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 within 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 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.

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 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.