribed in subparagraph (b) of paragraph 2 of Article 10 (Dividends). See

Code section 871(h)(4). The same rule would apply to interest that is contingent interest

disqualified as portfolio interest under Treasury regulations or subsequent modifications of Code

section 871(h)(4).

The second exception, in subparagraph (b) of paragraph 5, is consistent with the policy of

Code sections 860E(e) and 86OG(b) that excess inclusions with respect to a real estate mortgage

investment conduit (REMIC) should bear full U.S. tax in all cases. Without a full tax at source

foreign purchasers of residual interests would have a competitive advantage over U.S. purchasers

at the time these interests are initially offered. Also, absent this rule the U.S. fisc would suffer a

revenue loss with respect to mortgages held in a REMIC because of opportunities for tax

avoidance created by differences in the timing of taxable and economic income produced by these

interests.
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Relation to Other Articles

Notwithstanding the foregoing limitations on source country taxation of interest, the

saving clause of paragraph 4 of Article 1 permits the United States to tax its residents and

citizens, subject to the special foreign tax credit rules of paragraph 2 of Article 23 (Elimination of

Double Taxation), as if the Convention had not come into force.

As with other benefits of the Convention, the benefits of exclusive residence State taxation

of interest under paragraph 1 of Article 11, or limited source taxation under paragraph 5(a), are

available to a resident of the other State only if that resident is entitled to those benefits under the

provisions of Article 22 (Limitation on Benefits).

Article 12 (Royalties)

Article 12 specifies the taxing jurisdiction over royalties of the States of residence and

source and defines the terms necessary to apply the article.

Paragraph 1

Paragraph 1 grants to the State of residence of the beneficial owner of royalties the

exclusive right to tax royalties arising in the other Contracting State, subject to exceptions

provided in paragraph 3 (for royalties taxable as business profits and independent personal

services).

The "beneficial owner" of a royalty payment is understood generally to refer to any person

resident in a Contracting State to whom that State attributes the payment for purposes of its tax. 

Paragraph 1(d) of Article 4 (Residence) makes this point explicitly with regard to income derived

by fiscally transparent persons. Further, in accordance with paragraph 4 of the OECD

Commentaries to Article 12, the source State may disregard as beneficial owner certain persons

that nominally may receive a royalty payment but in substance do not control it. See also,

paragraph 24 of the OECD Commentaries to Article 1 (General Scope).

Paragraph 2

The term "royalties" as used in Article 12 is defined in paragraph 2 to include amounts of

any kind received as a consideration for the use of, or the right to use, any copyright of a literary,

artistic, scientific or other work; for the use of, or the right to use, any patent, trademark, design

or model, plan, secret formula or process, or other like right or property; or for information

concerning industrial, commercial, or scientific experience. It does not include income from

leasing personal property. Paragraph 1 does not refer to an amount "paid" to a resident of the

other Contracting State. The absence of this term is intended to eliminate any inference that an
-38-

amount must actually be paid to the resident before it is subject to the provisions of Article 12. 

Under paragraph 1, an amount that is accrued but not paid also would fall within Article 12.

The term royalties is defined in the Convention and therefore is generally independent of

domestic law. Certain terms used in the definition are not defined in the Convention, but these

may be defined under domestic tax law. For example, the term "secret process or formulas" is

found in the Code, and its meaning has been elaborated in the context of sections 351 and 367. 

See Rev. Rul. 55-17, 1955-1 C.B. 388; Rev. Rul. 64-56, 1964-1 C.B. 133; Rev. Proc. 69-19,

1969-2 C.B. 301.

Consideration for the use or right to use cinematographic films, or works on film, tape, or

other means of reproduction in radio or television broadcasting is specifically included in the

definition of royalties. It is intended that subsequent technological advances in the field of radio

and television broadcasting will not affect the inclusion of payments relating to the use of such

means of reproduction in the definition of royalties.

If an artist who is resident in one Contracting State records a performance in the other

Contracting State, retains a copyrighted interest in a recording, and receives payments for the

right to use the recording based on the sale or public playing of the recording, then the right of

such other Contracting State to tax those payments is governed by Article 12. See Boulez v.

Commissioner, 83 T.C. 584 (1984), aff’d, 810 F.2d 209 (D.C. Cir. 1986).

Under the Convention consideration received for the use or the right to use computer

programs is treated as royalties or as income from the alienation of tangible personal property,

depending on the facts and circumstances of the transaction giving rise to the payment. In

determining whether such a payment should be considered a royalty, the most important factor is

whether the transaction is properly characterized as involving the transfer of rights substantially

equivalent to rights in a material object in which the copyrighted program is embodied, i.e. a

program copy, or rights in the underlying copyright to the program. The fact that the transaction

is characterized as a license for copyright law purposes is not dispositive. For example, a typical

retail sale of a "shrink wrap” program generally will not be considered to give rise to royalty

income. Only transactions which involve the transfer of rights in the underlying copyright, such as

the rights enumerated in section 106 of the Copyright Act (17 U.S.C. 106), will result in royalties. 

For this purpose, a transfer of the right to reproduce the copyrighted program if no other

copyright rights are transferred, will not generally result in royalties. Therefore, if a transferee has

the limited right to make additional copies of the program for internal use, or utilize the software

on a network, but the transferee does not have the right to distribute the copies to the public, and

the transferee's rights in the software are otherwise similar to rights in a program copy, the

payment(s) will not be considered a royalty, since the transaction is effectively equivalent to a

bulk purchase of program copies. In some cases where the transferee's rights in the program are

equivalent to rights in a program copy but the terms of the transaction require the transferee to

make further payments for its continuing right to use the program, the payments may be properly

characterized as arising from the lease of a program copy, and is, therefore, not a royalty. 
-39-

The means by which the software is transferred is not relevant for purposes of this

analysis. Consequently, if software is electronically transferred but the rights obtained by the

transferee are substantially equivalent to rights in a program copy, the payment will be considered

income from the alienation of tangible personal property.

The term "royalties" also includes gain derived from the alienation of any right or property

that would give rise to royalties, to the extent the gain is contingent on the productivity, use, or

further alienation thereof. Gains that are not so contingent are dealt with under Article 13

(Capital Gains).

The term "industrial, commercial, or scientific experience" (sometimes referred to as

"know-how") has the meaning ascribed to it in paragraph 11 of the Commentary to Article 12 of

the OECD Model Convention. Consistent with that meaning, the term may include information

that is ancillary to a right otherwise giving rise to royalties, such as a patent or secret process.

Know-how also may include, in limited cases, technical information that is conveyed

through technical or consultancy services. It does not include general educational training of the

user's employees, nor does it include information developed especially for the user, such as a

technical plan or design developed according to the user's specifications. Thus, as provided in

paragraph 11 of the Commentaries to Article 12 of the OECD Model, the term "royalties" does

not include payments received as consideration for after-sales service, for services rendered by a

seller to a purchaser under a guarantee, or for pure technical assistance.

The term "royalties" also does not include payments for professional services (such as

architectural, engineering, legal, managerial, medical, software development services). For

example, income from the design of a refinery by an engineer (even if the engineer employed

know-how in the process of rendering the design) or the production of a legal brief by a lawyer is

not income from the transfer of know-how taxable under Article 12, but is income from services

taxable under either Article 14 (Independent Personal Services) or Article 15 (Dependent

Personal Services). Professional services may be embodied in property that gives rise to royalties,

however. Thus, if a professional contracts to develop patentable property and retains rights in the

resulting property under the development contract, subsequent license payments made for those

rights would be royalties.

Paragraph 3

This paragraph provides an exception to the rule of paragraph 1 that gives the State of

residence exclusive taxing jurisdiction in cases where the beneficial owner of the royalties carries

on business through a permanent establishment in the State of source or performs independent

personal services from a fixed base situated in that State and the royalties are attributable to that

permanent establishment or fixed base. In such cases the provisions of Article 7 (Business

Profits) or Article 14 (Independent Personal Services) will apply.
-40-

The provisions of paragraph 7 of Article 7 (Business Profits) apply to this paragraph. For

example, royalty income that is attributable to a permanent establishment or a fixed base and that

accrues during the existence of the permanent establishment or fixed base, but is received after the

permanent establishment or fixed base no longer exists, remains taxable under the provisions of

Articles 7 (Business Profits) or 14 (Independent Personal Services), respectively, and not under

this Article.

Paragraph 4

Paragraph 4 provides that in cases involving special relationships between the payor and

beneficial owner of royalties, Article 12 applies only to the extent the royalties would have been

paid absent such special relationships (i.e., an arm’s length royalty). Any excess amount of

royalties paid remains taxable according to the laws of the two Contracting States with due regard

to the other provisions of the Convention. If, for example, the excess amount is treated as a

distribution of corporate profits under domestic law, such excess amount will be taxed as a

dividend rather than as royalties, but the tax imposed on the dividend payment will be subject to

the rate limitations of paragraph 2 of Article 10 (Dividends).

Relation to Other Articles

Notwithstanding the foregoing limitations on source country taxation of royalties, the

saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax its

residents and citizens, subject to the special foreign tax credit rules of paragraph 2 of Article 23

(Elimination of Double Taxation), as if the Convention had not come into force.

As with other benefits of the Convention, the benefits of exclusive residence State taxation

of royalties under paragraph 1 of Article 12 are available to a resident of the other State only if

that resident is entitled to those benefits under Article 22 (Limitation on Benefits).

Article 13 (Capital Gains)

Article 13 assigns either primary or exclusive taxing jurisdiction over gains from the

alienation of property to the State of residence or the State of source, depending on the type of

property that is alienated, and defines the terms necessary to apply the Article.

Paragraph 1

Paragraph 1 of Article 13 preserves the non-exclusive right of the State of source to tax

gains attributable to the alienation of real property situated in that State. The paragraph therefore

permits the United States to apply section 897 of the Code to tax gains derived by a resident of

South Africa that are attributable to the alienation of real property situated in the United States
-41-

(as defined in paragraph 2). Gains attributable to the alienation of real property include gain from

any other property that is treated as a real property interest within the meaning of paragraph 2.

Paragraph 2

This paragraph defines the term "real property situated in the other Contracting State."

The term includes real property referred to in Article 6 (Income from Immovable Property (Real

Property)) (i.e., an interest in the real property itself), a "United States real property interest"

(when the United States is the other Contracting State under paragraph 1), and an equivalent

interest in real property situated in South Africa. The United States, thus, preserves the right to

apply its tax under FIRPTA to all real estate gains encompassed by that provision.

Under section 897(c) of the Code the term "United States real property interest" includes

shares in a U.S. corporation that owns sufficient U.S. real property interests to satisfy an assetratio test on certain testing dates. The term also includes certain foreign corporations that have

elected to be treated as US corporations for this purpose. Section 897(i). In applying paragraph

1 the United States will look through distributions made by a REIT. Accordingly, distributions

made by a REIT are taxable under paragraph 1 of Article 13 (not under Article 10 (Dividends))

when they are attributable to gains derived from the alienation of real property.

Paragraph 3

Paragraph 3 of Article 13 deals with the taxation of certain gains from the alienation of

movable property forming part of the business property of a permanent establishment that an

enterprise of a Contracting State has in the other Contracting State or of movable property

pertaining to a fixed base available to a resident of a Contracting State in the other Contracting

State for the purpose of performing independent personal services. This also includes gains from

the alienation of such a permanent establishment (alone or with the whole enterprise) or of such

fixed base. Such gains may be taxed in the State in which the permanent establishment or fixed

base is located.

A resident of South Africa that is a partner in a partnership doing business in the United

States generally will have a permanent establishment in the United States as a result of the

activities of the partnership, assuming that the activities of the partnership rise to the level of a

permanent establishment. Rev. Rul. 91-32, 1991-1 C.B. 107. Further, under paragraph 3, the

United States generally may tax a partner's distributive share of income realized by a partnership

on the disposition of movable property forming part of the business property of the partnership in

the United States.

Paragraph 4

This paragraph limits the taxing jurisdiction of the State of source with respect to gains

from the alienation of ships, aircraft, or containers operated in international traffic or movable
-42-

property pertaining to the operation of such ships, aircraft, or containers. Under paragraph 4

when such income is derived by an enterprise of a Contracting State it is taxable only in that

Contracting State. Notwithstanding paragraph 3, the rules of this paragraph apply even if the

income is attributable to a permanent establishment maintained by the enterprise in the other

Contracting State. This result is consistent with the general rule under Article 8 (Shipping and

Air Transport) that confers exclusive taxing rights over international shipping and air transport

income on the State of residence of the enterprise deriving such income.

Paragraph 5

Paragraph 5 grants to the State of residence of the alienator the exclusive right to tax

gains from the alienation of property other than property referred to in paragraphs 1 through 4.

For example, gain derived from shares, other than shares described in paragraphs 2 or 3, debt

instruments and various financial instruments, may be taxed only in the State of residence of the

alienator, to the extent such income is not otherwise characterized as income taxable under

another article (e.g., Article 10 (Dividends) or Article 11 (Interest)). Similarly, gain derived from

the alienation of tangible personal property, other than tangible personal property described in

paragraph 3, may be taxed only in the State of residence of the alienator. Gain derived from the

alienation of any property, such as a patent or copyright, that produces income taxable under

Article 12 (Royalties) is taxable under Article 12 and not under this article, provided that such

gain is of the type described in paragraph 2(b) of Article 12 (i.e., it is contingent on the

productivity, use, or disposition of the property). Thus, under either article such gain is taxable

only in the State of residence of the alienator. Sales by a resident of a Contracting State of real

property located in a third state are not taxable in the other Contracting State, even if the sale is

attributable to a permanent establishment located in the other Contracting State.

Relation to Other Articles

Notwithstanding the foregoing limitations on taxation of certain gains by the State of

source, the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to

tax its citizens and residents as if the Convention had not come into effect. Thus, any limitation in

this Article on the right of the United States to tax gains does not apply to gains of a U.S. citizen

or resident.

The benefits of this Article are also subject to the provisions of Article 22 (Limitation on

Benefits). Thus, only a resident of a Contracting State that satisfies one of the conditions in

Article 22 is entitled to the benefits of this Article.

Article 14 (Independent Personal Services)
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The Convention deals in separate articles with different classes of income from personal

services. Article 14 deals with the general class of income from independent personal services and

Article 15 deals with the general class of income from dependent personal services. Articles 16

through 20 provide exceptions and additions to these general rules for directors' fees (Article 16);

performance income of entertainers and sportsmen (Article 17); pensions in respect of personal

service income, social security benefits, annuities, alimony, and child support payments (Article

18); government service salaries and pensions (Article 19); and certain income of students and

trainees (Article 20).

Article 14 provides the general rule that an individual who is a resident of a Contracting

State and who derives income from performing professional services or other activities of an

independent character will be taxable on that income only in his State of residence. The income,

however, may be taxed in the other Contracting State if the services are performed there and the

income is attributable to a fixed base that is regularly available to the individual in that other State

for the purpose of performing his services.

There is an additional rule in Article 14, which is not in the U.S. or OECD Models. Under

this provision, if an individual who is a resident of one Contracting State is present in the other

Contracting State for a period or periods aggregating more than 183 days in a 12-month period

beginning or ending in the fiscal year concerned, that individual is treated as having a fixed base

regularly available to him in that State. This rule is consistent with the rule in subparagraph (k) of

paragraph 2 of Article 5 (Permanent Establishment), which deems an enterprise that is furnishing

services to have a permanent establishment in the State where the services are being furnished

under similar circumstances. All income that the individual derives from services performed in

that State will be attributed to that fixed base, if the fixed base is present because of the

application of the 183-day rule.

The 183-day period in this Article is to be measured using the "days of physical presence"

method. Under this method, the days that are counted include any day in which a part of the day

is spent in the host country. (Rev. Rul. 56-24, 1956-1 C.B. 851.) Thus, days that are counted

include the days of arrival and departure; weekends and holidays on which the employee does not

work but is present within the country; vacation days spent in the country before, during or after

the employment period, unless the individual's presence before or after the employment can be

shown to be independent of his presence there for employment purposes; and time during periods

of sickness, training periods, strikes, etc., when the individual is present but not working. If

illness prevented the individual from leaving the country in sufficient time to qualify for the benefit, those days will not count. Also, any part of a day spent in the host country while in transit

between two points outside the host country is not counted. These rules are consistent with the

description of the 183-day period in paragraph 5 of the Commentary to Article 15 in the OECD

Model.

Income derived by persons other than individuals or groups of individuals from the

performance of independent personal services is not covered by Article 14. Such income
-44-

generally would be business profits taxable in accordance with Article 7 (Business Profits). 

Income derived by employees of such persons generally would be taxable in accordance with

Article 15 (Dependent Personal Services).

