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[2012] ZASCA 61
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Commissioner for the South African Revenue Service v Tradehold Ltd (132/11) [2012] ZASCA 61; [2012] 3 All SA 15 (SCA); 2013 (4) SA 184 (SCA); 74 SATC 263 (8 May 2012)
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SUPREME
COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No: 132/11
Reportable
In
the matter between:
COMMISSIONER
FOR THE SOUTH AFRICAN
REVENUE
SERVICE
….....................................................................
Appellant
and
TRADEHOLD
LTD
….....................................................................
Respondent
Neutral citation:
Commissioner for the South African Revenue Service v Tradehold Ltd
(132/11)
[2012] ZASCA 61
(8 MAY 2012)
Coram:
NUGENT, CACHALIA, MALAN, TSHIQI JJA and BORUCHOWITZ AJA
Heard:
12 March 2012
Delivered:
8 May 2012
Summary:
Income
tax – s 12 of Eighth Schedule of Act 58 of 1962 –
deemed disposal of assets – Double Tax Agreement
between the
Republic of South Africa and Luxembourg – meaning of and effect
– Article 13(4) – includes within
its ambit capital gains
derived from the alienation of all property including a deemed
disposal of assets.
___________________________________________________________
ORDER
___________________________________________________________
On appeal from:
The Tax Court, Cape Town (Griesel J):
The appeal is
dismissed with costs, including those of two counsel.
___________________________________________________________
JUDGMENT
___________________________________________________________
BORUCHOWITZ AJA
(NUGENT, CACHALIA, MALAN and TSHIQI JJA concurring)
[1] This is an
appeal by the Commissioner for the South African Revenue Service from
a decision of the Tax Court, Cape Town (Griesel J).
The
respondent, Tradehold Limited (Tradehold), had successfully appealed
against an additional assessment raised by the Commissioner
based on
a taxable capital gain which, according to the Commissioner, arose
from a deemed disposal by Tradehold of its shares in
Tradegro
Holdings Limited, in terms of para 12(1) of the Eighth Schedule to
the Income Tax Act 58 of 1962 (the Act).
[2] Tradehold is an
investment holding company, incorporated in South Africa, with its
registered office at 36 Stellenberg Road,
Parow, Industria, and is
listed on the Johannesburg Stock Exchange. During the tax year under
consideration, being the year of
assessment ended 28 February 2003,
Tradehold’s only relevant asset was its 100 per cent
shareholding in Tradegro Holdings
which, in turn, owned 100 per cent
of the shares in Tradegro Limited, a company incorporated in Guernsey
which owned approximately
65 per cent of the issued share capital in
the UK-based company, Brown & Jackson plc.
[3]
On
2 July 2002, at a meeting of Tradehold’s board of directors in
Luxembourg, it was resolved that all further board meetings
would be
held in that country. This had the effect that, as from 2 July 2002,
Tradehold became effectively managed in Luxembourg.
It nevertheless
remained a ‘resident’ in the Republic notwithstanding the
relocation of the seat of its effective management
to Luxembourg by
reason of the definition,
at
that time, of the term ‘resident’ in s 2 of the Act.
1
This s
tatus
changed with effect from 26 February 2003, when the definition was
amended and Tradehold ceased to be a resident of the Republic.
2
[4] Relying on the
provisions of para 12 of the Eighth Schedule to the Act, the
Commissioner contended that when the respondent
relocated its seat of
effective management to Luxembourg on 2 July 2002, or when it ceased
to be a resident of the Republic on
26 February 2003, it was deemed
to have disposed of its only relevant asset, namely its 100 per cent
shareholding in Tradegro Holdings,
resulting in a capital gain being
realised in the 2003 year of assessment in an amount of R405 039
083. This tax is colloquially
referred to as an ‘exit tax’.
[5] Paragraph 12 of
the Eighth Schedule to the Act, insofar as it is relevant, reads:
‘
12 Events
treated as disposals and acquisitions –
(1)
Where an event described in subparagraph (2) occurs, a person will be
treated for the purposes of this Schedule as having disposed
of an
asset described in that subparagraph for proceeds equal to the market
value of the asset at the time of the event and to
have immediately
reacquired the asset at an expenditure equal to that market value,
which expenditure must be treated as an amount
of expenditure
actually incurred and paid for the purposes of paragraph 20(1)(
a
).
