Dividends tax is a tax which is imposed on shareholders on the receipt of dividends from companies and the purpose behind this form of tax is to make South Africa a more attractive international investment destination by eliminating the perception of a higher corporate tax rate.
In terms of the South African Income Tax Act No. 58 of 1962 under section 64E(1)(a), dividends tax at a rate of 20% (twenty percent) must be paid over to the South African Revenue Services (“SARS”) when a South African company declares dividends and pays those dividends to the shareholders of such company. The amount of such dividends tax must then be withheld by the company declaring and paying the dividends.
In many instances shareholders of South African companies are residents in other jurisdictions. As a result thereof double taxation agreements are concluded between the tax administrators of two countries to enable the administrators to eliminate double taxation of such individuals (“Double Taxation Agreement”). Where companies need to pay dividends to a non-resident shareholder with which South Africa has a Double Taxation Agreement, the rate at which the dividend tax must be withheld can be reduced in accordance with the Double Taxation Agreements.
South Africa and the Netherlands have a Double Taxation Agreement (“SA-Netherlands DTA”) and in terms of Article 10 of the SA-Netherlands DTA, the dividends declared by a South African company and paid to a resident of the Netherlands may only be taxed in South Africa at a maximum rate of 5% (five percent), if that shareholder holds at least 10% (ten percent) of the equity shares in the South African company.
The above provision in the SA-Netherlands DTA is however overridden by the “most favoured nation clause” article 10(10) of the SA-Netherlands DTA. This clause provides that where a Double Taxation Agreement was concluded between South Africa and any other third party after the conclusion of the SA-Netherlands DTA and that Double Tax Agreement limits its taxing rate to a lower or reduced rate lower than the current 5% (five percent), then the SA-Netherlands DTA will adapt the same rate as the Double Tax Agreement between South Africa and the third party.
On or about January 2019, the Netherlands Supreme Court considered the SA-Netherlands DTA to determine the appropriate tax rate to be applied on the payment of a dividend from a company based in the Netherlands to a South African resident shareholder. The Netherlands Supreme Court held that the “most favoured nation clause” must be applied. This issue was also considered by the Tax Court of South Africa in Cape Town, where the court came to the conclusion that the dividend distributions from a South African entity to a Netherland resident shareholder may be exempt from South African withholding tax in accordance with the “most favoured nation clause” in the SA-Netherlands DTA.
The purpose of the “most favoured nation clause” is to ensure that the relevant parties to the Double Tax Agreements maintain a mutual investment friendly environment and to eliminate any possible double taxation.
In the recent court case of ABC Proprietary Limited v The Commissioner for the South African Revenue Services (Case number: 14287) Tax Court of South Africa (Held at Cape Town), it was found that the provisions of the SA-Netherlands DTA provides that in the event that another country receives preferential treatment from South Africa, the Netherlands resident must be given the same preference.
The judgment was in favour of the taxpayer and SARS was required to refund the Netherlands shareholder. South African companies should therefore review whether they have paid dividends tax on dividends declared and paid to Netherland resident shareholders after 1 January 2016, as it provides them with an opportunity to apply for a refund of dividend tax under the SA-Netherlands DTA.
Date: 29 August 2019