A tale of three DTA’s: South African Tax Court confirms that no dividends tax is payable on distributions to Dutch resident shareholders
By FASKEN, The Netherlands
In terms of section 64E(1)(a) of the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act 58 of 1962 (“the ITA”) dividends tax at a rate of 20{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} must be paid when a South African company declares and pays a dividend. The amount of the tax must be withheld by the company declaring and paying the dividend.
If a dividend is paid to a beneficial owner which is not a resident of South Africa the rate at which dividends tax must be withheld may be reduced in accordance with the provisions of the applicable double tax agreement (“DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and...”) between the two countries, assuming there is one. In terms of the DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... between South Africa and the Netherland dividends may only be taxed in South Africa, if paid to a resident of the Netherlands, at a maximum rate of 5{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}, if that shareholder holds at least 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the equity shares in the South African company and 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} in all other cases. The DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... between South Africa and the Netherlands also provides for a so-called most favored nation clause which would, if applicable, reduces the maximum rate at which tax is payable on dividends paid by a South African company to a shareholder which is a resident of the Netherlands if the following requirements are met:
- South Africa must have concluded a double tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... with a third state;
- The DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... between South Africa and a third state must have been concluded after the DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... between South Africa and the Netherlands came into effect; and
- The taxation of dividends must be limited, under the double tax treatyA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... between South Africa and that third state, to a rate lower than the rate provided for in article 10(2)(a) of the DTAA Double Taxation Agreement (DTA), also known as a Double Taxation Treaty (or a Tax Treaty), is an international tax treaty between two or more countries that aims to prevent individuals or businesses from being taxed twice on the same income. With globalisation and the increase in cross-border economic activities, DTAs have become essential tools for promoting trade, investment, and... between South Africa and the Netherlands.
On 18 January 2019 the Dutch Supreme Court had to consider the above and determine the appropriate tax rate to be applied on the payment of a dividend from a Dutch company to a shareholder which is a resident of South Africa. The Court held that a dividend distribution from the taxpayer (a Dutch entity) to a South African entity in 2013 was subject to 0{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} Dutch dividend withholding tax as a result of the application of article 10(10), read together with the South Africa/Kuwait and South Africa/Sweden tax treaties.
SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... did not approve of the view taken by the Dutch court and was of the opinion that dividends paid by a South African company to a Dutch resident shareholder should be taxed at 5{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} if that shareholder, holds more than 10{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} of the shares in the South African company.
The conflicting views taken by SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... and the Dutch court created some uncertainty as to the correct rate of withholding to be applied when a South African company pays a dividend to a Dutch resident shareholder.
On 12 June 2019 the Cape Town Tax Court, in ABC Proprietary Limited v Commissioner for the South African Revenue ServiceThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... Case nr. 14287 (“ABC”) held that the reasoning of Dutch court, although not binding on South African courts, is correct. The court concluded as follows:
The argument, with which I agree is that the provisions of the Netherlands agreement are clear and provide that in the event of another state receiving preferential treatment from South African in the future, the Netherlands resident must be given the same preference. It is equally a clear fact that when the agreement was subsequently concluded with Sweden the provision in that agreement that the residents of Sweden should receive the same preferential treatment as any other party contracting with South Africa applies regardless of when such other state’s residents obtain such preference, i.e. irrespective of whether it was before the agreement was concluded with Sweden or afterwards. When the agreement was concluded with Sweden the residents of Kuwait already had preferential treatment and therefore the residents of Sweden were entitled to the same treatment.
In ABC the taxpayer, a South African resident company, paid dividends during April and October 2012 to a Dutch resident shareholder. The shareholder gave the requisite declarations and undertakings and the taxpayer withheld dividends tax at a rate of 5{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e}. The shareholder subsequently determined that the declarations and undertakings were incorrect and submitted amended declarations and undertakings requesting the taxpayer to withhold 0{780f53c297e2c008074d23b865a0ce0b35a4f08852d8e1e49466a5a902c4e44e} dividends tax on dividends paid to the shareholder. The taxpayer thereafter requested a refund from the Commissioner on the bases of the amended declarations and undertakings, which refund the Commissioner rejected.
Without relying on the Dutch Supreme Court decision, the Tax court found in favour of the taxpayer and held that the dividends in question were not subject to dividends withholdings tax. Whether or not the Commissioner appeals this decision is still to be seen.