(2)
Subparagraph (1) applies, in the case of –
(a)
a
person who ceases to be a resident, or a resident who is as a result
of the application of any agreement entered into by the Republic
for
the avoidance of double taxation treated as not being a resident, in
respect of all assets of that person other than assets
in the
Republic listed in paragraph 2(1)(
b
)(i)
and (ii);
(b)
an asset
of a person who is not a resident, which asset –
(i) becomes an asset
of that person’s permanent establishment in the Republic
otherwise than by way of acquisition; or
(ii) ceases to be an
asset of that person’s permanent establishment in the Republic
otherwise than by way of a disposal contemplated
in paragraph 11…’
[6] Paragraph 12
must be read with para 2 of the Eighth Schedule which provides:
‘
Application. –
(1)
Subject to paragraph 97, this Schedule applies to the disposal on or
after valuation date of –
any asset of a
resident; and
the following
assets of a person who is not a resident, namely –
(i) immovable
property situated in the Republic held by that person or any interest
or right of whatsoever nature of that person
to or in immovable
property situated in the Republic; or
(ii) any asset which
is attributable to a permanent establishment of that person in the
Republic.’
[7] Para 12(1)
speaks of a person being ‘treated as having disposed of an
asset’. This is a deeming provision. A deemed
disposal of
assets, except those listed in subsection 2(1)(
b
)(i) and(ii),
is triggered under para 12 when a company ceases to be a resident of
the Republic or is treated as not being a resident
as a result of the
application of a double tax agreement.
[8] On appeal to the
Tax Court it was contended by the respondent that if there was a
deemed disposal of the investment by Tradehold
during the 2003 year
of assessment, the capital gain that resulted from that disposal was
not taxable in South Africa but in Luxembourg.
The reason therefore
was that at the time the capital gain arose the respondent was deemed
to be a resident of Luxembourg in terms
of Art 4(3) of the Double Tax
Agreement (DTA) entered into between South Africa and the Government
of the Grand Duchy of Luxembourg
on 6 December 2000, which became
applicable to South Africa in respect of the years of assessment
beginning on or after 1 January
2001.
3
In terms of Art 4(3)
the deemed place of residence of a company is the place where its
effective management is situated.
[9] Article 13(4) of
the DTA provides as follows:
4
‘
Gains from
the alienation of any property other than that referred to in
paragraphs 1, 2 and 3, shall be taxable only in the Contracting
State
of which the alienator is a resident.’
[10] The Tax Court
rejected the Commissioner’s argument that the reference in Art
13(4) of the DTA to gains from the alienation
of property did not
include a deemed disposal of property as contemplated in para
12(2)
(a)
of the
Schedule. The Tax Court’s reasons are to be found in the
following passages in the judgment:
‘
In terms of
para 2(1)(a) of the Schedule, capital gains tax becomes payable
in respect of “the disposal of any asset
of a resident”.
Subparagraphs 12(1) and (2) of the Schedule provide that upon an
event occurring in terms of those provisions
‘a person will be
treated for the purposes of this Schedule as having disposed of an
asset’. I am unable to see any
reason why a deemed disposal of
property should not be treated as an alienation of property for
purposes of article 13(4) of the
DTA. I agree in this regard with
counsel for the appellant, who argued that it would be absurd if a
taxpayer were to be protected
in terms of art 13(4) from
liability for tax resulting from a gain from an
actual
alienation of property, but not from a
deemed
alienation of property.
It was contended on
behalf of the Commissioner that if the appellant was correct in this
regard, it would mean that the deemed disposal
provisions of para 12
would never apply if a party were to migrate to a country which is
party to a DTA. However, the same might
be said in respect of an
actual disposal of an asset which falls within article 13(4), but
this is not a reason for concluding
that the article would not apply
in that instance.’