The term "fixed base" is not defined in the Convention, but its meaning is understood to be

similar, but not identical, to that of the term "permanent establishment," as defined in Article 5

(Permanent Establishment). The term "regularly available" also is not defined in the Convention. 

Whether a fixed base is regularly available to a person will be determined based on all the facts

and circumstances. In general, the term encompasses situations where a fixed base is at the

disposal of the individual whenever he performs services in that State. It is not necessary that the

individual regularly use the fixed base, only that the fixed base be regularly available to him. For

example, a U.S. resident partner in a law firm would be considered to have a fixed base regularly

available to him in South Africa if the law firm had an office there that was available to him

whenever he wished to conduct business in South Africa, regardless of how frequently he

conducted business there. On the other hand, an individual who had no office in South Africa and

occasionally rented a hotel room to serve as a temporary office would not be considered to have a

fixed base regularly available to him, so long as he did not cross the 183-day threshold.

The taxing right conferred by this Article with respect to income from independent

personal services can be more limited than that provided in Article 7 for the taxation of business

profits. In both Articles the income of a resident of one Contracting State must be attributable to

a permanent establishment or fixed base in the other State in order for that other State to have a

taxing right. In Article 14 the income also must be attributable to services performed in that other

State, while Article 7 does not require that all of the income generating activities be performed in

the State where the permanent establishment is located.

The term "professional services or other activities of an independent character" is not

defined. It clearly includes those activities listed in paragraph 2 of Article 14 of the OECD

Model, such as independent scientific, literary, artistic, educational or teaching activities, as well

as the independent activities of physicians, lawyers, engineers, architects, dentists, and

accountants. That list, however, is not exhaustive. The term includes all personal services

performed by an individual for his own account, whether as a sole proprietor or a partner, where

he receives the income and bears the risk of loss arising from the services.

The taxation of income of an individual from those types of independent services which

are covered by Articles 16 through 20 is governed by the provisions of those Articles. For

example, taxation of the income of a corporate director would be governed by Article 16

(Directors' Fees) rather than Article 14.

This Article applies to income derived by a partner resident in the Contracting State that is

attributable to personal services of an independent character performed in the other State through

a partnership that has a fixed base in that other Contracting State. Income which may be taxed

under this Article includes all income attributable to the fixed base in respect of the performance
-45-

of the personal services carried on by the partnership (whether by the partner himself, other

partners in the partnership, or by employees assisting the partners) and any income from activities

ancillary to the performance of those services (for example, charges for facsimile services). 

Income that is not derived from the performance of personal services and that is not ancillary

thereto (for example, rental income from subletting office space), will be governed by other

Articles of the Convention. 

The application of Article 14 to a service partnership may be illustrated by the following

example: a partnership formed in the Contracting State has five partners (who agree to split

profits equally), four of whom are resident and perform personal services only in the Contracting

State at Office A, and one of whom performs personal services from Office B, a fixed base in the

other State. In this case, the four partners of the partnership resident in the Contracting State may

be taxed in the other State in respect of their share of the income attributable to the fixed base,

Office B. The services giving rise to income which may be attributed to the fixed base would

include not only the services performed by the one resident partner, but also, for example, if one

of the four other partners came to the other State and worked on an Office B matter there, the

income in respect of those services also. As noted above, this would be the case regardless of

whether the partner from the Contracting State actually visited or used Office B when performing

services in the other State.

Paragraph 7 of Article 7 (Business Profits) refers to Article 14. That rule clarifies that

income that is attributable to a permanent establishment or a fixed base, but that is deferred and

received after the permanent establishment or fixed base no longer exists, may nevertheless be

taxed by the State in which the permanent establishment or fixed base was located. Thus, under

Article 14, income derived by an individual U.S. resident from services performed in South Africa

and attributable to a fixed base there may be taxed by South Africa even if the income is deferred

and received after there is no longer a fixed base available to the resident in South Africa.

This Article is understood to incorporate the principles of paragraph 3 of Article 7 into

Article 14, although, unlike the U.S. Model, it is not made explicit in this Convention. Thus, all

relevant expenses must be allowed as deductions in computing the net income from services

subject to tax in the Contracting State where the fixed base is located.

Relation to Other Articles

If an individual resident of South Africa who is also a U.S. citizen performs independent

personal services in the United States, the United States may, by virtue of the saving clause of

paragraph 4 of Article 1 (General Scope) tax his income without regard to the restrictions of this

Article, subject to the special foreign tax credit rules of paragraph 2 of Article 23 (Elimination of

Double Taxation).

Article 15 (Dependent Personal Services)
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Article 15 apportions taxing jurisdiction over remuneration derived by a resident of a

Contracting State as an employee between the States of source and residence.

Paragraph 1

The general rule of Article 15 is contained in paragraph 1. Remuneration derived by a

resident of a Contracting State as an employee may be taxed by the State of residence, and the

remuneration also may be taxed by that other Contracting State to the extent derived from

employment exercised (i.e., services performed) in the other Contracting State. Paragraph 1 also

provides that the more specific rules of Articles 16 (Directors' Fees), 18 (Pensions and Annuities),

and 19 (Government Service) apply in the case of employment income described in one of these

articles. Thus, even though the State of source has a right to tax employment income under

Article 15, it may not have the right to tax that income under the Convention if the income is described, e.g., in Article 18 and is not taxable in the State of source under the provisions of that

Article. Because the Article applies to "salaries, wages and other remuneration," rather than to

"other similar remuneration", as in the OECD Model, it is clear that Article 15 applies to any form

of compensation for employment, including payments in kind.

Consistent with section 864(c)(6), Article 15 also applies regardless of the timing of actual

payment for services. Thus, a bonus paid to a resident of a Contracting State with respect to

services performed in the other Contracting State with respect to a particular taxable year would

be subject to Article 15 for that year even if it was paid after the close of the year. Similarly, an

annuity received for services performed in a taxable year would be subject to Article 15 despite

the fact that it was paid in subsequent years. In either case, whether such payments were taxable

in the State where the employment was exercised would depend on whether the tests of paragraph

2 were satisfied. Consequently, a person who receives the right to a future payment in

consideration for services rendered in a Contracting State would be taxable in that State even if

the payment is received at a time when the recipient is a resident of the other Contracting State.

Paragraph 2

Paragraph 2 sets forth an exception to the general rule that employment income may be

taxed in the State where the employment is exercised. Under paragraph 2, the State where the

employment is exercised may not tax the income from the employment if three conditions are

satisfied: (a) the individual is present in the State where the employment is exercised for a period

or periods not exceeding 183 days in any 12-month period that begins or ends during the relevant

fiscal year (i.e., the year in which the services are performed); (b) the remuneration is paid by, or

on behalf of, an employer who is not a resident of the State where the employment is exercised;

and (c) the remuneration is not borne as a deductible expense by a permanent establishment or

fixed base that the employer has in the State where the employment is exercised. In order for the

remuneration to be exempt from tax in the source State, all three conditions must be satisfied.
-47-

The 183-day period in condition (a), like that in Article 14 (Independent Personal

Services), is to be measured using the “days of physical presence" method. (See Explanation to

Article 14 for a description of this method.)

Conditions (b) and (c) are intended to ensure that a Contracting State will not be required

to allow a deduction to the payor for compensation paid and at the same time to exempt the

employee on the amount received. Accordingly, if a foreign person pays the salary of an

employee who is employed in the host State, but a host State corporation or permanent

establishment reimburses the payor with a payment that can be identified as a reimbursement,

neither condition (b) nor (c), as the case may be, will be considered to have been fulfilled.

The reference to remuneration "borne by" a permanent establishment or fixed base is

understood to encompass all expenses that economically are incurred and not merely expenses

that are currently deductible for tax purposes. Accordingly, the expenses referred to include

expenses that are capitalizable as well as those that are currently deductible. Further, salaries paid

by residents that are exempt from income taxation may be considered to be borne by a permanent

establishment or fixed base notwithstanding the fact that the expenses will be neither deductible,

depreciable, nor amortizable since the payor is exempt from tax. 

Paragraph 3

Paragraph 3 contains a special rule applicable to remuneration for services performed by a

resident of a Contracting State as an employee aboard a ship or aircraft operated in international

traffic. Such remuneration may be taxed only in the State of residence of the employee if the

services are performed as a member of the complement of the ship or aircraft. The "complement"

includes the crew. In the case of a cruise ship, for example, it may also include others, such as

entertainers, lecturers, etc., employed by the shipping company to serve on the ship throughout its

voyage. The use of the term "complement" is intended to clarify that a person who exercises his

employment as, for example, an insurance salesman while aboard a ship or aircraft is not covered

by this paragraph. This paragraph is inapplicable to persons dealt with in Article 14 (Independent

Personal Services).

Relation to Other Articles

If a U.S. citizen who is resident in South Africa performs services as an employee in the

United States and meets the conditions of paragraph 2 for source country exemption, he

nevertheless is taxable in the United States by virtue of the saving clause of paragraph 4 of Article

1 (General Scope), subject to the special foreign tax credit rule of paragraph 2 of Article 23

(Elimination of Double Taxation).

Article 16 (Directors' Fees)
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This Article provides that a Contracting State may tax the fees and other remuneration

paid by a company that is a resident of that State for services performed in that State by a resident

of the other Contracting State in his capacity as a director of the company. This rule is an

exception to the more general rules of Article 14 (Independent Personal Services) and Article 15

(Dependent Personal Services). Thus, for example, in determining whether a director's fee paid to

a non-employee director is subject to tax in the country of residence of the corporation, it is not

relevant to establish whether the fee is attributable to a fixed base in that State.

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). 

Thus, if a U.S. citizen who is a resident of South Africa is a director of a U.S. corporation, the

United States may tax his full remuneration regardless of where he performs his services, subject

to the special foreign tax credit rule of paragraph 2 of Article 23 (Elimination of Double

Taxation).

Article 17 (Entertainers and Sportsmen)

This Article deals with the taxation in a Contracting State of entertainers (i.e., performing

artists) and sportsmen resident in the other Contracting State from the performance of their

services as such. The Article applies both to the income of an entertainer or sportsman who

performs services on his own behalf and one who performs services on behalf of another person,

either as an employee of that person, or pursuant to any other arrangement. The rules of this

Article take precedence, in some circumstances, over those of Articles 14 (Independent Personal

Services) and 15 (Dependent Personal Services).

This Article applies only with respect to the income of performing artists and sportsmen. 

Others involved in a performance or athletic event, such as producers, directors, technicians,

managers, coaches, etc., remain subject to the provisions of Articles 14 and 15. In addition,

except as provided in paragraph 2, income earned by legal persons is not covered by Article 17.

Paragraph 1

Paragraph 1 describes the circumstances in which a Contracting State may tax the

performance income of an entertainer or sportsman who is a resident of the other Contracting

State. Under the paragraph, income derived by an individual resident of a Contracting State from

activities as an entertainer or sportsman exercised in the other Contracting State may be taxed in

that other State if the amount of the gross receipts derived by the performer exceeds $7,500 (or

its equivalent in South African rand) for the taxable year. The $7,500 includes expenses

reimbursed to the individual or borne on his behalf. If the gross receipts exceed $7,500, the full

amount, not just the excess, may be taxed in the State of performance.

The OECD Model provides for taxation by the country of performance of the

remuneration of entertainers or sportsmen with no dollar or time threshold. The United States
-49-

introduces the dollar threshold test in its treaties to distinguish between two groups of entertainers

and athletes -- those who are paid relatively large sums of money for very short periods of service,

and who would, therefore, normally be exempt from host country tax under the standard personal

services income rules, and those who earn relatively modest amounts and are, therefore, not easily

distinguishable from those who earn other types of personal service income. The United States

has entered a reservation to the OECD Model on this point.

Tax may be imposed under paragraph 1 even if the performer would have been exempt

from tax under Articles 14 (Independent Personal Services) or 15 (Dependent Personal Services). 

On the other hand, if the performer would be exempt from host-country tax under Article 17, but

would be taxable under either Article 14 or 15, tax may be imposed under either of those Articles. 

Thus, for example, if a performer derives remuneration from his activities in an independent

capacity, and the remuneration is not attributable to a fixed base, he may be taxed by the host

State in accordance with Article 17 if his remuneration exceeds $7,500 annually, despite the fact

that he generally would be exempt from host State taxation under Article 14. However, a

performer who receives less than the $7,500 threshold amount and therefore is not taxable under

Article 17, nevertheless may be subject to tax in the host country under Articles 14 or 15 if the

tests for host-country taxability under those Articles are met. For example, if an entertainer who

is an independent contractor earns $5,000 of income in a State for the calendar year, but the

income is attributable to a fixed base regularly available to him in the State of performance, that

State may tax his income under Article 14.

Since it frequently is not possible to know until year-end whether the income an

entertainer or sportsman derived from a performance in a Contracting State will exceed $7,500,

nothing in the Convention precludes that Contracting State from withholding tax during the year

and refunding after the close of the year if the taxability threshold has not been met.

As explained in paragraph 9 of the OECD Commentaries to Article 17, Article 17 applies

to all income connected with a performance by the entertainer, such as appearance fees, award or

prize money, and a share of the gate receipts. Income derived from a Contracting State by a

performer who is a resident of the other Contracting State from other than actual performance,

such as royalties from record sales and payments for product endorsements, is not covered by this

Article, but by other articles of the Convention, such as Article 12 (Royalties) or Article 14

(Independent Personal Services). For example, if an entertainer receives royalty income from the

sale of live recordings, the royalty income would be exempt from source country tax under Article

12, even if the performance was conducted in the source country, although he could be taxed in

the source country with respect to income from the performance itself under this Article if the

dollar threshold is exceeded.

In determining whether income falls under Article 17 or another article, the controlling

factor will be whether the income in question is predominantly attributable to the performance

itself or other activities or property rights. For instance, a fee paid to a performer for

endorsement of a performance in which the performer will participate would be considered to be
-50-

so closely associated with the performance itself that it normally would fall within Article 17. 

Similarly, a sponsorship fee paid by a business in return for the right to attach its name to the

performance would be so closely associated with the performance that it would fall under Article

17 as well. As indicated in paragraph 9 of the Commentaries to Article 17 of the OECD Model, a

cancellation fee would not be considered to fall within Article 17 but would be dealt with under

Article 7, 14 or 15.

As indicated in paragraph 4 of the Commentaries to Article 17 of the OECD Model,

where an individual fulfills a dual role as performer and non-performer (such as a player-coach or

an actordirector), but his role in one of the two capacities is negligible, the predominant character

of the individual's activities should control the characterization of those activities. In other cases

there should be an apportionment between the performance-related compensation and other

compensation.

Consistently with Article 15 (Dependent Personal Services), Article 17 also applies

regardless of the timing of actual payment for services. Thus, a bonus paid to a resident of a

Contracting State with respect to a performance in the other Contracting State with respect to a

particular taxable year would be subject to Article 17 for that year even if it was paid after the

close of the year.

Paragraph 2

Paragraph 2 is intended to deal with the potential for abuse when a performer's income

does not accrue to the performer himself, but to another person. Foreign performers commonly

perform in the United States as employees of, or under contract with, a company or other person.

The relationship may truly be one of employee and employer, with no abuse of the tax

system either intended or realized. On the other hand, the "employer" may, for example, be a

company established and owned by the performer, which is merely acting as the nominal income

recipient in respect of the remuneration for the performance (a "star company"). The performer

may act as an "employee," receive a modest salary, and arrange to receive the remainder of the

income from his performance in another form or at a later time. In such case, absent the

provisions of paragraph 2, the income arguably could escape host-country tax because the

company earns business profits but has no permanent establishment in that country. The

performer may largely or entirely escape host-country tax by receiving only a small salary in the

year the services are performed, perhaps small enough to place him below the dollar threshold in

paragraph 1. The performer might arrange to receive further payments in a later year, when he is

not subject to host-country tax, perhaps as deferred salary payments, dividends or liquidating

distributions.

Paragraph 2 seeks to prevent this type of abuse while at the same time protecting the

taxpayer’s rights to the benefits of the Convention when there is a legitimate employee-employer

relationship between the performer and the person providing his services. Under paragraph 2,
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when the income accrues to a person other than the performer, and the performer or related

persons participate, directly or indirectly, in the receipts or profits of that other person, the

income may be taxed in the Contracting State where the performer's services are exercised,

without regard to the provisions of the Convention concerning business profits (Article 7) or

independent personal services (Article 14). Thus, even if the "employer" has no permanent

establishment or fixed base in the host country, its income may be subject to tax there under the

provisions of paragraph 2. Taxation under paragraph 2 is on the person providing the services of

the performer. This paragraph does not affect the rules of paragraph 1, which apply to the

performer himself. The income taxable by virtue of paragraph 2 is reduced to the extent of salary

payments to the performer, which fall under paragraph 1.

