BPR 372: Whether lease payments for use of equipment constitute royalties

Summary of the corporate structure:

The applicant is a resident company.

The co-applicant is a resident company.

Proposed transaction:

The applicant and the co-applicant are resident companies that own and let equipment in South Africa. When there is additional demand in certain other countries, such equipment will by prior arrangement, be provided on a temporary basis to entities resident in those countries in exchange for rental payments.

Each of the foreign countries has entered into a treaty with South Africa for the avoidance of double taxation.

In each case, the treaty defines a royalty in article 12 as, amongst others “payments of any kind received as a consideration for the use of, or the right to use industrial, commercial or scientific equipment”.

The equipment will be made available for an extended period to the foreign entities.

The equipment will remain in the respective foreign country during the peak season until demand has dropped, as opposed to returning the equipment to South Africa on the completion of each individual lease.

The foreign entities will:

• have full access and possession of the equipment to make business-related rentals.
• assume responsibility for any risk as regards damage, theft, etc.
• take responsibility for repairs, maintenance, insurance, etc.
• make the equipment available only for business-related rentals in the foreign country and not for private or other matters.
• return the equipment where it makes economic sense for both the applicant and the co-applicant and the foreign entities.

Conditions and assumptions:

Neither the applicant nor the co-applicant has a permanent establishment in the foreign countries.

Ruling:

a) The amounts to be paid to the applicant and co-applicant will constitute royalties as defined in the relevant treaties.

b) Any amounts which must be withheld as withholding taxes on those royalties under the laws of the countries concerned will meet the requirements of section 6quat(1A). The applicant and the co-applicant will therefore be permitted to claim rebates in respect of the withholding taxes which are levied by the other countries in terms of article 12 of the relevant treaty.

c) No view is expressed on any potential transfer pricing implications of the proposed transaction.

Find a copy of BPR 372 here.

20/05/2022