[11] The
Commissioner’s principal submission is that a deemed disposal
provided for in para 12 of the Eighth Schedule is not
an ‘alienation’
as contemplated in Art 13(4) of the DTA. It was submitted that
something that is deemed to have occurred
has not actually occurred
and thus a deemed disposal of an asset is notionally different from
an alienation thereof. In support
of this submission the Commissioner
invoked the following dictum of Cave J in
R v Norfolk County
Council
(1891) 60 LJ QB 379
at 380:
‘
Generally
speaking when you talk of a thing being deemed to be something, you
do not mean to say that it is that which it is deemed
to be. It is
rather an admission that it is not what it is deemed to be and that,
notwithstanding, it is not that particular thing,
nevertheless it is
deemed to be that thing.’
[12] Reference was
also made to
New Union Goldfields Limited v
Commissioner for Inland Revenue
1950 (3) SA
392
(A) at 407A where Van den Heever JA remarked:
‘
I exclude
from consideration all the deeming clauses contained in the Act and
those connected with them; for once the Legislature
“deems”,
it departs from reality.’
[13] Citing a dictum
from C
ronje NO v Paul Els Investments (Pty) Ltd
1982 (2) SA
179
(T), it was contended for the Commissioner that the term
‘alienation’ as used in the DTA bears the same meaning as
it does in the domestic law, namely, the action of transferring
ownership to another. In
Cronje,
Ackermann J, considering
the term in a different context came to the conclusion (at 188A) that
‘die woord “alienation”
‘n beperkte betekenis
het, naamlik die handeling waardeur eiendomsreg oorgedra word’.
Reliance was also placed by the
Commissioner on a definition to
similar effect in the
Shorter Oxford English Dictionary.
For
these reasons, it was submitted, Tradehold was not protected in terms
of Art 13(4) from liability for tax resulting from a
deemed
alienation of its assets.
[14] The following
further arguments were advanced. It was argued that if Art 13(4)
indeed applied, it would mean that the ‘exit
tax’ could
only be levied in the event of a South African taxpayer emigrating to
a country which has not entered into a DTA
with the Republic
containing a provision similar to Art 13(4),
which
could never have been the intention of the legislature. Moreover, the
disposal of an asset contained in subpara 12(1) of the
Schedule, is
stated to apply ‘for purposes of this Schedule’ and
therefore could not have had any effect on the DTA
or have resulted
in ‘the alienation of property’ as contemplated in Art
13(4) In the alternative and on the assumption
that the exit tax
could be levied it was contended that Tradehold’s investment
would have been attributable to a permanent
establishment and
therefore formed part of the assets excluded by para 2(1)(
b
)(ii)
of the Eighth Schedule
[15] The DTA is one
of many double tax agreements entered into between South Africa and
other countries. Its principal objectives
are the avoidance of double
taxation and the prevention of fiscal evasion. The enabling
legislation is s 108 (1) of the Act,
which reads:
‘
108
Prevention of or relief from, double taxation
(1)
The
National Executive may enter into an agreement with the government of
any other country, whereby arrangements are made with
such government
with a view to the prevention, mitigation or discontinuance of the
levying, under the laws of the Republic and
of such other country, of
tax in respect of the same income, profits or gains, or tax imposed
in respect of the same donation,
or to the rendering of reciprocal
assistance in the administration of and the collection of taxes under
the said laws of the Republic
and of such other country.
(2)
As
soon as may be after the approval by Parliament of any such
agreement, as contemplated in section 231 of the Constitution, the
arrangements thereby made shall be notified by publication in the
Gazette
and the
arrangements so notified shall thereupon have effect as if enacted in
this Act.’
[16] Once brought
into operation a double tax agreement has the effect of law. Its
legal effect was described by Corbett JA in
SIR
v Downing
1975 (4) SA 518
(A) at 523A:
‘
[A]s long as
the convention is in operation, its provisions, so far as they relate
to immunity, exemption or relief in respect of
income tax in the
Republic, have effect as if enacted in Act 58 of 1962 (see s
108(2)).’
[17] Double tax
agreements effectively allocate taxing rights between the contracting
states where broadly similar taxes are involved
in both countries.
They achieve the objective of s 108, generally, by stating in which
contracting state taxes of a particular
kind may be levied or that
such taxes shall be taxable only in a particular contracting state
or, in some cases, by stating that
a particular contracting state may
not impose the tax in specified circumstances. A double tax agreement
thus modifies the domestic
law and will apply in preference to the
domestic law to the extent that there is any conflict.