For purposes of paragraph 2, income is deemed to accrue to another person (i.e., the

person providing the services of the performer) if that other person has control over, or the right

to receive, gross income in respect of the services of the performer. Direct or indirect

participation in the profits of a person may include, but is not limited to, the accrual or receipt of

deferred remuneration, bonuses, fees, dividends, partnership income or other income or

distributions.

Paragraph 2 does not apply if it is established that neither the performer nor any persons

related to the performer participate directly or indirectly in the receipts or profits of the person

providing the services of the performer. Assume, for example, that a circus owned by a U.S.

corporation performs in South Africa, and promoters of the performance in South Africa pay the

circus, which, in turn, pays salaries to the circus performers. The circus is determined to have no

permanent establishment in South Africa. Since the circus performers do not participate in the

profits of the circus, but merely receive their salaries out of the circus’ gross receipts, the circus is

protected by Article 7 and its income is not subject to South African tax. Whether the salaries of

the circus performers are subject to South African tax under this Article depends on whether they

exceed the $7,500 threshold in paragraph 1.

Since pursuant to Article 1 (General Scope) the Convention only applies to persons who

are residents of one of the Contracting States, if the star company is not a resident of one of the

Contracting States then taxation of the income is not affected by Article 17 or any other provision

of the Convention.

Paragraph 3

Paragraph 3 provides an exception to the rules in paragraphs 1 and 2 in the case of a visit

to a Contracting State by a performer who is a resident of the other Contracting State and whose

visit is substantially supported by the public funds of his State of residence or of a political

subdivision or local authority of that State. In the circumstances described, only the State of

residence of the performer may tax his income from performances so supported in the other State. 

This rule is not found in the U.S. or OECD Models.
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Paragraph 4

Paragraph 4 authorizes the Contracting States, through an exchange of diplomatic notes,

to increase the $7,500 threshold referred to in paragraph 1 to reflect economic and monetary

developments. This rule is intended to operate as follows: if, after the Convention has been in

force for some time, inflation rates have been such as to make the $7,500 exemption threshold for

entertainers or athletes unrealistically low in terms of the original objectives intended in setting the

threshold, the Contracting States may agree to a higher threshold without the need for formal

amendment to the treaty and ratification by the Contracting States. This authority can be

exercised, however, only to the extent necessary to restore those original objectives. This

provision can be applied only to the benefit of taxpayers, i.e., only to increase thresholds, not to

reduce them. In the U.S. Model, such a change in monetary thresholds can be accomplished by a

mutual agreement by the competent authorities, and does not require diplomatic notes to be

exchanged between the Contracting States.

Relationship to Other Articles

This Article is subject to the provisions of the saving clause of paragraph 4 of Article 1

(General Scope). Thus, if an entertainer or a sportsman who is resident in South Africa is a

citizen of the United States, the United States may tax all of his income from performances in the

United States without regard to the provisions of this Article, subject, however, to the special

foreign tax credit provisions of paragraph 2 of Article 23 (Elimination of Double Taxation). In

addition, benefits of this Article are subject to the provisions of Article 22 (Limitation on

Benefits).

Article 18 (Pensions and Annuities)

This Article deals with the taxation of private (i.e., non-government service) pensions and

annuities, social security benefits, alimony and child support payments, as well as with the tax

treatment of contributions to, and earnings by, pension plans.

Paragraph 1 - Distributions

Under paragraph 1, pension distributions (and other similar remuneration) in consideration

of past employment from sources within one Contracting State and beneficially owned by a

resident of the other Contracting State may be taxed by the source State to a limited extent. The

State of residence of the beneficiary may also tax the distribution to the extent allowed by the

laws of that State. The Treaty, like the 1996 U.S. Model, makes explicit the fact that the term

"pension distributions and other similar remuneration" includes both periodic and single sum

payments. 
-53-

Where the U.S. is the source State, the tax on the distribution is limited to 15 percent of

the gross amount of the distribution, as long as the distribution is not subject to the penalty for

early withdrawal under section 72(t) of the Code. If the distribution is subject to the early

withdrawal penalty, the reduced treaty tax rate does not apply and the normal Code tax rates

apply.

Where South Africa is the source State, a pro rata amount of a pension distribution

corresponding to the amount of the gross pension distribution from South African sources will be

taxed to a beneficiary who is a U.S. resident. The portion of a pension distribution from an

employer's pension plan for which South Africa is the source State is equal to the total pension

distribution multiplied by a fraction, the numerator of which is the employee's days of service for

the employer in South Africa and the denominator of which is the employee's total days of service

for the employer. This rule applies only if the beneficial owner (i) has been employed in South

Africa for a period or periods aggregating two years or more during the ten year period

immediately preceding the date on which the pension first became due; and (ii) was employed in

South Africa for a period or periods aggregating ten years or more. 

For example, assume that the pension was first due to a U.S. resident from a South

African pension plan on July 1, 1997. From July 1, 1987 through June 30, 1992, the beneficiary

was employed in the United States, and from July 1, 1992 through June 30, 1997, was employed

in South Africa, retiring to the U.S. on July 1, 1997. Although the beneficiary satisfies the two

out of the last ten years test, the aggregated ten years of work in South Africa test is not satisfied. 

In this example only the United States may tax the distributions. If, instead, the beneficiary had

worked in the United States from July 1, 1977 through June 30, 1987, and in South Africa from

July 1, 1987 through June 30, 1997, retiring in the United States on July 1, 1997, both portions of

the test are satisfied. Thus, South Africa may tax half of each distribution to the beneficiary,

because the beneficiary has worked in South Africa for ten out of his twenty years of service for

the employer. In this example, the United States may also tax the entire distribution under the

rules of the Internal Revenue Code. The beneficiary may claim a foreign tax credit for any tax

paid to South Africa on the distribution.

For purposes of this rule, the phrase "the date on which the pension first became due"

refers to the first date on which the participant or beneficiary received a pension payment or, if

earlier, the first date on which the participant or beneficiary could have received a pension

payment if the participant or beneficiary had requested to have payment made at that earlier time.

The following examples illustrate the meaning of the phrase "the date on which the

pension first became due."

Example (1) Individual A works for company B from 1987 to 1997. The company B

pension plan provides that plan participants who work for the company for at least five

years may elect to receive benefits on or after the first day of the month following the

month they retire, provided they have reached age 60. In 1997, A attains age 60. He
-54-

continues to work, however, until December 31, 1998, at which time he retires. The date

on which A’s pension first becomes due is January 1, 1999.

Example (2) The facts are the same as in Example (1), except that A makes an election

under the company B plan to begin receiving benefits on January 1, 2000. As in Example

(1), the date on which the pension first becomes due is January 1, 1999, and is not affected

by A’s voluntary election.

The phrase “pension distributions and other similar remuneration” is intended to

encompass payments made by private retirement plans and arrangements in consideration of past

employment, as well as tier 2 railroad retirement benefits (See 45 U.S.C. 231 et seq.). In the

United States, the plans encompassed by Paragraph 1 include, under current law: qualified plans

under section 401(a), individual retirement plans (including individual retirement plans that are

part of a simplified employee pension plan that satisfies section 408(k), section 408(p) accounts,

and other individual retirement accounts), non-discriminatory section 457 plans, section 403(a)

qualified annuity plans, and section 403(b) plans. In South Africa, qualifying plans are

occupational plans which include pension funds and provident funds.

The competent authorities may agree that distributions from plans not listed above, but

meeting similar criteria, may also qualify for the benefits of Paragraph 1. These criteria are as

follows:

a) The plan must be written;

b) In the case of an employer-maintained plan, the plan must be nondiscriminatory, i.e., it

(alone or in combination with other comparable plans) must cover a wide range of

employees, including rank and file employees, and actually provide significant benefits for

the entire range of covered employees;

c) In the case of an employer-maintained plan the plan must contain provisions that

severely limit the employees’ ability to use plan assets for purposes other than retirement,

and in all cases be subject to tax provisions that discourage participants from using the

assets for purposes other than retirement; and

d) The plan must provide for payment of a reasonable level of benefits at death, a stated

age, or an event related to work status, and otherwise require minimum distributions

under rules designed to ensure that any death benefits provided to the participants’

survivors are merely incidental to the retirement benefits provided to the participants.

Pensions in respect of government service are not covered by this paragraph. They are

covered either by paragraph 2 of this Article, if they are in the form of social security benefits, or

by paragraph 2 of Article 19 (Government Service). Thus, Article 19 covers section 457, 401(a)

and 403(b) plans established for government employees. If a pension in respect of government
-55-

service is not covered by Article 19 solely because the service is rendered in connection with any

trade or business carried on by either state, the pension is covered by this article.

Paragraph 2 - Social Security

The treatment of social security benefits is dealt with in paragraph 2. This paragraph

provides that, notwithstanding the provisions of paragraph 1, payments made by one of the Contracting States under the provisions of its social security or similar legislation to a resident of the

other Contracting State or to a citizen of the United States will be taxable only by the Contracting

State making the payment. This paragraph applies to social security beneficiaries whether they

have contributed to the system as private sector or government employees. 

The phrase "other similar public pensions" is intended to refer to United States tier 1 railroad retirement benefits. The reference to U.S. citizens is necessary to insure that a social

security payment by South Africa to a U.S. citizen who is not resident in the United States will

not be taxable by the United States. 

Paragraph 3 - Annuities

Under paragraph 3, annuities that are derived and beneficially owned by a resident of a

Contracting State are taxable only in that State unless the annuity was purchased in the other

Contracting State while such person was a resident of that other State, in which case the annuity

may also be taxed in that other State. An annuity, as the term is used in this paragraph, means a

stated sum paid periodically at stated times during life or during a specified number of years,

under an obligation to make the payments in return for adequate and full consideration (other than

for services rendered). An annuity received in consideration for services rendered would be

treated as deferred compensation and generally taxable in accordance with Article 14

(Independent Personal Services) or Article 15 (Dependent Personal Services).

Paragraphs 4 and 5 - Alimony and Child Support

Paragraphs 4 and 5 deal with alimony and child support payments. Both alimony, under

paragraph 4, and child support payments, under paragraph 5, are defined as periodic payments

made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or

compulsory support. Paragraph 4 provides that an alimony payment made to a payee who is a

resident of one State by a resident of the other State is taxable only by the State of residence of

the payor and only if the payor may deduct the payment in the State of residence. If the payment

is not deductible by the payor in the State of residence, no tax is levied in either State. 

Paragraph 5 provides that support payments on behalf of a minor child made by a resident

of one State to a resident of the other State are not covered by paragraph 4. If such payments are

not deductible to the payor, they are exempt from tax in both States. In the event that the payor
-56-

is allowed a deduction for a child support payment in his State of residence, the payment would

be taxable to the payee by that State under Article 21 (Other Income). 

Paragraph 6 - Contributions, Earnings and Rollovers

Paragraph 6 provides a limited deferral of income where an individual works in one State

(work State) and participates in a pension plan in the other State (plan State). Paragraph 6 is

intended to prevent certain differences between U.S. and South African law regarding the

treatment of pension contributions, earnings, and transfers from one plan to another from

inhibiting the flow of personal services between the two States.

Paragraph 6 provides three types of benefits in the work State with respect to pension

plans located in the plan State, to the extent such benefits are allowed by the work State with

respect to its own tax favored pension plans: (1) deductions (or exclusions) at the plan

participant and employer level for contributions to a pension plan (subparagraph (a)); (2) deferral

of tax on undistributed earnings realized by the plan (subparagraph (b)); and (3) deferral of tax on

rollovers from the plan State plan to a work State plan (subparagraph (c)).

Subparagraph 6(a) allows the individual a deduction (or exclusion) in computing his

taxable income in the work State for contributions made by or on behalf of the individual to a plan

in the plan State. Subparagraph 6(a) also provides that any benefits accrued under the plan or

payments made to the plan by or on behalf of the individual's plan State employer during that

period will not be treated as part of the individual's work State taxable income and will be allowed

as a deduction in computing the profits of the employer in the work State.

Where the United States is the work State, the exclusion of the individual's contributions

from the individual’s income under this paragraph is limited to elective contributions not in excess

of the amount specified in section 402(g). Deduction of employer contributions is subject to the

limitations of sections 415 and 404. The section 404 limitation on deductions would be calculated

as if the individual were the only individual covered by the plan.

Subparagraph 6(b) provides that income earned by the plan will not be taxable in the work

State until and to the extent that the earnings are distributed. At such time, the provisions of

paragraph 1 would apply to the distributions.

Subparagraph 6(c) permits the individual to withdraw funds from the plan in the plan State

for the purpose of rolling over the amounts to a plan established in the work State without being

subjected to tax currently in the work State with respect to such amounts. This benefit is subject

to any restrictions on rollovers under the laws of the work State. For instance, in the United

States a rollover ordinarily must be made within 60 days of the withdrawal from the first plan

under section 408(d)(3)(A)(i) and section 402(c). For purposes of maintaining the tax-exempt

status of a U.S. pension arrangement receiving rolled-over amounts, the assets received will be

treated as assets rolled over from a qualified plan.
-57-

The benefits of this paragraph are allowed to an individual who is present in the work

State to perform either dependent or independent personal services. Subparagraph 6(d) provides

that the individual can receive the benefits of this paragraph only if he was contributing to the plan

in the plan State, or to a plan that was replaced by the plan to which he is contributing, before

coming to the work State. The allowance of a successor plan would apply if, for example, the

employer has been taken over by another corporation that replaces the existing plan with its own

plan, rolling membership in the old plan over into the new plan. 

In addition, the work State competent authority must determine that the recognized plan

to which a contribution is made in the plan State generally corresponds to a pension plan

recognized for tax purposes in the work State. It is understood that United States plans eligible

for the benefits of paragraph 6 include qualified plans under section 401(a), individual retirement

plans (including individual retirement plans that are part of a simplified employee pension plan that

satisfies section 408(k), section 408(p) accounts, and other individual retirement accounts),

section 403(a) qualified annuity plans, and section 403(b) plans. This list is narrower than the

similar list provided under paragraph 1. This is because in the U.S. most non-qualified plans are

not eligible for deductions of contributions by the employer and/or the participant. 

Finally, the benefits under this paragraph are limited to the benefits that the work State

accords to the work State plan most similar to that in the plan State, even if the plan State would

have afforded greater benefits under its law. Thus, for example, if the work State has a cap on

contributions equal to, say, five percent of the remuneration, and the plan State has a seven

percent cap, the deduction is limited to five percent, even though the individual would have been

allowed the larger deduction had he remained in the plan State.

Paragraph 7 - Source

For purposes of the Treaty, the source of pension distributions, including distributions

attributable to both contributions and earnings, is determined with reference to the place at which

the services creditable under the pension arrangement are performed. For example, if a U.S.

citizen works only in South Africa for a U.S. corporation with a U.S. pension plan, the

distributions received by the U.S. citizen upon retirement will be completely foreign source,

including the portion of the distributions attributable to earnings within the U.S. pension plan.

Relationship to other Articles

Pensions in respect of government service are generally covered by paragraph 2 of Article

19 (Government Service), and not by this Article. Exceptions to this rule are pensions in respect

of government service in the form of social security benefits, which are covered by paragraph 2 of

this Article. Thus, Article 19 covers section 457, 401(a) and 403(b) plans established for

government employees. However, if a pension in respect of government service is not covered by

Article 19 solely because the service is renedered in connection with any trade or business carried

on by either State, the pension is covered by this article. 
-58-

Paragraphs 1 and 3 of Article 18 are subject to the saving clause of paragraph 4 of Article

1 (General Scope). Thus, for example, a U.S. citizen who is a resident of South Africa, and

receives a pension distribution from the United States, may be subject to full U.S. tax at graduated

rates on the distribution, notwithstanding the rule in paragraph 1 that limits U.S. taxation of the

distribution to 15 percent of the gross amount. Similarly, a U.S. citizen who is a resident of

South Africa may be subject to U.S. tax on U.S. source annuities notwithstanding the fact that the

annuity was purchased while the U.S. citizen was a resident of South Africa. Paragraphs 2, 4, 5,

6 and 7 are excepted from the saving clause by virtue of paragraph 5(a) of Article 1. Thus, the

United States will allow U.S. citizens and residents the benefits of paragraphs 2, 4, 5, 6 and 7. 

Article 19 (Government Service)

Paragraph 1 of Article 19 deals with the taxation of remuneration for services rendered to

the Government of a Contracting State, including political subdivisions and local authorities of

those States, in connection with Governmental activities. The paragraph applies both to

government employees and to independent contractors engaged by governments to perform

services for them. Paragraph 2 deals with the taxation of pensions in respect of the services

referred to in paragraph 1.

