UPDATE ON THE APPLICATION OF THE MOST FAVOURED NATION CLAUSE IN THE SOUTH AFRICA AND NETHERLANDS TAX TREATY

By Esther Geldenhuys,Robyn Berger,Wally Horak Monday, September 30, 2019
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On 12 June 2019 the Tax Court in Cape Town upheld the application of the most favoured nation clause in the double taxation agreement (DTA) concluded between South Africa and the Netherlands (SA-Netherlands DTA), which implies that the South African Revenue Service (SARS) has to refund the dividends tax imposed on a Netherlands shareholder holding at least 10% of the shares in a South African company. Read our earlier newsflash here.

The application of the most favoured nation clause and the provision of a 0% dividends tax in these circumstances is, however, dependent on the application of the current DTA concluded between South African and Kuwait (SA-Kuwait DTA).

Evidence was given in the Tax Court case that before dividends tax came into effect on 1 April 2012, the SA-Kuwait DTA was renegotiated by National Treasury to provide for a 5% dividends tax on dividends declared by a South African company.

However, due to unforeseen circumstances, although the negotiations to amend the SA-Kuwait DTA were finalised, Kuwait still had to take the final steps in terms of its domestic procedures to give effect to the protocol to the SA-Kuwait DTA.

On 3 September 2019 National Treasury, together with the Standing Committee on Finance and the Select Committee on Finance, held presentations on the various 2019 draft tax bills.

In one of these presentations, National Treasury confirmed that they have notified Kuwait that if they do not sign the protocol by September 2019, South Africa will have no choice but to terminate the SA-Kuwait DTA.

National Treasury also stated that Kuwait has now shown commitment to sign the protocol and that National Treasury is in the process of finalising the constitutional requirements for signature of the protocol.

Accordingly, from the date on which the protocol to the SA-Kuwait DTA comes into effect (which will be the date stated in the notice published in the Government Gazette), dividends declared by a South African company to a Netherlands shareholder will be subject to dividends tax at the rate of 5%.

A taxpayer who wishes to claim a refund of dividends tax may still proceed to do so, even after the protocol to the SA-Kuwait DTA comes into effect.