[18] The DTA is
based upon the Model Tax Convention on Income and on Capital agreed
to by the committee on Fiscal Affairs of the
Organisation for
European Economic Co-operation and Development (OECD),
which
has served as the basis for similar agreements that exist between
many countries. In interpreting its provisions one must
therefore not
expect to find an exact correlation between the wording in the DTA
and that used in the domestic taxing statute.
Inevitably, they use
wording of a wide nature, intended to encompass the various taxes
generally found in the OECD member countries.
In addition, because
the double tax agreements are intended to encompass not only existing
taxes, but also taxes which may come
into existence at later dates
(see Art 2(2)), and bearing in mind the complex nature of taxation in
the various member countries,
inevitably the wording in the DTA
cannot be expected to match precisely that used in the domestic
taxing statute. In
SIR v Downing supra
Corbett JA remarked at 523C-D:
‘
The
convention makes liberal use of what has been termed “international
tax language” (see
Ostime
(Inspector of Taxes) v Australian Mutual Provident Society
,
1960 AC 459
at p 480).’
[19] It
is to be observed that Art 3 groups together a number of general
definitions required for the interpretation of the terms
used in the
DTA. Subarticle 2 provides for a general rule of interpretation for
terms used in the DTA that are not defined. ‘Alienation’
is not one of the defined terms and thus Art 3(2) finds application.
5
[20] A helpful
approach in dealing with the correlation between domestic taxing
legislation and a double tax agreement is to be
found in
Ostime
(Inspector of Taxes) v Australian Mutual Provident Society
[1959]
3 All ER 245.
In the speech of Lord Radcliffe (at 248) it was stated
that the first step in any interpretive inquiry is to ascertain where
in
the scheme of the double tax agreement the relevant tax falls, and
then to consider whether the tax can be imposed consistently
with the
obligations undertaken thereunder.
[21] The need to
interpret international treaties in a manner which gives effect to
the purpose of the treaty and which is congruent
with the words
employed in the treaty is well established. See
Pan American World
Airways Inc v SA Fire and Accident Insurance
1965 (3) SA 150
(A)
at 167H;
Potgieter v British Airways
plc
[2005] ZAWCHC 5
;
2005 (3) SA
133
(C).
[22] The first step
therefore is to determine into which Article of the DTA the
particular tax falls. Article 2 of the DTA specifies
the taxes to
which it applies.
6
With regard to the
Republic, it is said to apply to ‘the normal tax’, which
includes tax on capital gains. It is plain
that the parties to the
DTA intended that all taxes referred to in Art 2 would be dealt with
in one or other of the articles of
the DTA.
[23] The crisp
question that falls to be determined is whether the term ‘alienation’
as used in the DTA includes within
its ambit gains arising from a
deemed (as opposed to actual) disposal of assets. As mentioned above
the term must be given a meaning
that is congruent with the language
of the DTA having regard to its object and purpose.
[24] Article 13 is
widely cast. It includes within its ambit capital gains derived from
the alienation of all property. It is reasonable
to suppose that the
parties to the DTA were aware of the provisions of the Eighth
Schedule and must have intended Art 13 to apply
to capital gains of
the kind provided in the Schedule. It is of significance that no
distinction is drawn in Art 13(4) between
capital gains that arise
from actual or deemed alienations of property. There is moreover no
reason in principle why the parties
to the DTA would have intended
that Art 13 should apply only to taxes on actual capital gains
resulting from actual alienations
of property.
[25] Having regard
to the factors mentioned, I am of the view that the term ‘alienation’
as it is used in the DTA is
not restricted to actual alienation. It
is a neutral term having a broader meaning, comprehending both actual
and deemed disposals
of assets giving rise to taxable capital gains.
[26] Consequently
,
Art 13(4) of the DTA applies to capital gains that arise
from both actual and deemed alienations or disposals of property. It
follows
therefore that from 2 July 2002, when Tradehold relocated its
seat of effective management to Luxembourg, the provisions of the
DTA
became applicable and that country had exclusive taxing rights in
respect of all of Tradehold’s capital gains. This conclusion
renders it unnecessary to deal with the Commissioner’s other
contentions.