Paragraph 1

Subparagraph (a) provides that remuneration paid by, or out of funds created by one of

the States or its political subdivisions or local authorities to an individual who is rendering

services to that State, political subdivision or local authority is exempt from tax by the other

State. Paragraph 3 makes clear that the services dealt with in paragraph 1 must be rendered in the

discharge of governmental functions.

Subparagraph (b) provides an exception to the rule in subparagraph (a). Under this

subparagraph, such payments are taxable exclusively in the other State (i.e., the host State) if the

services are rendered in that other State and the individual is a resident of that State who is either

a national of that State or a person who did not become resident of that State solely for purposes

of rendering the services. For example, if the U.S. Embassy in Pretoria hires a South African

citizen, or a South African resident who was already resident there before applying for the

position in the Embassy, the salary that the person receives from the U.S. Embassy will be subject

to tax only in South Africa.

The use of the phrase "paid by, or out of funds created by, a Contracting State" is

intended to clarify that remuneration and pensions paid by such entities as government-owned

corporations are covered by the Article, as long as the other conditions of the Article are satisfied.

Paragraph 2
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Paragraph 2 deals with the taxation of a pension paid by, or out of funds created by, one

of the States or a political subdivision or a local authority thereof to an individual in respect of

services rendered to that State or subdivision or authority (i.e., the services dealt with in

paragraph 1). Subparagraph (a) provides that such a pension is taxable only in that State. 

Subparagraph (b) provides an exception under which such a pension is taxable only in the other

State if the individual is a resident of, and a national of, that other State. Pensions paid to retired

civilian and military employees of a Government of either State are intended to be covered under

paragraph 2. When benefits paid by a State in respect of services rendered to that State or a

subdivision or authority are in the form of social security benefits, however, those payments are

covered by paragraph 2 of Article 18 (Pensions and Annuities). The result will usually be the

same whether Article 18 or 19 applies, since social security benefits are taxable exclusively by the

source country and so, as a general matter, are government pensions. The result will differ only

when the payment is made to a citizen and resident of the other Contracting State, who is not also

a citizen of the paying State. In such a case, social security benefits continue to be taxable at

source while government pensions become taxable only in the residence country.

Paragraph 3

Paragraph 3 provides that payments in respect of services rendered in connection with a

trade or business carried on by a Contracting State, or a political subdivision or local authority of

that State are not covered by Article 19. This applies both to remuneration for services and to

pensions. This is analogous to the language in the U.S. Model that limits the application of

Article 19 to services rendered "in the discharge of functions of a governmental nature." This is

understood to encompass functions traditionally carried on by a government. It would not include

functions that commonly are found in the private sector (e.g., air transport, utilities). Rather, it is

limited to functions that generally are carried on solely by the government (e.g., military,

diplomatic service, tax administrators) and activities that directly support the carrying out of those

functions.

The remuneration that is carved out of coverage of Article 19 by the provisions of

paragraph 3 is subject to the provisions of Articles 14 (Independent Personal Services), 15

(Dependent Personal Services), 16 (Directors’ Fees), 17 (Entertainers and Sportsmen) or 18

(Pensions and Annuities). Thus, if a local government sponsors a basketball team in an

international tournament, and pays the athletes from public funds, the compensation of the players

is covered by Article 17 and not Article 19, because the athletes are not engaging in a

governmental function when they play basketball.

Relation to other Articles

Under paragraph 5(b) of Article 1 (General Scope), the saving clause (paragraph 4 of

Article 1) does not apply to the benefits conferred by the United States under Article 19 if the

recipient of the benefits is neither a citizen of the United States, nor a person who has been

admitted for permanent residence there (i.e., a "green card" holder). Thus, a South African
-60-

resident who in the course of performing functions of a governmental nature for South Africa

becomes a resident of the United States (but not a permanent resident), would be entitled to the

benefits of this Article. Similarly, an individual who receives a pension paid by the Government of

South Africa in respect of services rendered to that Government is taxable on that pension only in

South Africa unless the individual is a U.S. citizen or acquires a U.S. green card.

Article 20 (Students, Apprentices and Business Trainees)

This Article provides rules for host-country taxation of visiting students, apprentices or

business trainees. Persons who meet the tests of the Article will be exempt from tax in the State

that they are visiting with respect to designated classes of income. Several conditions must be

satisfied in order for an individual to be entitled to the benefits of this Article.

First, the visitor must have been, either at the time of his arrival in the host State or

immediately before, a resident of the other Contracting State.

Second, the purpose of the visit must be the full-time education or training of the visitor. 

Thus, if the visitor comes principally to work in the host State but also is a part-time student, he

would not be entitled to the benefits of this Article, even with respect to any payments he may

receive from abroad for his maintenance or education, and regardless of whether or not he is in a

degree program. Whether a student is to be considered full-time will be determined by the rules

of the educational institution at which he is studying. Similarly, a person who visits the host State

for the purpose of obtaining business training and who also receives a salary from his hostcountry

employer for providing services would not be considered a trainee and would not be entitled to

the benefits of this Article.

The host-country exemption in the Article applies only to payments received by the

student, apprentice or business trainee for the purpose of his maintenance, education or training

that arise outside the host State. A payment will be considered to arise outside the host State if

the payor is located outside the host State. Thus, if an employer from South Africa sends an

employee to the United States for training, the payments the trainee receives from abroad from his

employer for his maintenance or training while he is present in the United States will be exempt

from United States tax. In all cases substance over form will prevail in determining the identity of

the payor. Consequently, payments made directly or indirectly by the U.S. person with whom the

visitor is training, but which have been routed through a non-U.S. source, such as, for example, a

foreign bank account, would not be treated as arising outside the United States for this purpose. 

Moreover, if a U.S. person reimbursed a foreign person for payments by the foreign person to the

visitor, the payments by the foreign person would not be treated as arising outside the United

States.

In the case of an apprentice or business trainee, the benefits of the Article will extend only

for a period of one year from the time that the visitor first arrives in the host country. If,
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however, an apprentice or trainee remains in the host country for a second year, thus losing the

benefits of the Article, he would not retroactively lose the benefits of the Article for the first year.

The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to this

Article with respect to an individual who is neither a citizen of the United States nor has been

admitted for permanent residence there. The saving clause, however, does apply with respect to

U.S. citizens and permanent residents. Thus, a U.S. citizen who is a resident of South Africa and

who visits the United States as a full-time student at an accredited university will not be exempt

from U.S. tax on remittances from abroad that otherwise constitute U.S. taxable income. A

person, however, who is not a U.S. citizen, and who visits the United States as a student and

remains long enough to become a resident under U.S. law, but does not become a permanent

resident (i.e., does not acquire a green card), will be entitled to the full benefits of the Article.

Article 21 (Other Income)

Article 21 generally assigns taxing jurisdiction over income not dealt with in the other

articles (Articles 6 through 20) of the Convention to the State of residence of the beneficial owner

of the income and defines the terms necessary to apply the article. An item of income is "dealt

with" in another article if it is the type of income described in the article and it has its source in a

Contracting State. For example, all royalty income that arises in a Contracting State and that is

beneficially owned by a resident of the other Contracting State is "dealt with" in Article 12

(Royalties).

Examples of items of income covered by Article 21 include income from gambling,

punitive (but not compensatory) damages, covenants not to compete, and certain income from

financial instruments to the extent derived by persons not engaged in the trade or business of

dealing in such instruments (unless the transaction giving rise to the income is related to a trade or

business, in which case it is dealt with under Article 7 (Business Profits)). The Article also applies

to items of income that are not dealt with in the other articles because of their source or some

other characteristic. For example, Article 11 (Interest) addresses only the taxation of interest

arising in a Contracting State. Interest arising in a third State that is not attributable to a

permanent establishment, therefore, is subject to Article 21.

Distributions from partnerships and distributions from trusts are not generally dealt with

under Article 21 because partnership and trust distributions generally do not constitute income. 

Under the Code, partners include in income their distributive share of partnership income

annually, and partnership distributions themselves generally do not give rise to income. Also,

under the Code, trust income and distributions have the character of the associated distributable

net income and therefore would generally be covered by another article of the Convention. See

Code section 641 et seq.

Paragraph 1
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The general rule of Article 21 is contained in paragraph 1. Items of income not dealt with

in other articles and beneficially owned by a resident of a Contracting State will be taxable only in

the State of residence. This exclusive right of taxation applies whether or not the residence State

exercises its right to tax the income covered by the Article.

The reference to "items of income beneficially owned by a resident of a Contracting State"

is intended to make clear that the exclusive residence taxation provided by paragraph 1 applies

only when a resident of a Contracting State is the beneficial owner of the income. Thus, source

taxation of income not dealt with in other articles of the Convention is not limited by paragraph 1

if it is nominally paid to a resident of the other Contracting State, but is beneficially owned by a

resident of a third State.

Paragraph 2

This paragraph provides an exception to the general rule of paragraph 1 for income, other

than income from real property, that is attributable to a permanent establishment or fixed base

maintained in a Contracting State by a resident of the other Contracting State. The taxation of

such income is governed by the provisions of Articles 7 (Business Profits) and 14 (Independent

Personal Services). Therefore, income arising outside the United States that is attributable to a

permanent establishment maintained in the United States by a resident of South Africa generally

would be taxable by the United States under the provisions of Article 7. This would be true even

if the income is sourced in a third State.

There is an exception to this general rule with respect to income a resident of a

Contracting State derives from real property located outside the other Contracting State (whether

in the first-mentioned Contracting State or in a third State) that is attributable to the resident's

permanent establishment or fixed base in the other Contracting State. In such a case, only the

first-mentioned Contracting State (i.e., the State of residence of the person deriving the income)

and not the host State of the permanent establishment or fixed base may tax that income. This

special rule for foreign-situs property is consistent with the general rule, also reflected in Article 6

(Income from Immovable Property (Real Property)), that only the situs and residence States may

tax real property and real property income. Even if such property is part of the property of a

permanent establishment or fixed base in a Contracting State, that State may not tax it if neither

the situs of the property nor the residence of the owner is in that State.

Relation to Other Articles

This Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). 

Thus, the United States may tax the income of a resident of South Africa that is not dealt with

elsewhere in the Convention, if that resident is a citizen of the United States. The Article is also

subject to the provisions of Article 22 (Limitation on Benefits). Thus, if a resident of South

Africa earns income that falls within the scope of paragraph 1 of Article 21, but that is taxable by

the United States under U.S. law, the income would be exempt from U.S. tax under the
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provisions of Article 21 only if the resident satisfies one of the tests of Article 22 for entitlement

to benefits.

Article 22 (Limitation on Benefits)

Purpose of Limitation on Benefits Provisions

The United States views an income tax treaty as a vehicle for providing treaty benefits to

residents of the two Contracting States. This statement begs the question of who is to be treated

as a resident of a Contracting State for the purpose of being granted treaty benefits. The

Commentaries to the OECD Model authorize a tax authority to deny benefits, under substanceoverform principles, to a nominee in one State deriving income from the other on behalf of a

third-country resident. In addition, although the text of the OECD Model does not contain

express anti-abuse provisions, the Commentaries to Article 1 contain an extensive discussion

approving the use of such provisions in tax treaties in order to limit the ability of third state

residents to obtain treaty benefits. The United States holds strongly to the view that tax treaties

should include provisions that specifically prevent misuse of treaties by residents of third

countries. Consequently, all recent U.S. income tax treaties contain comprehensive Limitation on

Benefits provisions.

A treaty that provides treaty benefits to any resident of a Contracting State permits "treaty

shopping": the use, by residents of third states, of legal entities established in a Contracting State

with a principal purpose to obtain the benefits of a tax treaty between the United States and the

other Contracting State. It is important to note that this definition of treaty shopping does not

encompass every case in which a third state resident establishes an entity in a U.S. treaty partner,

and that entity enjoys treaty benefits to which the third state resident would not itself be entitled. 

If the third country resident had substantial reasons for establishing the structure that were

unrelated to obtaining treaty benefits, the structure would not fall within the definition of treaty

shopping set forth above.

Of course, the fundamental problem presented by this approach is that it is based on the

taxpayer's intent, which a tax administrator is normally ill-equipped to identify. In order to avoid

the necessity of making this subjective determination, Article 22 sets forth a series of objective

tests. The assumption underlying each of these tests is that a taxpayer that satisfies the

requirements of any of the tests probably has a real business purpose for the structure it has

adopted, or has a sufficiently strong nexus to the other Contracting State (e.g., a resident

individual) to warrant benefits even in the absence of a business connection, and that this business

purpose or connection is sufficient to justify the conclusion that obtaining the benefits of the

Treaty is not a principal purpose of establishing or maintaining residence.

For instance, the assumption underlying the active trade or business test under paragraph 3

is that a third country resident that establishes a "substantial" operation in the other State and that
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derives income from a similar activity in the United States would not do so primarily to avail itself

of the benefits of the Treaty; it is presumed in such a case that the investor had a valid business

purpose for investing in the other State, and that the link between that trade or business and the

U.S. activity that generates the treaty-benefitted income manifests a business purpose for placing

the U.S. investments in the entity in the other State. It is considered unlikely that the investor

would incur the expense of establishing a substantial trade or business in the other State simply to

obtain the benefits of the Convention. A similar rationale underlies the other tests in Article 22.

While these tests provide useful surrogates for identifying actual intent, these mechanical

tests cannot account for every case in which the taxpayer was not treaty shopping. Accordingly,

Article 22 also includes a provision (paragraph 4) authorizing the competent authority of a

Contracting State to grant benefits. While an analysis under paragraph 4 may well differ from that

under one of the other tests of Article 22, its objective is the same: to identify investors whose

residence in the other State can be justified by factors other than a purpose to derive treaty

benefits.

Article 22 and the anti-abuse provisions of domestic law complement each other, as

Article 22 effectively determines whether an entity has a sufficient nexus to the Contracting State

to be treated as a resident for treaty purposes, while domestic anti-abuse provisions (e.g., business

purpose, substance-overform, step transaction or conduit principles) determine whether a

particular transaction should be recast in accordance with its substance. Thus, internal law

principles of the source State may be applied to identify the beneficial owner of an item of income,

and Article 22 then will be applied to the beneficial owner to determine if that person is entitled to

the benefits of the Convention with respect to such income.

Structure of the Article

The structure of Article 22 is as follows: Paragraph 1 states the general rule that residents

are entitled to benefits otherwise accorded to residents only to the extent provided in the Article. 

Paragraph 2 lists a series of attributes of a resident of a Contracting State, the presence of any one

of which will entitle that person to all the benefits of the Convention. Paragraph 3 provides that,

with respect to a person not entitled to benefits under paragraph 2, benefits nonetheless may be

granted to that person with regard to certain types of income. Paragraph 4 provides that benefits

also may be granted if the competent authority of the State from which benefits are claimed

determines that it is appropriate to provide benefits in that case. Paragraph 5 defines the term

"recognized stock exchange,” as used in paragraph 2(c). Paragraph 6 deals with the so-called

"triangular case", under which U.S.-source income of a South African resident is attributable to a

permanent establishment of that resident in a third jurisdiction, and is exempt from tax in South

Africa.

Paragraph 1
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Paragraph 1 provides that a resident of a Contracting State will be entitled to the benefits

otherwise accorded to residents of a Contracting State under the Convention only to the extent

provided in the Article. The benefits otherwise accorded to residents under the Convention

include all limitations on sourcebased taxation under Articles 6 through 21, the treaty-based relief

from double taxation provided by Article 23 (Elimination of Double Taxation), and the protection

afforded to residents of a Contracting State under Article 24 (Non-Discrimination). Some

provisions do not require that a person be a resident in order to enjoy the benefits of those

provisions. These include paragraph 1 of Article 24 (Non-Discrimination), Article 25 (Mutual

Agreement Procedure), and Article 27 (Diplomatic Agents and Consular Officers). Article 22

accordingly does not limit the availability of the benefits of these provisions.

Paragraph 2

Paragraph 2 has seven subparagraphs, each of which describes a category of residents that

are entitled to all benefits of the Convention.

Individuals -- Subparagraph 2(a)

Subparagraph a) provides that individual residents of a Contracting State will be entitled

to all treaty benefits. If such an individual receives income as a nominee on behalf of a third

country resident, benefits may be denied under the respective articles of the Convention by the

requirement that the beneficial owner of the income be a resident of a Contracting State.

Governmental Entities -- Subparagraph 2(b)

Subparagraph b) provides that the Contracting States, and their political subdivisions and

local authorities also will be entitled to all benefits of the Convention.

