On 12 June 2019, the Cape Town Finance Court confirmed the application of the most-favoured-nation clause of the Double Taxation Convention (DBA) between South Africa and the Netherlands (SA-Netherlands DBA), which means that the South African Revenue Service (SARS) must refund the dividend tax imposed on the Dutch taxable person. The argument with which I agree is that the provisions of the Dutch agreement are clear and provide that, if another State in the future receives preferential treatment from South Africa, the country established in the Netherlands must enjoy the same preference. It is equally clear that in the event of the subsequent conclusion of the Agreement with Sweden, this Agreement provides that residents of Sweden should enjoy the same preferential treatment as any other Contracting Party concluding with South Africa, irrespecting the date on which the inhabitants of that other State shall enjoy such a preference, that is: Whether before or after the conclusion of the agreement with Sweden. When the agreement was concluded with Sweden, the inhabitants of Kuwait were already given preferential treatment, so that swedes were entitled to the same treatment. For the purposes of Article 10(1) and (2), DBA SA-Netherlands, the maximum tax rate that may be levied by South Africa is 5% if the beneficiary holds at least 10% of the shares of the company paying the dividend. However, Article 10(10) of the DBA SOUTH AFRICA-Netherlands provides for the automatic application of a lower tax rate to dividends where South Africa and a third country have concluded a double taxation convention providing for a lower tax rate. In this case, the lowest rate applies to the DBA SOUTH AFRICA-Netherlands from the date of entry into force of the double taxation agreement concluded with the third country. It is important to note that the South African-Dutch DBA Protocol, which contained the most-favoured-nation clause, entered into force in 2008. Where a dividend is paid to a beneficial owner who is not established in South Africa, the rate at which the dividend tax is to be withheld may be reduced, in accordance with the provisions of the applicable Double Taxation Convention (“DBA”) between the two countries, provided that there is one. For the purposes of the DBA between South Africa and the Netherlands, dividends may be taxed in South Africa only if they are paid to a person established in the Netherlands at a maximum rate of 5 % if that shareholder holds at least 10 % of the shares in the South African company and, in all other cases, 10 %. The DBA between South Africa and the Netherlands also provides for a so-called most-favoured-nation clause, which, where appropriate, lowers the maximum rate by which dividends paid by a South African company to a shareholder based in the Netherlands must be paid if the following conditions are met: SARS has argued that the Court of Justice takes into account the intention of South Africa and all other parties as regards the interpretation of the DBA SA-Netherlands, certain words must be interpreted as meaning that the most-favoured-nation clause of the DBA SOUTH AFRICA-Sweden will apply only to a favourable `future` DBA with a third country. SARS also argued that the complainant took advantage of a completely unexpected, unforeseen and unfortunate event to refuse to pay potentially financially disastrous taxes for South Africa in South Africa. For more information or support, please contact your usual contact person in the Bowmans Tax Practice.
A Story of Three DTAs: South African Financial Court Confirms No Dividend Tax on Dividends Should Be Paid to Shareholders Established in the Netherlands Within the meaning of Section 64E(1)(a) of the Income Tax Act 58 of 1962 (“itA”), a dividend tax of 20% must be paid if a South African company declares and pays a dividend. . . .