[27] The Tax Court
was thus correct in holding that the Commissioner had incorrectly
included a taxable gain resulting from the
deemed disposal of
Tradehold’s investment in its income for the 2003 year of
assessment. Accordingly the appeal cannot succeed.
[28]
The
appeal is dismissed with costs, including those of two counsel.
____________________
P BORUCHOWITZ
ACTING JUDGE OF
APPEAL
Appearances:
APPELLANT: PJJ
Marais SC with HGA Snyman SC
Instructed by:
The State Attorney,
Pretoria
The State Attorney,
Bloemfontein
RESPONDENT: PA
Solomon SC with J Boltar
Instructed by:
Edward Nathan
Sonnenbergs, Cape Town
Matsepes Attorneys,
Bloemfontein
1
Prior
to its amendment and during the period 2 July 2002 to 25 February
2003, the term ‘resident’ was defined as follows
in s 1
of the Act.
‘
Section 1
“
Resident”
means any –
natural person who
is –
…
person (other than
a natural person) which is incorporated, established or formed in
the Republic or which has its place of
effective management in the
Republic (but excluding any international headquarter company)…’
2
The
amendment on 26 February 2003 added the following words to the
definition of ‘resident’: ‘[B]ut does not
include
any person who is deemed to be exclusively a resident of another
country for purposes of the application of any agreement
entered
into between Governments of the Republic and that other country for
the avoidance of double taxation.’
3
Article
4 insofar as it is relevant provides as follows:
‘
1. For the
purposes of this Convention the term “resident of a
Contracting State” means:
(a)
in
Luxembourg, any person who, under the laws of Luxembourg, is liable
to tax therein by reason of his domicile, residence, place
of
management or any other criterion of a similar nature, but this term
does not include any person who is liable to tax in Luxembourg
in
respect only of income from sources in Luxembourg or capital
situated therein;
(b)
in South
Africa, any individual who is ordinarily resident in South Africa
and any other person which has its place of effective
management in
South Africa; and
(c) . . . Where by
reason of the provisions of paragraph 1 an individual is a resident
of both Contracting States, then his status
shall be determined as
follows:
2. Where by reason
of the provisions of paragraph 1 a person other than an individual
is a resident of both Contracting States,
then it shall be deemed to
be a resident of the State in which its place of effective
management is situated.’
4
The
full text of Article13 reads:
‘
Capital
Gains
1.
Gains derived by a
resident of a Contracting State from the alienation of immovable
property referred to in Article 6 and situated
in other Contracting
States may be taxed in that other State.
2. Gains from the
alienation of movable property forming part of the business property
of a permanent establishment which 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, including
such gains from the
alienation of such a permanent establishment (alone or with the
whole enterprise) or of such fixed base,
may be taxed in that other
State.
3 Gains of an
enterprise of a Contracting State from the alienation of ships or
aircraft operated in international traffic or
movable property
pertaining to the operation of such ships or aircraft, shall be
taxable only in that State.
4.
Gains from the alienation of any property other than that referred
to in paragraphs 1, 2 and 3, shall be taxable only in the
Contracting State of which the alienator is a resident.’
5
Art
3(2) reads: As regards the application of the Convention at any time
by a Contracting State, any term not defined therein
shall, unless
the context otherwise requires, have the meaning which it has at
that time under the law of that State for the
purposes of the taxes
to which the Convention applies, any meaning under the applicable
tax laws of that State prevailing over
a meaning given to the term
under other laws of that State.’
6
Article
2 provides as follows:
‘
Taxes
covered
1. The existing
taxes to which the Convention shall apply are :
(a)
in
Luxembourg
. . .
(
b)
in South
Africa : (i)the normal tax; and
(ii) the secondary
tax on companies
(herein after
referred to as "South African tax").
2. The Convention
shall apply also to any identical or substantially similar taxes
which are imposed after the date of signature
of the Convention in
addition to, or in place of, the existing taxes. The competent
authorities of the Contracting States shall
notify each other of
substantial changes which have been made in their respective
taxation laws.