The Cape Town Tax Court recently upheld the application of the so-called 'most favoured nation clause' contained within the double tax agreement between South Africa and the Netherlands ("the SA-NL DTA"). The implication being that the South African Revenue Services ("SARS") may need to refund any dividend withholding tax imposed on a Dutch tax resident after 18 March 2012.
The SA-NL DTA provides for the taxing rights on dividends to be with the country of residence of the investor; however it allows for the country of the investment to introduce a maximum withholding tax rate on dividends of 5% to 10% depending on the circumstances. This initial provision setting out the taxing rights on dividends of the respective countries are overridden by a 'most favoured nation clause', which provides that where any double tax agreement concluded between South Africa and a third party after the conclusion of the SA-NL DTA, and that double tax agreement limits its taxing rate to a lower or reduced rate than the one set-out above, the SA-NL DTA will adapt the same rate as applied in the DTA between South Africa and the third party.
Sweden and South Africa amended their double tax agreement to include a most favoured nation clause in March 2012; however this clause applied retrospectively as well, unlike the SA-NL DTA (which only refer to future double tax agreements to be concluded). The double tax agreement between South Africa and Kuwait, concluded in 1997, provides for a 0% dividend withholding tax rate within the country of investment, which as a result of the 'most favoured nation clause' meant that this rate will now also be applicable between South Africa and the Netherlands.
SA & Kuwait DTA (1997) > SA & Sweden DTA(2012) > SA-NL DTA(2009).
Refund of a Dividend after March 2012
The Dutch Supreme Court of Appeal confirmed this interpretation of the 'most favoured nation' clause earlier this year when they found that the dividend withheld by a Dutch BV to its South African parent was incorrect and no dividend should have been withheld. The proper application of the SA-NL DTA should lead to a refund of the Dutch dividend withholding tax.
South Africa Tax Court confirms interpretation
The case of ABC Proprietary Limited v the Commissioner of the South African Revenue Services (Case No: 14287) confirmed this interpretation. SARS argued that the taxpayer was exploiting what is an entirely unanticipated, unforeseen and unfortunate occurrence as this was never the intention of the parties. The court had sympathy with SARS, but confirmed that the provisions of the SA-NL DTA are clear and unambiguous. SARS may decide to appeal against the judgement.
The purpose of a 'most favoured nation' clause is to ensure that the relevant countries remain a preferential destination of investment between each other. It will be to our surprise if SARS are successful with an appeal at the Supreme Court of Appeal and we believe that South Africa may need to amend one or all of the relevant tax treaties to give effect to their intentions.
It`s therefore advisable that any parties that was subject any dividend withholding tax after 18 March 2012 prepare their necessary applications for a refund of any dividend withholding tax to avoid prescription.
Originally published 29 June 2019
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