Publicly-Traded Corporations -- Subparagraph 2(c)(i)

Subparagraph c) applies to two categories of corporations: publicly-traded corporations

and subsidiaries of publicly-traded corporations. Clause i) of subparagraph 2(c) provides that a

company will be entitled to all the benefits of the Convention if all the shares in the class or classes

of shares that represent more than 50 percent of the voting power and value of the company are

regularly traded on a "recognized stock exchange” located in either State. The term "recognized

stock exchange” is defined in paragraph 5. By stating that "all of the shares" in the principal class

or classes of shares must be regularly traded on a recognized stock exchange, the subparagraph

makes clear that all shares in the principal class or classes of shares (as opposed to only a portion

of such shares) must satisfy the requirements of this subparagraph.

If a company has only one class of shares, it is only necessary to consider whether the

shares of that class are regularly traded on a recognized stock exchange. If the company has more

than one class of shares, it is necessary as an initial matter to determine whether one of the classes
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accounts for more than half of the voting power and value of the company. If so, then only those

shares are considered for purposes of the regular trading requirement. If no single class of shares

accounts for more than half of the company's voting power and value, it is necessary to identify a

group of two or more classes of the company's shares that account for more than half of the

company's voting power and value, and then to determine whether each class of shares in this

group satisfies the regular trading requirement. Although in a particular case involving a company

with several classes of shares it is conceivable that more than one group of classes could be

identified that account for more than 50% of the shares, it is only necessary for one such group to

satisfy the requirements of this subparagraph in order for the company to be entitled to benefits. 

Benefits would not be denied to the company even if a second, non-qualifying, group of shares

with more than half of the company's voting power and value could be identified.

The term "regularly traded" is not defined in the Convention. In accordance with

paragraph 2 of Article 3 (General Definitions), this term will be defined by reference to the

domestic tax laws of the State from which treaty benefits are sought, generally the source State. 

In the case of the United States, this term is understood to have the meaning it has under Treas. 

Reg. section 1.884-5(d)(4)(i)(B), relating to the branch tax provisions of the Code. Under these

regulations, a class of shares is considered to be "regularly traded" if two requirements are met:

trades in the class of shares are made in more than de minimis quantities on at least 60 days during

the taxable year, and the aggregate number of shares in the class traded during the year is at least

10 percent of the average number of shares outstanding during the year. Sections 1.884-

5(d)(4)(i)(A), (ii) and (iii) will not be taken into account for purposes of defining the term

"regularly traded" under the Convention. Authorized but unissued shares are not considered for

purposes of this test.

As described more fully below, the regular trading requirement can be met by trading on

any recognized exchange or exchanges located in either State or, if the competent authorities so

agree, in a third State. Trading on one or more recognized stock exchanges may be aggregated

for purposes of this requirement. Thus, a U.S. company could satisfy the regularly traded

requirement through trading, in whole or in part, on a recognized stock exchange located in South

Africa.

Subsidiaries of Publicly-Traded Corporations -- Subparagraph 2(c)(ii)

Clause (ii) of subparagraph 2(c) provides a test under which certain companies that are

directly or indirectly controlled by companies satisfying the publicly-traded test of subparagraph

2(c)(i) may be entitled to the benefits of the Convention. Under this test, a company will be

entitled to the benefits of the Convention if 50 percent or more of each class of shares in the

company is directly or indirectly owned by companies that are described in subparagraph 2(c)(i).

This test differs from that under subparagraph 2(c)(i) in that 50 percent of each class of

the company's shares, not merely the class or classes accounting for more than 50 percent of the

company's votes and value, must be held by publicly-traded companies described in subparagraph
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2(c)(i). Thus, the test under subparagraph 2(c)(ii) considers the ownership of every class of

shares outstanding, while the test under subparagraph 2(c)(i) only considers those classes that

account for a majority of the company's voting power and value.

Clause (ii) permits indirect ownership. Consequently, the ownership by publicly-traded

companies described in clause (i) need not be direct. However, any intermediate owners in the

chain of ownership must themselves be entitled to benefits under paragraph 2.

Tax Exempt Organizations -- Subparagraph 2(d)

Subparagraph 2(d) provides that certain tax exempt organizations will be entitled to all the

benefits of the Convention. These entities are entities that generally are exempt from tax in their

State of residence and that are organized and operated exclusively to fulfill religious, educational,

scientific and other charitable purposes.

Pension Funds -- Subparagraph 2(e)

Subparagraph 2(e) provides that tax-exempt entities that provide pension and other

benefits to employees pursuant to a plan will be entitled to all the benefits of the Convention, as

long as more than half of the beneficiaries, members or participants of the organization are

individual residents of either Contracting State. For purposes of this provision, the term

"beneficiaries, members or participants" should be understood to refer to the persons receiving

benefits from the organization.

Ownership/Base Erosion -- Subparagraph 2(f)

Subparagraph 2(f) provides a two part test, the so-called ownership and base erosion test. 

This test applies to any form of legal entity, other than a trust, which is dealt with in subparagraph

(g), that is a resident of a Contracting State. Both prongs of the test must be satisfied for the

resident to be entitled to benefits under subparagraph 2(f).

The ownership prong of the test, under clause i), requires that 50 percent or more of each

class of beneficial interests in the person (in the case of a corporation, 50 percent or more of each

class of its shares) be owned on at least half the days of the person's taxable year by persons who

are themselves entitled to benefits under other tests of paragraph 2 (i.e., subparagraphs a), b), c),

d), or e)). The ownership may be indirect through other persons themselves entitled to benefits

under paragraph 2.

The base erosion prong of the test under subparagraph 2(f) requires that less than 50

percent of the person's gross income for the taxable year be paid or accrued, directly or indirectly,

to non-residents of either State (unless income is attributable to a permanent establishment located

in either Contracting State), in the form of payments that are deductible for tax purposes in the

entity’s State of residence. Depreciation and amortization deductions, which are not "payments,"
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are disregarded for this purpose. The purpose of this provision is to determine whether the

income derived from the source State is in fact subject to the tax regime of either State. 

Consequently, payments to any resident of either State, as well as payments that are attributable

to permanent establishments in either State, are not considered base eroding payments for this

purpose.

The term “gross income”, is not defined in the Convention. Thus, in accordance with

paragraph 2 of Article 3 (General Definitions), in determining whether a person deriving income

from United States sources is entitled to the benefits of the Convention, the United States will

ascribe the meaning to the term that it has in the United States. In such cases, "gross income" will

be defined as gross receipts less cost of goods sold.

It is intended that the provisions of paragraph 2 will be self executing. Unlike the

provisions of paragraph 4, discussed below, claiming benefits under paragraph 2 does not require

advance competent authority ruling or approval. The tax authorities may, of course, on review,

determine that the taxpayer has improperly interpreted the paragraph and is not entitled to the

benefits claimed.

Trusts - Ownership/Base Erosion -- Subparagraph 2(g)

This subparagraph applies ownership/base erosion rules, similar to those in subparagraph

(f), to trusts. The base erosion rule in subparagraph (g)(ii) is the same as that in subparagraph

(f)(ii). Trusts are, however, subject to a more stringent ownership rule in subparagraph (g)(i) than

the rule applied under subparagraph (f)(i). Trusts are entitled to benefits under this provision if

they are treated as residents under Article 4 (Residence) and they otherwise satisfy the

requirements of this subparagraph.

The ownership rule in subparagraph (g)(i) requires that 80 percent or more of the

aggregate beneficial interests in the trust be owned on at least 274 days of the taxable year by

persons who are themselves entitled to benefits under the other tests of paragraph 2 (i.e.,

subparagraphs (a), (b), (c), (d), (e) or (f)). The ownership may be indirect through other persons

themselves entitled to benefits under paragraph 2.

For purposes of this subparagraph, the beneficial interests in a trust will be considered to

be owned by its beneficiaries in proportion to each beneficiary's actuarial interest in the trust. The

interest of a remainder beneficiary will be equal to 100 percent less the aggregate percentages held

by income beneficiaries. A beneficiary's interest in a trust will not be considered to be owned by a

person entitled to benefits under the other provisions of paragraph 2 if it is not possible to

determine the beneficiary's actuarial interest. Consequently, if it is not possible to determine the

actuarial interest of any beneficiaries in a trust, the ownership test under clause i) cannot be

satisfied, unless all beneficiaries are persons entitled to benefits under the other subparagraphs of

paragraph 2
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The trust base erosion test in subparagraph (g)(ii) is the same as that applied to other

entities in subparagraph (f)(ii). For purposes of this subparagraph, trust distributions would be

considered deductible payments to the extent they are deductible from the taxable base.

Paragraph 3

Paragraph 3 sets forth a test under which a resident of a Contracting State that is not

generally entitled to benefits of the Convention under paragraph 2 may receive treaty benefits with

respect to certain items of income that are connected to an active trade or business conducted in

its State of residence.

Subparagraph 3(a) sets forth a three-pronged test that must be satisfied in order for a

resident of a Contracting State to be entitled to the benefits of the Convention with respect to a

particular item of income. First, the resident must be engaged in the active conduct of a trade of

business in its State of residence. Second, the income derived from the other State must be

derived in connection with, or be incidental to, that trade or business. Third, the trade or business

must be substantial in relation to the activity in the other State that generated the item of income. 

These determinations are made separately for each item of income derived from the other State. 

It therefore is possible that a person would be entitled to the benefits of the Convention with

respect to one item of income but not with respect to another. If a resident of a Contracting State

is entitled to treaty benefits with respect to a particular item of income under paragraph 3, the

resident is entitled to all benefits of the Convention insofar as they affect the taxation of that item

of income in the other State. Set forth below is a discussion of each of the three prongs of the

test under paragraph 3.

Trade or Business -- Subparagraphs 3(a)(i) and (b)

The term "trade or business" is not defined in the Convention. Pursuant to paragraph 2 of

Article 3 (General Definitions), when determining whether a resident of South Africa is entitled to

the benefits of the Convention under paragraph 3 with respect to income derived from U.S.

sources, the United States will ascribe to this term the meaning that it has under the law of the

United States. Accordingly, the United States competent authority will refer to the regulations

issued under section 367(a) for the definition of the term "trade or business." In general,

therefore, a trade or business will be considered to be a specific unified group of activities that

constitute or could constitute an independent economic enterprise carried on for profit. 

Furthermore, a corporation generally will be considered to carry on a trade or business only if the

officers and employees of the corporation conduct substantial managerial and operational

activities. See Code section 367(a)(3) and the regulations thereunder.

Notwithstanding this general definition of trade or business, subparagraph 3(b) provides

that the business of making or managing investments will be considered to be a trade or business

only when part of banking, insurance or securities activities conducted by a bank, insurance
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company, or registered securities dealer. Conversely, such activities conducted by a person other

than a bank, insurance company or registered securities dealer will not be considered to be the

conduct of an active trade or business, nor would they be considered to be the conduct of an

active trade or business if conducted by a bank, insurance company or securities dealer, but not as

part of the company's banking, insurance or securities business.

Because a headquarters operation is in the business of managing investments, a company

that functions solely as a headquarters company will not be considered to be engaged in an active

trade or business for purposes of paragraph 3.

Derived in Connection With Requirement - Subparagraphs 3(a)(ii) and (d)

Subparagraph 3(d) provides that income is derived in connection with a trade or business

if the income-producing activity in the other State is a line of business that forms a part of or is

complementary to the trade or business conducted in the State of residence by the income

recipient. Although no definition of the terms "forms a part of" or "complementary" is set forth in

the Convention, it is intended that a business activity generally will be considered to "form a part

of" a business activity conducted in the other State if the two activities involve the design,

manufacture or sale of the same products or type of products, or the provision of similar services. 

In order for two activities to be considered to be "complementary," the activities need not relate

to the same types of products or services, but they should be part of the same overall industry and

be related in the sense that the success or failure of one activity will tend to result in success or

failure for the other. In cases in which more than one trade or business is conducted in the other

State and only one of the trades or businesses forms a part of or is complementary to a trade or

business conducted in the State of residence, it is necessary to identify the trade or business to

which an item of income is attributable. Royalties generally will be considered to be derived in

connection with the trade or business to which the underlying intangible property is attributable. 

Dividends will be deemed to be derived first out of earnings and profits of the treaty-benefitted

trade or business, and then out of other earnings and profits. Interest income may be allocated

under any reasonable method consistently applied. A method that conforms to U.S. principles for

expense allocation will be considered a reasonable method. The following examples illustrate the

application of subparagraph 3(d).

Example 1. USCo is a corporation resident in the United States. USCo is engaged in an

active manufacturing business in the United States. USCo owns 100 percent of the shares

of SACo, a corporation resident in South Africa. SACo distributes USCo products in

South Africa. Since the business activities conducted by the two corporations involve the

same products, SACo’s distribution business is considered to form a part of USCo’s

manufacturing business within the meaning of subparagraph 3(d).

Example 2. The facts are the same as in Example 1, except that USCo does not

manufacture. Rather, USCo operates a large research and development facility in the

United States that licenses intellectual property to affiliates worldwide, including SACo. 
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SACo and other USCo affiliates then manufacture and market the USCo-designed

products in their respective markets. Since the activities conducted by SACo and USCo

involve the same product lines, these activities are considered to form a part of the same

trade or business.

Example 3. Americair is a corporation resident in the United States that operates an

international airline. SASub is a wholly-owned subsidiary of Americair resident in South

Africa. SASub operates a chain of hotels in South Africa that are located near airports

served by Americair flights. Americair frequently sells tour packages that include air

travel to South Africa and lodging at SASub hotels. Although both companies are

engaged in the active conduct of a trade or business, the businesses of operating a chain of

hotels and operating an airline are distinct trades or businesses. Therefore SASub's

business does not form a part of Americair's business. However, SASub's business is

considered to be complementary to Americair's business because they are part of the same

overall industry (travel) and the links between their operations tend to make them

interdependent.

Example 4. The facts are the same as in Example 3, except that SASub owns an office

building in South Africa instead of a hotel chain. No part of Americair's business is

conducted through the office building. SASub's business is not considered to form a part

of or to be complementary to Americair's business. They are engaged in distinct trades or

businesses in separate industries, and there is no economic dependence between the two

operations.

Example 5. USFlower is a corporation resident in the United States. USFlower produces

and sells flowers in the United States and other countries. USFlower owns all the shares

of SAHolding, a corporation resident in South Africa. SAHolding is a holding company

that is not engaged in a trade or business. SAHolding owns all the shares of three

corporations that are resident in South Africa: SAFlower, SALawn, and SAFish. 

SAFlower distributes USFlower flowers under the USFlower trademark in the other State. 

SALawn markets a line of lawn care products in the other State under the USFlower

trademark. In addition to being sold under the same trademark, SALawn and SAFlower

products are sold in the same stores and sales of each company's products tend to generate

increased sales of the other's products. SAFish imports fish from the United States and

distributes it to fish wholesalers in South Africa. For purposes of paragraph 3, the

business of SAFlower forms a part of the business of USFlower, the business of SALawn

is complementary to the business of USFlower, and the business of SAFish is neither part

of nor complementary to that of USFlower.

Finally, a resident in one of the States also will be entitled to the benefits of the

Convention with respect to income derived from the other State if the income is "incidental" to

the trade or business conducted in the recipient's State of residence. Subparagraph 3(d) provides

that income derived from a State will be incidental to a trade or business conducted in the other
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State if the production of such income facilitates the conduct of the trade or business in the other

State. An example of incidental income is the temporary investment of working capital derived

from a trade or business.

Substantiality -- Subparagraphs 3(a)(iii) and (c)

As indicated above, subparagraph 3(a)(iii) provides that income that a resident of a State

derives from the other State will be entitled to the benefits of the Convention under paragraph 3

only if the income is derived in connection with a trade or business conducted in the recipient's

State of residence and that trade or business is “substantial” in relation to the income-producing

activity in the other State. Subparagraph 3(c) provides that whether the trade or business of the

income recipient is substantial will be determined based on all the facts and circumstances. These

circumstances generally would include the relative scale of the activities conducted in the two

States and the relative contributions made to the conduct of the trade or businesses in the two

States.

In addition to this subjective rule, subparagraph 3(c) provides a safe harbor under which

the trade or business of the income recipient may be deemed to be substantial based on three

ratios that compare the size of the recipient's activities to those conducted in the other State. The

three ratios compare: (i) the value of the assets in the recipient's State to the assets used in the

other State; (ii) the gross income derived in the recipient's State to the gross income derived in the

other State; and (iii) the payroll expense in the recipient's State to the payroll expense in the other

State. The average of the three ratios with respect to the preceding taxable year must exceed 10

percent, and each individual ratio must exceed 7.5 percent. If any individual ratio does not exceed

7.5 percent for the preceding taxable year, the average for the three preceding taxable years may

be used instead. Thus, if the taxable year is 1998, the preceding year is 1997. If one of the ratios

for 1997 is not greater than 7.5 percent, the average ratio for 1995, 1996, and 1997 with respect

to that item may be used.

