On 12 June 2019 the Cape Town Tax Court (“the Tax Court”) delivered its judgment in an important test case between ABC Pty Ltd (“the Taxpayer”) and the South African Revenue Service (“SARS”), relating to the interpretation and application of the so-called most favoured nation clause (“the MFN clause”) in the double taxation agreement between South Africa and the Netherlands (“SA/Netherlands DTA”).
The Tax Court found in favour of the Taxpayer’s interpretation, that the MFN clause in the SA/Netherlands DTA, when read with the MFN clause in the SA/Sweden DTA and
the dividend article in the SA/Kuwait DTA, results in the dividend withholding tax (“DWT”) rate being reduced from 5% to 0% of the gross amount of the dividends paid.
This is the case in circumstances where a SA resident company declares and pays dividends and the beneficial owner is a Dutch company holding at least 10% of the capital in the company paying the dividends.
The Dutch Supreme Court came to a similar conclusion on 18 January 2019, in relation to the same MFN clause.
The interpretation adopted by the Tax Court in essence relies on the fact that the SA/Kuwait DTA presently provides for a DWT rate of 0%. SARS has previously attempted to address this matter, by successfully renegotiating the SA/Kuwait DTA to provide for an increased DWT rate of 5% in circumstances where the beneficial owner is a company holding at least 10% of the capital in the company paying the dividends. However, Kuwait has to date failed to ratify the negotiated changes, with the result that the protocol is presently not yet in force.
If and when the protocol is ratified by Kuwait (which could occur retrospectively), or if the SA/Kuwait DTA is unilaterally terminated by SARS and/or National Treasury, the 0% DWT rate will no longer apply in terms of the SA/Netherlands DTA. The DWT rate will then accordingly revert to 5% in circumstances where the beneficial owner is a company holding at least 10% of the capital in the company paying the dividends.
SARS may still appeal the decision of the Tax Court, thus placing the matter before the Supreme Court of Appeal. However, considering that the Tax Court has essentially come to the same conclusion as the Dutch Supreme Court, it is doubtful whether such an appeal will be successful.
Contact us should you wish to discuss this interesting development.
In our view, Dutch courage is not required to apply a 0% WHT in the appropriate circumstances.
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