Member Article

In 2014 and 2015, ENSafrica published two articles on the “most favoured nation clause” contained in article 10(10) of the protocol (“2008 Netherlands Protocol”) issued under the Netherlands/South Africa (“SA”) double tax agreement (“Netherlands/SA DTA”).

In the 2014 article, ENSafrica highlighted the view that has been expressed in the market that article 10(10) of the 2008 Netherlands Protocol gives rise to a complete exemption from dividends tax in SA where dividends are distributed by an SA company to a Dutch shareholder that is the beneficial owner of such dividend and holds at least 10% of the shares in the SA company. ENSafrica pointed out that the rationale for this view, although likely to be rejected by the South African Revenue Service (“SARS”), has been that on a literal interpretation of article 10(10), it provides that if SA has concluded a double taxation agreement (“DTA”) with any other country after the date of conclusion of the 2008 Netherlands Protocol and such DTA provides for, inter alia, the complete exemption of dividends from dividends tax, the provisions of such DTA will automatically apply to the Netherlands/SA DTA, with the result that the dividends will similarly be exempt from dividends tax in SA. The prize DTA that appeared to avail to such complete dividends tax exemption is the Kuwait/SA DTA (under article 10(1)), which, according to the SARS website, was published on 20 April 2007 and entered into force on 25 April 2006, with both dates being after the date of conclusion of the 2008 Netherlands Protocol.

In the 2015 article, ENSafrica communicated that, after engaging with SARS on the issue, SARS is of the view that a complete exemption from dividends tax cannot be claimed by a Dutch shareholder under article 10(10) on the basis that the Kuwait/SA DTA was signed on 17 February 2004 and therefore, in SARS’ view, “concluded” prior to the date of conclusion of the 2008 Netherlands Protocol, notwithstanding the publication date and the date of entry into force of the Kuwait/SA DTA following the conclusion date of the 2008 Netherlands Protocol. In the same article, ENSafrica drew attention to an additional “most favoured nation clause” contained in article 10(6) of the 2012 protocol (“2012 Sweden Protocol”) to the Sweden/SA DTA, which goes further than article 10(10) of the 2008 Netherlands Protocol to provide a catch-all clause availing to a reduced dividends tax rate in the event of a DTA being concluded between SA and another country that provides for a lower rate than that contained in the Sweden/SA DTA, in the absence of any provisos pertaining to the date of conclusion of the relevant DTA.

In the backdrop of the above, and specifically SARS’ view that article 10(10) of the 2008 Netherlands Protocol should not avail to a 0% dividends tax rate, it is interesting to note that this issue has been recently canvassed in the Netherlands in the judgment of the Rechtbank Zeeland-West Brabant Court handed down on 29 October 2015. The facts of the judgment are, in essence, that a Dutch BV distributed dividends to its sole shareholder being an SA company, from which 5% was withheld in the form of dividend withholding tax. The SA company claimed the dividend withholding tax back from the Dutch revenue authorities which (holding the same view as SARS) rejected the claim, resulting in the SA company approaching the Dutch district court for relief. The court ruled in favor of the SA company and confirmed a complete exemption from dividends tax for the SA company through a reading of article 10(10) of the 2008 Netherlands Protocol, article 10(6) of the 2012 Sweden Protocol and article 10(1) of the Kuwait/SA DTA. The court’s reasoning can be summarised as follows:

• firstly, the court recognised the provision under article 10(10) to the 2008 Netherlands Protocol that provides for the automatic application of a lower dividends tax rate if SA concluded a DTA with another country which recognises a lower dividends tax rate;
• secondly, the court recognised the conclusion date of the 2008 Netherlands Protocol to be 28 November 2008;
• thirdly, the court referred to article 10(6) of the 2012 Sweden Protocol and confirmed that, because article 10(6) does not have any reference to the date of conclusion of the relevant DTA, dividends paid under the Sweden/SA DTA should be exempt from dividends tax;
• the court then ruled that since the 2008 Netherlands Protocol was concluded after the 2012 Sweden Protocol, it would be relevant to consider the clause in the 2012 Sweden Protocol for purposes of considering the Netherlands/SA DTA i.e. in relation to dividends paid from the Netherlands to SA;
• finally, the court held that because:
  • the 2012 Sweden Protocol provides for a 0% dividends tax rate, owing to the reading of article 10(6) of the 2012 Sweden Protocol with article 10(1) of the Kuwait/SA DTA; and
  • the 2012 Sweden Protocol was duly concluded after the 2008 Netherlands Protocol,

by virtue of article 10(10) of the 2008 Netherlands Protocol, the dividends tax rate in relation to dividends paid from an SA company to a beneficial owner in the Netherlands would be reduced to 0% (where the beneficial holder holds the minimum 10% shares in the SA company).

The essence of the judgment is that the reading of two separate DTAs to which SA is party (i.e. article 10(6) of the 2012 Sweden DTA and article 10(1) of the Kuwait/SA DTA) result in the meeting of the requirements under a separate DTA, being article 10(10) of the 2008 Netherlands DTA.

While there is logic in the argument, as stated above, as the essence of article 10(10) of the 2008 Netherlands DTA is that there needs to be a reduced rate under another DTA which requirement is met (albeit through the reading of two other DTAs), having engaged with SARS on obtaining an exemption under article 10(10) of the 2008 Netherlands DTA, it is known that SARS is of the view that there is no treaty relief under article 10(10) that would result in a 0% dividends tax rate.

The Dutch judgment certainly makes for interesting reading, however, notwithstanding the fact that the judgment articulates a rational basis for which an inference can similarly be drawn in SA that there will be no dividends tax where an SA company pays a dividend to a Dutch beneficial owner, it should be noted as follows:

• bearing in mind our understanding of SARS’ views on their ability to impose tax on dividends paid to a Dutch beneficial owner (i.e. that there is no complete exemption under article 10(10) of the 2008 Netherlands DTA);
• the fact that the Dutch judgment is not a judgment of SA courts for which any reliance or precedent can be drawn (albeit the judgment pertains to a bilateral treaty of effect in SA); and
• since we understand that SARS is presently negotiating amendments to the Netherlands/SA DTA (which is likely to close this loop-hole given the meeting of minds of SARS and the Dutch revenue authorities on the issue),

it would be remiss to express a positive view that dividends paid by an SA company to a beneficial owner in the Netherlands (holding the requisite 10% shareholding) are exempt from dividends tax.

What is clear is there is now an apparent distortion as to whether or not dividends paid by an SA company to a beneficial owner in the Netherlands are exempt from dividends tax. Because of the Dutch judgment and the publicity it has achieved internationally, one could only hope that SARS will issue some form of publication to obtain clarity on this conundrum.