The term "value" also is not defined in the Convention. Therefore, this term also will be

defined under U.S. law for purposes of determining whether a person deriving income from

United States sources is entitled to the benefits of the Convention. In such cases, "value"

generally will be defined using the method used by the taxpayer in keeping its books for purposes

of financial reporting in its country of residence. See Treas. Reg. §1.884-5(e)(3)(ii)(A).

Only items actually located or incurred in the two Contracting States are included in the

computation of the ratios. If the person from whom the income in the other State is derived is not

wholly-owned by the recipient (and parties related thereto) then the items included in the

computation with respect to such person must be reduced by a percentage equal to the percentage

control held by persons not related to the recipient. For instance, if a United States corporation

derives income from a South African corporation in which it holds 80 percent of the shares, and

unrelated parties hold the remaining shares, for purposes of subparagraph 3(c) only 80 percent of

the assets, payroll and gross income of the South African company would be taken into account.
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Consequently, if neither the recipient nor a person related to the recipient has an

ownership interest in the person from whom the income is derived, the substantiality test always

will be satisfied (the denominator in the computation of each ratio will be zero and the numerator

will be a positive number). Of course, the other two prongs of the test under paragraph 3 would

have to be satisfied in order for the recipient of the item of income to receive treaty benefits with

respect to that income. For example, assume that a South African resident is in the business of

banking in South Africa. The bank loans money to unrelated residents of the United States. The

bank would satisfy the substantiality requirement of this subparagraph with respect to interest paid

on the loans because it has no ownership interest in the payors.

Paragraph 4

Paragraph 4 provides that a resident of one of the States that is not otherwise entitled to

the benefits of the Convention may be granted benefits under the Convention if the competent

authority of the State from which benefits are claimed so determines. This discretionary provision

is included in recognition of the fact that, with the increasing scope and diversity of international

economic relations, there may be cases where significant participation by third country residents in

an enterprise of a Contracting State is warranted by sound business practice or long-standing

business structures and does not necessarily indicate a motive of attempting to derive unintended

Convention benefits.

The competent authority of a State will base a determination under this paragraph on

whether the establishment, acquisition, or maintenance of the person seeking benefits under the

Convention, or the conduct of such person's operations, has or had as one of its principal

purposes the obtaining of benefits under the Convention. Thus, persons that establish operations

in one of the States with the principal purpose of obtaining the benefits of the Convention

ordinarily will not be granted relief under paragraph 4.

The competent authority may determine to grant all benefits of the Convention, or it may

determine to grant only certain benefits. For instance, it may determine to grant benefits only with

respect to a particular item of income in a manner similar to paragraph 3. Further, the competent

authority may set time limits on the duration of any relief granted.

It is assumed that, for purposes of implementing paragraph 4, a taxpayer will not be

required to wait until the tax authorities of one of the States have determined that benefits are

denied before he will be permitted to seek a determination under this paragraph. In these

circumstances, it is also expected that if the competent authority determines that benefits are to be

allowed, they will be allowed retroactively to the time of entry into force of the relevant treaty

provision or the establishment of the structure in question, whichever is later.

Finally, there may be cases in which a resident of a Contracting State may apply for

discretionary relief to the competent authority of his State of residence. For instance, a resident

of a State could apply to the competent authority of his State of residence in a case in which he
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had been denied a treaty-based credit under Article 23 on the grounds that he was not entitled to

benefits of the article under Article 22.

Paragraph 5

Paragraph 5 provides that the term "recognized stock exchange" means (i) the NASDAQ

System owned by the National Association of Securities Dealers, and any stock exchange

registered with the Securities and Exchange Commission as a national securities exchange for

purposes of the Securities Exchange Act of 1934; (ii) the Johannesburg Stock Exchange; and (iii)

any other exchanges that the competent authorities may agree should be recognized for this

purpose.

Paragraph 6

Paragraph 6 addresses the so-called "triangular case," in which a South African enterprise

derives income from the United States, and that income is attributable to a permanent

establishment located in a third jurisdiction, and that third jurisdiction imposes little or no income

tax liability on those profits. This provision is included in this Convention to prevent triangular

case abuse in those instances in which South Africa exempts from tax profits attributable to a

permanent establishment of its residents located in third countries, but would tax the income,

subject to a foreign tax credit, if the income were earned directly by the South African resident

and were not attributable to the permanent establishment in the third jurisdiction. Unlike most

U.S. treaties in which such a provision is found, this paragraph will be applied only in limited

circumstances under this Convention, unless South African law changes. Since South Africa

currently does not normally tax the foreign-source income of South African residents, most items

of U.S. income earned by a resident of South Africa will not be taxed whether it is earned directly

by the resident or attributable to a permanent establishment in a third jurisdiction. South Africa

currently does, however, treat as South African source certain items of income derived from the

United States, that the United States treats as U.S. source, and subjects to source taxation in the

United States. Such income would, therefore, be subject to South African tax when earned

directly by a South African resident. If, however, that income is attributable to a permanent

establishment in a third jurisdiction, South Africa will not tax it. It would be inappropriate to

grant treaty benefits with respect to such income.

Paragraph 6 generally denies treaty benefits with respect to income beneficially owned by

a South African resident and attributable to a permanent establishment in a third jurisdiction if the

combined tax in South Africa and the third jurisdiction is less than 50 percent of the tax that

would be imposed in South Africa if the income were earned by the South African resident and

were not attributable to the permanent establishment. The paragraph is drafted unilaterally to

apply only to income of a South African resident, since it has no application with respect to the

United States because the United States does not exempt the profits of a U.S. person attributable

to its foreign permanent establishments.
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For example, assume that a South African company has a permanent establishment in a

third country that imposes little tax. Assume further that the permanent establishment derives

from the United States royalty income attributable to its third country permanent establishment. 

The royalty is paid for the exploitation of a patent that was developed in South Africa. Under

South African law the source of a royalty is the place where the technology was developed. 

South Africa, however, will not impose its income tax on the profits of the South African

company from its permanent establishment in the third country. The United States, under these

circumstances, would tax the royalty at source at a rate of 15 percent.

The paragraph provides three exceptions to the general restrictions. First, the provisions

of paragraph 6 do not apply to interest derived in connection with or incidental to an active trade

or business carried on by the permanent establishment in the third jurisdiction. The business of

making or managing investments is not an active trade or business for this purpose unless the

activities are banking or insurance activities carried on by a bank or insurance company. Second,

they do not apply to royalties received as compensation for the use of, or the right to use,

intangible property produced or developed by the permanent establishment itself. Third, in the

case of a South African resident with a permanent establishment in a third jurisdiction, the

provisions of paragraph 6 do not apply if the profits of the permanent establishment are taxed in

the United States, i.e., under the subpart F provisions of Part III of Subchapter N of chapter 1 of

subtitle A of the Internal Revenue Code.

Article 23 (Elimination of Double Taxation)

This Article describes the manner in which each Contracting State undertakes to relieve

double taxation. The United States uses the foreign tax credit method under its internal law, and

by treaty. South Africa exempts many classes of foreign source income under its law. Where,

however, it does tax, it also uses the foreign tax credit method to relieve double taxation.

Paragraph 1

The United States agrees, in paragraph 1, to allow to its citizens and residents a credit

against U.S. tax for income taxes paid or accrued to South Africa. By referring to "South African

tax", which is defined in Article 2 (Taxes Covered) to mean the covered South African taxes,

paragraph 1 also provides that South Africa's covered taxes are income taxes for purposes of the

U.S. foreign tax credit. This result is based on the Treasury Department's review of South

Africa's laws.

The credit under the Convention is allowed in accordance with the provisions and subject

to the limitations of U.S. law, as that law may be amended over time, so long as the general

principle of this Article, i.e., the allowance of a credit, is retained. Thus, although the Convention

provides for a foreign tax credit, the terms of the credit are determined by the provisions, at the

time a credit is given, of the U.S. statutory credit.
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Subparagraph (b) provides for a deemed-paid credit, consistent with section 902 of the

Code, to a U.S. corporation in respect of dividends received from a corporation resident in South

Africa of which the U.S. corporation owns at least 10 percent of the voting stock. This credit is

for the tax paid by the South African corporation on the profits out of which the dividends are

considered paid.

For purposes of the Secondary Tax on Companies (“STC”), a corporate taxpayer may

“write up” its assets prior to making a distribution, increasing its “distributable profits”. Such a

write-up raises concerns under the realization requirement of section 1.901-2(b)(2) of the

regulations. Such a write-up, however, would not be normal accounting or business practice. 

Therefore, this feature of the tax is unlikely to alter its predominant character as that of an income

tax in the U.S. sense. Because the write-up would constitute a voluntary increase in the base on

which the STC is imposed, however, the increased amount of tax on any such write-up that did

occur would be non-compulsory under section 1.901-2(e)(5) and, therefore, would not be a

creditable amount. 

As indicated, the U.S. credit under the Convention is subject to the various limitations of

U.S. law (see Code sections 901 - 908). For example, the credit against U.S. tax generally is

limited to the amount of U.S. tax due with respect to net foreign source income within the

relevant foreign tax credit limitation category (see Code section 904(a) and (d)), and the dollar

amount of the credit is determined in accordance with U.S. currency translation rules (see, e.g.,

Code section 986). Similarly, U.S. law applies to determine carryover periods for excess credits

and other inter-year adjustments. When the alternative minimum tax is due, the alternative

minimum tax foreign tax credit generally is limited in accordance with U.S. law to 90 percent of

alternative minimum tax liability. Furthermore, nothing in the Convention prevents the limitation

of the U.S. credit from being applied on a per-country basis (should internal law be changed), an

overall basis, or to particular categories of income (see, e.g., Code section 865(h)).

Paragraph 2

Paragraph 2 provides special rules for the tax treatment in both States of certain types of

income derived from U.S. sources by U.S. citizens who are resident in South Africa. Since U.S.

citizens, regardless of residence, are subject to United States tax at ordinary progressive rates on

their worldwide income, the U.S. tax on the U.S. source income of a U.S. citizen resident in

South Africa may exceed the U.S. tax that may be imposed under the Convention on an item of

U.S. source income derived by a resident of South Africa who is not a U.S. citizen.

Subparagraph (a) of paragraph 2 provides special credit rules for South Africa with

respect to items of income that are either exempt from U.S. tax or subject to reduced rates of

U.S. tax under the provisions of the Convention when received by residents of South Africa who

are not U.S. citizens. The tax credit of South Africa allowed by paragraph 2(a) under these

circumstances need not exceed the U.S. tax that may be imposed under the provisions of the

Convention, other than tax imposed solely by reason of the U.S. citizenship of the taxpayer under
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the provisions of the saving clause of paragraph 4 of Article 1 (General Scope). Thus, if a U.S.

citizen resident in South Africa received U.S. source portfolio dividends, and South Africa taxed

the dividend, the foreign tax credit granted by South Africa would be limited to 15 percent of the

dividend -- the U.S. tax that may be imposed under subparagraph 2(b) of Article 10 (Dividends) --

even if the shareholder were subject to U.S. net income tax because of his U.S. citizenship. With

respect to royalty or interest income, South Africa would not be required to allow a foreign tax

credit even if it taxed the income, because its residents are exempt from U.S. tax on these classes

of income under the provisions of Articles 11 (Interest) and 12 (Royalties).

Paragraph 2(b) eliminates the potential for double taxation that can arise because

subparagraph 2(a) provides that South Africa need not provide full relief for the U.S. tax imposed

on its citizens resident in South Africa. The subparagraph provides that the United States will

credit the income tax paid or accrued to South Africa after the application of subparagraph 2(a). 

It further provides that in allowing the credit, the United States will not reduce its tax below the

amount that is taken into account in South Africa in applying subparagraph 2(a). Since the

income described in paragraph 2 is U.S. source income, special rules are required to resource

some of the income to South Africa in order for the United States to be able to credit South

Africa's tax. This resourcing is provided for in subparagraph 2(c), which deems the items of

income referred to in subparagraph 2(a) to be from foreign sources to the extent necessary to

avoid double taxation under paragraph 2(b). The rules of paragraph 2(c) apply only for purposes

of determining U.S. foreign tax credits with respect to taxes referred to in paragraphs 1(b) and 2

of Article 2 (Taxes Covered).

The following two examples illustrate the application of paragraph 2 in the case of a U.S.

source portfolio dividend received by a U.S. citizen resident in South Africa. In both examples,

the U.S. rate of tax on residents of South Africa under paragraph 2(b) of Article 10 (Dividends)

of the Convention is 15 percent. In both examples the U.S. income tax rate on the U.S. citizen is

36 percent. In Example I, assume the South African income tax rate on its resident (the U.S.

citizen) is 25 percent (below the U.S. rate), and in Example II, assume the South African rate on

its resident is 40 percent (above the U.S. rate).

Example I Example II

Paragraph 2(a)

U.S. dividend declared $100.00 $100.00

Notional U.S. withholding tax per Article 10(2)(b) 15.00 15.00

South Africa taxable income 100.00 100.00

South Africa tax before credit 25.00 40.00

South Africa foreign tax credit 15.00 15.00

Net post-credit South Africa tax 10.00 25.00
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Example I Example II

Paragraphs 2(b) and (c)

U.S. pre-tax income $100.00 $100.00

U.S. pre-credit citizenship tax 36.00 36.00

Notional U.S. withholding tax 15.00 15.00

U.S. tax available for credit 21.00 21.00

Income resourced from U.S. to South Africa 27.77 58.33

U.S. tax on resourced income 10.00 21.00

U.S. credit for South African tax 10.00 21.00

Net post-credit U.S. tax 11.00 0.00

Total U.S. tax 26.00 15.00

In both examples, in the application of paragraph 2(a), South Africa credits a 15 percent

U.S. tax against its residence tax on the U.S. citizen. In example I the net South African tax after

foreign tax credit is $10.00; in the second example it is $25.00. In the application of paragraphs

2(b) and (c), from the U.S. tax due before credit of $36.00, the United States subtracts the

amount of the U.S. source tax of $15.00, against which no U.S. foreign tax credit is to be

allowed. This provision assures that the United States will collect the tax that it is due under the

Convention as the source country. In both examples, the maximum amount of U.S. tax against

which credit for South African tax may be claimed is $21.00. Initially, all of the income in these

examples was U.S. source. In order for a U.S. credit to be allowed for the full amount of South

African tax, an appropriate amount of the income must be resourced. The amount that must be

resourced depends on the amount of South African tax for which the U.S. citizen is claiming a

U.S. foreign tax credit. In example I, the South African tax was $10.00. In order for this amount

to be creditable against U.S. tax, $27.77 ($10 divided by .36) must be resourced as foreign

source. When South African tax is credited against the U.S. tax on the resourced income, there is

a net U.S. tax of $11.00 due after credit. In example II, South African tax was $25 but, because

the amount available for credit is reduced under subparagraph 2(c) by the amount of the U.S.

source tax, only $21.00 is eligible for credit. Accordingly, the amount that must be resourced is

limited to the amount necessary to ensure a foreign tax credit for $21 of South African tax, or

$58.33 ($21 divided by .36). Thus, even though South African tax was $25.00 and the U.S. tax

available for credit was $21.00, there is no excess credit available for carryover.

Paragraph 3

Paragraph 3 provides the rules for the South African double taxation relief. Under this

paragraph, United States taxes (i.e., the United States taxes listed as covered taxes in Article 2

(Taxes Covered)) paid by South African residents in accordance with the Convention will be

allowed as a credit against the South African taxes payable by that resident. Two conditions are

specified. U.S. taxes imposed solely by reason of citizenship under the saving clause of paragraph

4 of Article 1 (General Scope) are not covered by this rule. South Africa's obligation with respect

to such taxes is dealt with in paragraph 2. The paragraph also specifies that the South African

credit shall not exceed the percentage of the South African tax due before the credit, which is the

same as the ratio of the U.S. source income in respect of which the credit is being claimed to total

South African income.
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Relation to Other Articles

By virtue of the exceptions in subparagraph 5(a) of Article 1 (General Scope) this Article

is not subject to the saving clause of paragraph 4 of Article 1. Thus, the United States will allow a

credit to its citizens and residents in accordance with the Article, even if such credit were to

provide a benefit not available under the Code.

Article 24 (Non-discrimination)

This Article assures that nationals of a Contracting State, in the case of paragraph 1, and

residents of a Contracting State, in the case of paragraphs 2 through 5, will not be subject,

directly or indirectly, to discriminatory taxation in the other Contracting State. For this purpose,

non-discrimination means providing national treatment. Not all differences in tax treatment, either

as between nationals of the two States, or between residents of the two States, are violations of

this national treatment standard. Rather, the national treatment obligation of this Article applies

only if the nationals or residents of the two States are comparably situated.

Each of the relevant paragraphs of the Article provides that two persons that are

comparably situated must be treated similarly. Although the actual words differ from paragraph

to paragraph (e.g., paragraph 1 refers to two nationals "in the same circumstances," paragraph 2

refers to two enterprises "carrying on the same activities" and paragraph 3 refers to two

enterprises that are "similar"), the common underlying premise is that if the difference in treatment

is directly related to a tax-relevant difference in the situations of the domestic and foreign persons

being compared, that difference is not to be treated as discriminatory (e.g., if one person is taxable

in a Contracting State on worldwide income and the other is not, or tax may be collectible from

one person at a later stage, but not from the other, distinctions in treatment would be justified

under paragraph 1. Other examples of such factors that can lead to non-discriminatory differences

in treatment will be noted in the discussions of each paragraph.

The operative paragraphs of the Article also use different language to identify the kinds of

differences in taxation treatment that will be considered discriminatory. For example, paragraphs

1 and 3 speak of "any taxation or any requirement connected therewith that is other or more

burdensome," while paragraph 2 specifies that a tax "shall not be less favorably levied."

Regardless of these differences in language, only differences in tax treatment that materially

disadvantage the foreign person relative to the domestic person are properly the subject of the

Article.

Paragraph 1

Paragraph 1 provides that a national of one Contracting State may not be subject to

taxation or connected requirements in the other Contracting State that are different from, or more

burdensome than, the taxes and connected requirements imposed upon a national of that other
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State in the same circumstances. As noted above, whether or not the two persons are both

taxable on worldwide income is a significant circumstance for this purpose.

A national of a Contracting State is afforded protection under this paragraph even if the

national is not a resident of either Contracting State. Thus, a U.S. citizen who is resident in a

third country is entitled, under this paragraph, to the same treatment in South Africa as a national

of South Africa who is in similar circumstances (i.e., who is resident in a third State). The term

"national" in relation to a Contracting State is defined in subparagraph 1(f) of Article 3 (General

Definitions).

Because the relevant circumstances referred to in the paragraph relate, among other

things, to taxation on worldwide income, paragraph 1 does not obligate the United States to apply

the same taxing regime to a national of South Africa who is not resident in the United States and a

U.S. national who is not resident in the United States. United States citizens who are not

residents of the United States but who are, nevertheless, subject to United States tax on their

worldwide income are not in the same circumstances with respect to United States taxation as

citizens of South Africa who are not United States residents. Thus, for example, Article 24 would

not entitle a national of South Africa resident in a third country to taxation at graduated rates on

U.S. source dividends or other investment income that applies to a U.S. citizen resident in the

same third country.

The definition of the term "national" is found in Article 3 (General Definitions). The

definition covers both individuals and juridical persons that are nationals of a Contracting State.

Paragraph 2

Paragraph 2 provides that a Contracting State may not tax a permanent establishment or

fixed base of an enterprise of the other Contracting State less favorably than an enterprise of that

first-mentioned State that is carrying on the same activities.

The fact that a U.S. permanent establishment of a South African enterprise is subject to

U.S. tax only on income that is attributable to the permanent establishment, while a U.S.

corporation engaged in the same activities is taxable on its worldwide income is not, in itself, a

sufficient difference to deny national treatment to the permanent establishment. There are cases,

however, where the two enterprises would not be similarly situated and differences in treatment

may be warranted. For instance, it would not be a violation of the non-discrimination protection

of paragraph 2 to require the foreign enterprise to provide information in a reasonable manner that

may be different from the information requirements imposed on a resident enterprise, because

information may not be as readily available to the Internal Revenue Service from a foreign as from

a domestic enterprise. Similarly, it would not be a violation of paragraph 2 to impose penalties on

persons who fail to comply with such a requirement (see, e.g., sections 874(a) and 882(c)(2)). 

Further, a determination that income and expenses have been attributed or allocated to a
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permanent establishment in conformity with the principles of Article 7 (Business Profits) implies

that the attribution or allocation was not discriminatory.

Section 1446 of the Code imposes on any partnership with income that is effectively

connected with a U.S. trade or business the obligation to withhold tax on amounts allocable to a

foreign partner. In the context of this Convention, this obligation applies with respect to a share

of the partnership income of a South African partner and attributable to a U.S. permanent

establishment. There is no similar obligation with respect to the distributive shares of U.S.

resident partners. It is understood, however, that this distinction is not a form of discrimination

within the meaning of paragraph 2 of the Article. No distinction is made between U.S. and nonU.S. partnerships, since the law requires that partnerships of both U.S. and non-U.S. domicile

withhold tax in respect of the partnership shares of non-U.S. partners. Furthermore, in

distinguishing between U.S. and non-U.S. partners, the requirement to withhold on the non-U.S.

but not the U.S. partner's share is not discriminatory taxation, but, like other withholding on

nonresident aliens, is merely a reasonable method for the collection of tax from persons who are

not continually present in the United States, and as to whom it otherwise may be difficult for the

United States to enforce its tax jurisdiction. If tax has been over-withheld, the partner can, as in

other cases of over-withholding, file for a refund. (The relationship between paragraph 2 and the

imposition of the branch tax is dealt with below in the discussion of paragraph 6.)

Paragraph 2 obligates the host State to provide national treatment not only to permanent

establishments of an enterprise of the other State, but also to other residents of such State that are

taxable in the host State on a net basis because they derive income from independent personal

services performed in the host State that is attributable to a fixed base in that State. Thus, an

individual resident of South Africa who performs independent personal services in the U.S., and

who is subject to U.S. income tax on the income from those services that is attributable to a fixed

base in the United States, is entitled to no less favorable tax treatment in the United States than a

U.S. resident engaged in the same kinds of activities. With such a rule in a treaty, the host State

cannot tax its own residents on a net basis, but disallow deductions (other than personal allowances, etc., as provided in paragraph 4) with respect to the income attributable to the fixed base.

Paragraph 3

Paragraph 3 requires that a Contracting State not impose taxation or connected

requirements on an enterprise of that State that is wholly or partly owned or controlled, directly

or indirectly, by one or more residents of the other Contracting State, that is other or more

burdensome than the taxation or connected requirements that it imposes on other similar

enterprises of that first-mentioned Contracting State. For this purpose it is understood that

"similar" refers to similar activities or ownership of the enterprise.

The Tax Reform Act of 1986 changed the rules for taxing corporations on certain

distributions they make in liquidation. Prior to 1986, corporations were not taxed on distributions

of appreciated property in complete liquidation, although nonliquidating distributions of the same
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property, with several exceptions, resulted in corporate-level tax. In part to eliminate this

disparity, the law now generally taxes corporations on the liquidating distribution of appreciated

property. The Code provides an exception in the case of distributions by 80 percent or more

controlled subsidiaries to their parent corporations, on the theory that the built-in gain in the asset

will be recognized when the parent sells or distributes the asset. This exception does not apply to

distributions to parent corporations that are tax-exempt organizations or, except to the extent

provided in regulations, foreign corporations. The policy of the legislation is to collect one

corporate-level tax on the liquidating distribution of appreciated property. If, and only if, that tax

can be collected on a subsequent sale or distribution does the legislation defer the tax. It is

understood that the inapplicability of the exception to the tax on distributions to foreign parent

corporations under section 367(e)(2) does not conflict with paragraph 3 of the Article. While a

liquidating distribution to a U.S. parent will not be taxed, and, except to the extent provided in

regulations, a liquidating distribution to a foreign parent will, paragraph 3 merely prohibits

discrimination among corporate taxpayers on the basis of U.S. or foreign stock ownership. 

Eligibility for the exception to the tax on liquidating distributions for distributions to non-exempt,

U.S. corporate parents is not based upon the nationality of the owners of the distributing

corporation, but rather is based upon whether such owners would be subject to corporate tax if

they subsequently sold or distributed the same property. Thus, the exception does not apply to

distributions to persons that would not be so subject -- not only foreign corporations, but also

tax-exempt organizations. A similar analysis applies to the treatment of section 355 distributions

subject to section 367(e)(1).

For the reasons given above in connection with the discussion of paragraph 2 of the

Article, it is also understood that the provision in section 1446 of the Code for withholding of tax

on non-U.S. partners does not violate paragraph 3 of the Article.

It is further understood that the ineligibility of a U.S. corporation with nonresident alien

shareholders to make an election to be an “S" corporation does not violate paragraph 3 of the

Article. If a corporation elects to be an S corporation (requiring 35 or fewer shareholders), it is

generally not subject to income tax and the shareholders take into account their pro rata shares of

the corporation's items of income, loss, deduction or credit. (The purpose of the provision is to

allow an individual or small group of individuals to conduct business in corporate form while

paying taxes at individual rates as if the business were conducted directly.) A nonresident alien

does not pay U.S. tax on a net basis, and, thus, does not generally take into account items of loss,

deduction or credit. Thus, the S corporation provisions do not exclude corporations with

nonresident alien shareholders because such shareholders are foreign, but only because they are

not net-basis taxpayers. Similarly, the provisions exclude corporations with other types of

shareholders where the purpose of the provisions cannot be fulfilled or their mechanics

implemented. For example, corporations with corporate shareholders are excluded because the

purpose of the provisions to permit individuals to conduct a business in corporate form at

individual tax rates would not be furthered by their inclusion.
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Paragraph 4

This paragraph provides that a Contracting State is not obligated to grant to a resident of

the other Contracting State any tax allowances, reliefs, etc., that it grants to its own residents on

account of their civil status or family responsibilities. Thus, if a sole proprietor who is a resident

of South Africa has a permanent establishment in the United States, in assessing income tax on the

profits attributable to the permanent establishment, the United States is not obligated to allow to

the South African resident the personal allowances for himself and his family that he would be

permitted to take if the permanent establishment were a sole proprietorship owned and operated

by a U.S. resident, despite the fact that the individual income tax rates would apply.

Paragraph 5

Paragraph 5 prohibits discrimination in the allowance of deductions. When an enterprise

of a Contracting State pays interest, royalties or other disbursements to a resident of the other

Contracting State, the first-mentioned Contracting State must allow a deduction for those

payments in computing the taxable profits of the enterprise as if the payment had been made under

the same conditions to a resident of the first-mentioned Contracting State. An exception to this

rule is provided for cases where the provisions of paragraph 1 of Article 9 (Associated

Enterprises), paragraph 4 of Article 11 (Interest) or paragraph 4 of Article 12 (Royalties) apply,

because all of these provisions permit the denial of deductions in certain circumstances in respect

of transactions between related persons. This exception would include the denial or deferral of

certain interest deductions under Code section 163(j).

The term "other disbursements" is understood to include a reasonable allocation of

executive and general administrative expenses, research and development expenses and other

expenses incurred for the benefit of a group of related persons that includes the person incurring

the expense.

Paragraph 6

Paragraph 6 of the Article confirms that no provision of the Article will prevent either

Contracting State from imposing the branch tax described in paragraph 6 of Article 10 (Dividends). Since imposition of the branch tax under the Convention is specifically sanctioned by

paragraph 6 of Article 10 (Dividends), its imposition could not be precluded by Article 24, even

without paragraph 6. Under the generally accepted rule of construction that the specific takes

precedence over the more general, the specific branch tax provision of Article 10 would take

precedence over the more general national treatment provision of Article 24.

Paragraph 7

Notwithstanding the specification in Article 2 (Taxes Covered) of taxes covered by the

Convention for general purposes, for purposes of providing non-discrimination protection this
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Article applies to taxes of every kind and description imposed by a Contracting State or a political

subdivision or local authority thereof. Customs duties are not considered to be taxes for this

purpose.

Relation to Other Articles

The saving clause of paragraph 4 of Article 1 (General Scope) does not apply to this

Article, by virtue of the exceptions in paragraph 5(a) of Article 1. Thus, for example, a U.S.

citizen who is a resident of South Africa may claim benefits in the United States under this Article.

Nationals of a Contracting State may claim the benefits of paragraph 1 regardless of

whether they are entitled to benefits under Article 22 (Limitation on Benefits), because that

paragraph applies to nationals and not residents. They may not claim the benefits of the other

paragraphs of this Article with respect to an item of income unless they are generally entitled to

treaty benefits with respect to that income under a provision of Article 22.

ARTICLE 25 (MUTUAL AGREEMENT PROCEDURE)

This Article provides the mechanism for taxpayers to bring to the attention of the

Contracting States' competent authorities issues and problems that may arise under the

Convention. It also provides a mechanism for cooperation between the competent authorities of

the Contracting States to resolve disputes and clarify issues that may arise under the Convention

and to resolve cases of double taxation not provided for in the Convention. The competent

authorities of the two Contracting States are identified in paragraph 1(g) of Article 3 (General

Definitions).

Paragraph 1

This paragraph provides that where a resident of a Contracting State considers that the

actions of one or both Contracting States will result in taxation that is not in accordance with the

Convention he may present his case to the competent authority of either Contracting State. 

Allowing a person to bring a case to either competent authority follows the U.S. Model

provisions, which is based on paragraph 16 of the OECD Commentary to Article 25, which

suggests that countries may agree to allow a case to be brought to either competent authority. 

There is no apparent reason why a resident of a Contracting State must take its case to the

competent authority of its State of residence and not to that of the partner. Under this approach,

for example, a U.S. permanent establishment of a corporation resident in South Africa that faces

inconsistent treatment in the two countries would be able to bring its complaint to the competent

authority in either Contracting State.
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Although the typical cases brought under this paragraph will involve economic double

taxation arising from transfer pricing adjustments, the scope of this paragraph is not limited to

such cases. For example, if a Contracting State treats income derived by a company resident in

the other Contracting State as attributable to a permanent establishment in the first-mentioned

Contracting State, and the resident believes that the income is not attributable to a permanent

establishment, or that no permanent establishment exists, the resident may bring a complaint under

paragraph 1 to the competent authority of either Contracting State.

It is not necessary for a person bringing a complaint first to have exhausted the remedies

provided under the national laws of the Contracting States before presenting a case to the

competent authorities, nor does the fact that the statute of limitations may have passed for seeking

a refund preclude bringing a case to the competent authority.

Unlike the U.S. Model, but like the OECD Model, paragraph 1 provides that a case must

be presented to a competent authority within three years of the first notification of the action

giving rise to taxation not in accordance with the provisions of the Convention. In the case of

taxes withheld at source, the case must be brought within three years of the date of the collection

of the tax. Paragraph 18 of the Commentaries to the OECD Model states that identifying the date

of the first notification, as referred to in paragraph 1, should be done in a manner most favorable

to the taxpayer. For example, if an action results from the tax authority following a published

procedure, the first notification would not be the date of publication of the procedure, but rather

the date on which the taxpayer was first notified of the decision to apply the procedure to him.

Paragraph 2

This paragraph instructs the competent authorities in dealing with cases brought by

taxpayers under paragraph 1. It provides that if the competent authority of the Contracting State

to which the case is presented judges the case to have merit, and cannot reach a unilateral

solution, it shall seek an agreement with the competent authority of the other Contracting State

pursuant to which taxation not in accordance with the Convention will be avoided. During the

period that a proceeding under this Article is pending, any assessment and collection procedures

should be suspended. Any agreement is to be implemented even if such implementation otherwise

would be barred by the statute of limitations or by some other procedural limitation, such as a

closing agreement. In a case where the taxpayer has entered a closing agreement (or other

written settlement) with the United States prior to bringing a case to the competent authorities,

the U.S. competent authority will endeavor only to obtain a correlative adjustment from South

Africa and will not take any action that would otherwise change such agreements. See, Rev.

Proc. 96-13, 1996-3 I.R.B. 31, section 7.05. Because, as specified in paragraph 2 of Article 1

(General Scope), the Convention cannot operate to increase a taxpayer's liability, time or other

procedural limitations can be overridden only for the purpose of making refunds and not to

impose additional tax.

Paragraph 3
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Paragraph 3 authorizes the competent authorities to resolve difficulties or doubts that may

arise as to the application or interpretation of the Convention. Paragraph 5 includes a nonexhaustive list of examples of the kinds of matters about which the competent authorities may

reach agreement. See the Technical Explanation of paragraph 5 for a discussion of these

examples.

Paragraph 3 also authorizes the competent authorities to consult for the purpose of

eliminating double taxation in cases not provided for in the Convention. This provision is

intended to permit the competent authorities to implement the treaty in particular cases in a

manner that is consistent with its expressed general purposes. It permits the competent

authorities to deal with cases that are within the spirit of the provisions but that are not

specifically covered. An example of such a case might be double taxation arising from a transfer

pricing adjustment between two permanent establishments of a third-country resident, one in the

United States and one in South Africa. Since no resident of a Contracting State is involved in the

case, the Convention does not apply, but the competent authorities nevertheless may use the

authority of the Convention to prevent the double taxation.

Agreements reached by the competent authorities under paragraph 3 need not conform to

the internal law provisions of either Contracting State. Paragraph 3 is not, however, intended to

authorize the competent authorities to resolve problems of major policy significance that normally

would be the subject of negotiations between the Contracting States themselves. For example,

this provision would not authorize the competent authorities to agree to allow a U.S. foreign tax

credit under the treaty for a tax imposed by South Africa where that tax is not otherwise a

covered tax and is not an identical or substantially similar tax imposed after the date of signature

of the treaty. The determination of whether a foreign tax credit may be taken for such a tax is

determined under the Code, independent of the treaty.

Paragraph 4

Paragraph 4 provides that the competent authorities may communicate directly with each

other for the purpose of reaching an agreement. This makes clear that the competent authorities

of the two Contracting States may communicate without going through diplomatic channels. 

Such communication may be in various forms, including, where appropriate, through face-to-face

meetings of representatives of the competent authorities.

The paragraph also makes clear that the competent authorities may develop bilateral

procedures for implementing agreements reached under this Article. Each competent authority

may, in addition, develop unilateral procedures to enable the bilateral procedures referred to in the

preceding sentence to operate.
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Paragraph 5

This paragraph lists a number of matters about which the competent authorities may reach

agreement. This list is purely illustrative; it does not grant any authority that is not implicitly

present as a result of the general language of paragraph 3. The competent authorities may, for

example, agree to the same attribution of income, deductions, credits or allowances between an

enterprise in one Contracting State and its permanent establishment in the other (subparagraph

(a)) or between related persons (subparagraph (b)). These allocations are to be made in

accordance with the arm's length principle underlying Article 7 (Business Profits) and Article 9

(Associated Enterprises). Agreements reached under these subparagraphs may include agreement

on a methodology for determining an appropriate transfer price, common treatment of a

taxpayer's cost sharing arrangement, or upon an acceptable range of results under that

methodology.

As indicated in subparagraphs (c), (d), (e) and (f), the competent authorities also may

agree to settle a variety of conflicting applications of the Convention. They may agree to

characterize particular items of income in the same way (subparagraph (c)), to characterize

entities in a particular way (subparagraph (d)), to apply the same source rules to particular items

of income (subparagraph (e)), and to adopt a common meaning of a term (subparagraph f)).

Since the list under paragraph 5 is not exhaustive, the competent authorities may, under

the authority of Article 25, reach agreement on issues not enumerated in paragraph 5 if necessary

to avoid double taxation. For example, the competent authorities may seek agreement on a

uniform set of standards for the use of exchange rates, or agree on consistent timing of gain

recognition with respect to a transaction to the extent necessary to avoid double taxation. 

Furthermore, unlike the U.S. Model, the list in paragraph 5 does not explicitly authorize the

competent authorities to agree to advance pricing arrangements. At the time of the negotiations,

South Africa did not believe that it had the authority to make prospective agreements. If,

however, in the future South Africa is able to exercise such authority, the Article will allow the

competent authorities to enter into advance pricing arrangements.

Other Issues

Treaty effective dates and termination in relation to competent authority dispute resolution

A case may be raised by a taxpayer under a treaty with respect to a year for which a treaty

was in force after the treaty has been terminated. In such a case the ability of the competent

authorities to act is limited. They may not exchange confidential information, nor may they reach

a solution that varies from that specified in its law.

A case also may be brought to a competent authority under a treaty that is in force, but

with respect to a year prior to the entry into force of the treaty. The scope of the competent

authorities to address such a case is not constrained by the fact that the treaty was not in force
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when the transactions at issue occurred, and, if the competent authorities so agree, they have

available to them the full range of remedies afforded under this Article.

Triangular competent authority solutions

International tax cases may involve more than two taxing jurisdictions (e.g., transactions

among a parent corporation resident in country A and its subsidiaries resident in countries B and

C). As long as there is a complete network of treaties among the three countries, it should be

possible, under the full combination of bilateral authorities, for the competent authorities of the

three States to work together on a three-sided solution. Although country A may not be able to

give information received under Article 26 (Exchange of Information) from country B to the

authorities of country C, if the competent authorities of the three countries are working together,

it should not be a problem for them to arrange for the authorities of country B to give the

necessary information directly to the tax authorities of country C, as well as to those of country

A. Each bilateral part of the trilateral solution must, of course, not exceed the scope of the

authority of the competent authorities under the relevant bilateral treaty.

Relation to Other Articles

This Article is not subject to the saving clause of paragraph 4 of Article 1 (General Scope)

by virtue of the exceptions in paragraph 5(a) of that Article. Thus, rules, definitions, procedures,

etc. that are agreed upon by the competent authorities under this Article may be applied by the

United States with respect to its citizens and residents even if they differ from the comparable

Code provisions. Similarly, as indicated above, U.S. law (e.g., statutes of limitations) may be

overridden to provide refunds of tax to a U.S. citizen or resident under this Article. A person

may seek relief under Article 25 regardless of whether he is generally entitled to benefits under

Article 22 (Limitation on Benefits). As in all other cases, the competent authority is vested with

the discretion to decide whether the claim for relief is justified.

Article 26 (Exchange of Information and Administrative Assistance)

Paragraph 1

This Article provides for the exchange of information between the competent authorities

of the Contracting States. The information to be exchanged is that which is necessary for carrying

out the provisions of the Convention or the domestic laws of the United States or of South Africa

concerning the taxes covered by the Convention. Referring to information that is "necessary" for

carrying out the provisions of the Convention is understood to be equivalent to the reference in

the U.S. Model to information that is "relevant." Thus use of the term "necessary" should not be

interpreted as requiring a requesting State to demonstrate that it would be disabled from enforcing

its tax laws unless it obtained a particular item of information.
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The taxes covered by the Convention for purposes of this Article constitute a broader

category of taxes than those referred to in Article 2 (Taxes Covered). As provided in paragraph

6, for purposes of exchange of information, covered taxes include all taxes administered by the

competent authorities of the Contracting States. Exchange of information for purposes of

applying a domestic law is authorized insofar as the taxation under that domestic law is not

contrary to the Convention. Thus, for example, information may be exchanged with respect to a

covered tax, even if the transaction to which the information relates is a purely domestic

transaction in the requesting State and, therefore, the exchange is not made for the purpose of

carrying out the Convention.

An example of such a case is provided in the OECD Commentary: A company resident in

the United States and a company resident in South Africa transact business between themselves

through a third-country resident company. Neither Contracting State has a treaty with the third

State. In order to enforce their internal laws with respect to transactions of their residents with

the third-country company (since there is no relevant treaty in force), the Contracting State may

exchange information regarding the prices that their residents paid in their transactions with the

third-country resident.

Paragraph 1 states that information exchange is not restricted by Article 1 (General

Scope). Accordingly, information may be requested and provided under this Article with respect

to persons who are not residents of either Contracting State. For example, if a third-country

resident has a permanent establishment in South Africa which engages in transactions with a U.S.

enterprise, the United States could request information with respect to that permanent

establishment, even though it is not a resident of either Contracting State. Similarly, if a thirdcountry resident maintains a bank account in South Africa, and the Internal Revenue Service has

reason to believe that funds in that account should have been reported for U.S. tax purposes but

have not been so reported, information can be requested from South Africa with respect to that

person's account.

Paragraph 1 also provides assurances that any information exchanged will be treated as

secret, subject to the same disclosure constraints as information obtained under the laws of the

requesting State. Information received may be disclosed only to persons, including courts and

administrative bodies, concerned with the assessment, collection, enforcement or prosecution in

respect of the taxes to which the information relates, or to persons concerned with the

administration of these taxes. The information must be used by these persons in connection with

these designated functions. Persons in the United States concerned with the administration of

taxes include legislative bodies, such as the tax-writing committees of Congress and the General

Accounting Office. Information received by these bodies must be for use in the performance of

their role in overseeing the administration of U.S. tax laws. Information received may be

disclosed in public court proceedings or in judicial decisions.

The Article authorizes the competent authorities to exchange information on a routine

basis, on request in relation to a specific case, or spontaneously. It is contemplated that the
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Contracting States will utilize this authority to engage in all of these forms of information

exchange, as appropriate.

Paragraph 2

Paragraph 2 provides that the obligations undertaken in paragraph 1 to exchange

information do not require a Contracting State to carry out administrative measures that are at

variance with the laws or administrative practice of either State. Nor is a Contracting State

required to supply information not obtainable under the laws or administrative practice of either

State, or to disclose trade secrets or other information, the disclosure of which would be contrary

to public policy. Thus, a requesting State may be denied information from the other State if the

information would be obtained pursuant to procedures or measures that are broader than those

available in the requesting State.

While paragraph 2 states conditions under which a Contracting State is not obligated to

comply with a request from the other Contracting State for information, the requested State is not

precluded from providing such information, and may, at its discretion, do so subject to the

limitations of its internal law.

Paragraph 3

Paragraph 3 provides that when information is requested by a Contracting State in

accordance with this Article, the other Contracting State is obligated to obtain the requested

information as if the tax in question were the tax of the requested State, even if that State has no

direct tax interest in the case to which the request relates.

Paragraph 3 further provides that the requesting State may specify the form in which

information is to be provided (e.g., depositions of witnesses and authenticated copies of original

documents) so that the information can be usable in the judicial proceedings of the requesting

State. The requested State should, if possible, provide the information in the form requested to

the same extent that it can obtain information in that form under its own laws and administrative

practices with respect to its own taxes.

Paragraph 4

Paragraph 4 provides for assistance in collection of taxes to the extent necessary to ensure

that treaty benefits are enjoyed only by persons entitled to those benefits under the terms of the

Convention. Under paragraph 4, a Contracting State will endeavor to collect on behalf of the

other State only those amounts necessary to ensure that any exemption or reduced rate of tax at

source granted under the Convention by that other State is not enjoyed by persons not entitled to

those benefits. For example, if a U.S. source dividend is paid to an addressee in South Africa, the

withholding agent under current rules may withhold at the treaty's portfolio dividend rate of 15

percent. If, however, the addressee is merely acting as a nominee on behalf of a third-country
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resident, paragraph 4 would obligate South Africa to withhold and remit to the United States the

additional tax that should have been collected by the U.S. withholding agent.

Paragraph 5

This paragraph also makes clear that the Contracting State asked to collect a tax under the

provisions of paragraph 4 is not obligated, in the process of providing collection assistance, to

carry out administrative measures that are different from those used in the collection of its own

taxes, or that would be contrary to its sovereignty, security or public policy.

Paragraph 6

As noted above in the discussion of paragraph 1, the exchange of information provisions

of the Convention apply to all taxes administered by the competent authorities of the Contracting

States, not just to those taxes designated as covered taxes under Article 2 (Taxes Covered). The

U.S. competent authority may, therefore, request information for purposes of, for example, estate

and gift taxes or federal excise taxes. The paragraph makes clear that the reference to "taxes"

does not include customs duties.

Paragraph 7

Finally, paragraph 7 provides that the competent authority of the requested State shall

allow representatives of the applicant State to enter the requested State to interview individuals

and examine books and records with the consent of the persons subject to examination.

Treaty effective dates and termination in relation to competent authority dispute resolution

A tax administration may seek information with respect to a year for which a treaty was in

force after the treaty has been terminated. In such a case the ability of the other tax

administration to act is limited. The treaty no longer provides authority for the tax

administrations to exchange confidential information. They may only exchange information

pursuant to domestic law.

The competent authority also may seek information under a treaty that is in force, but with

respect to a year prior to the entry into force of the treaty. The scope of the competent

authorities to address such a case is not constrained by the fact that a treaty was not in force when

the transactions at issue occurred, and the competent authorities have available to them the full

range of information exchange provisions afforded under this Article. Even though a prior treaty

may have been in effect during the years in which the transaction at issue occurred, the exchange

of information provisions of the current treaty apply.
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Article 27 (Diplomatic Agents and Consular Officers)

This Article confirms that any fiscal privileges to which diplomatic or consular officials are

entitled under general provisions of international law or under special agreements will apply

notwithstanding any provisions to the contrary in the Convention. The agreements referred to

include any bilateral agreements, such as consular conventions, that affect the taxation of

diplomats and consular officials and any multilateral agreements dealing with these issues, such as

the Vienna Convention on Diplomatic Relations and the Vienna Convention on Consular

Relations. The United States generally adheres to the provisions of these multilateral agreements

because their terms are consistent with customary international law.

The Article does not independently provide any benefits to diplomatic agents and consular

officers. Article 19 (Government Service) does so, as do Code section 893 and a number of

bilateral and multilateral agreements. In the event that there is a conflict between the tax treaty

and international law or such other treaties, under which the diplomatic agent or consular official

is entitled to greater benefits under the latter, the latter laws or agreements shall have precedence. 

Conversely, if the tax treaty confers a greater benefit than another agreement, the affected person

could claim the benefit of the tax treaty.

Pursuant to subparagraph 5(b) of Article 1, the saving clause of paragraph 4 of Article 1

(General Scope) does not apply to override any benefits of this Article available to an individual

who is neither a citizen of the United States nor has immigrant status in the United States.

Article 28 (Entry into Force)

This Article contains the rules for bringing the Convention into force and giving effect to

its provisions.

Paragraph 1

Paragraph 1 provides that each State must notify the other as soon as its “constitutional

requirements” for ratification have been complied with. The constitutional requirements include

ratification.

In the United States, the process leading to ratification and entry into force is as follows:

Once a treaty has been signed by authorized representatives of the two Contracting States, the

Department of State sends the treaty to the President who formally transmits it to the Senate for

its advice and consent to ratification, which requires approval by two-thirds of the Senators

present and voting. Prior to this vote, however, it generally has been the practice for the Senate

Committee on Foreign Relations to hold hearings on the treaty and make a recommendation

regarding its approval to the full Senate. Both Government and private sector witnesses may

testify at these hearings. After receiving the Senate's advice and consent, the treaty is returned to
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the President for his signature on the ratification document. The President's signature on the

document completes the process in the United States.

Paragraph 2

Paragraph 2 provides that the Convention will enter into force 30 days after the date on

which the second of the two notifications of the completion of ratification requirements has been

received. The date on which the Convention enters into force is not necessarily the date on which

its provisions take effect. Paragraph 2, therefore, also contains rules that determine when the

provisions of the treaty will have effect.

Under paragraph 2(a), the Convention will have effect with respect to taxes withheld at

source (principally dividends, interest and royalties) for amounts paid or credited on or after the

first day of January next following the date on which the Convention enters into force. For

example, if the second notice of ratification is received on September 25 of 1997, the withholding

rates specified in paragraph 2 of Article 10 (Dividends) would be applicable to any dividends paid

or credited on or after January 1, 1998.

For all other taxes, paragraph 2(b) specifies that the Convention will have effect for any

taxable year or assessment period beginning on or after January 1 of the year following entry into

force.

As discussed under Articles 25 (Mutual Agreement Procedure) and 26 (Exchange of

Information), the powers afforded the competent authority under these Articles may be applied

retroactively to taxable periods preceding entry into force.

Article 29 (Termination)

The Convention is to remain in effect indefinitely, unless terminated by one of the

Contracting States in accordance with the provisions of Article 29. The Convention may be

terminated by either Contracting State at any time after five years from the year in which the

Convention enters into force by giving notice of termination through the diplomatic channel at

least six months prior to the termination date. If notice of termination is given, the provisions of

the Convention with respect to withholding at source will cease to have effect for amounts paid or

credited on or after January first following the expiration of a period of 6 months beginning with

the delivery of notice of termination. For other taxes, the Convention will cease to have effect as

of taxable periods beginning on or after January first following the expiration of this 6 month

period.

A treaty performs certain specific and necessary functions regarding information exchange

and mutual agreement. In the case of information exchange the treaty's function is to override

confidentiality rules relating to taxpayer information. In the case of mutual agreement its function
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is to allow competent authorities to modify internal law in order to prevent double taxation and

tax avoidance. With respect to the effective termination dates for these aspects of the treaty,

therefore, if a treaty is terminated as of January 1 of a given year, no otherwise confidential

information can be exchanged after that date, regardless of whether the treaty was in force for the

taxable year to which the request relates. Similarly, no mutual agreement departing from internal

law can be implemented after that date, regardless of the taxable year to which the agreement

relates. Therefore, for the competent authorities to be allowed to exchange otherwise confidential

information or to reach a mutual agreement that departs from internal law, a treaty must be in

force at the time those actions are taken and any existing competent authority agreement ceases to

apply.

Article 29 relates only to unilateral termination of the Convention by a Contracting State. 

Nothing in that Article should be construed as preventing the Contracting States from concluding

a new bilateral agreement, subject to ratification, that supersedes, amends or terminates provisions

of the Convention without the six-month notification period.

Customary international law observed by the United States and other countries, as

reflected in the Vienna Convention on Treaties, allows termination by one Contracting State at

any time in the event of a "material breach" of the agreement by the other Contracting State.