Binding Private Ruling 267 confirms that the applicant, a South African company that is a wholly owned subsidiary of a Swedish company, does not have to withhold dividends tax on proposed dividends to its parent as a result of the application of the most-favoured-nation provision in Article 10(6) of the SA/Sweden treaty in light of the dividend taxing rights in the SA/Kuwait treaty.
A protocol amending the double tax agreement (DTA) between South Africa and Sweden took effect from 18 March 2012. This protocol amended amongst others the article of the DTA that deals with the rights to tax dividends. The amended version of Article 10(2) placed a limit of 5% of the gross dividend amount on the tax imposed on a dividend in the country in which the company paying the dividend is a resident if the beneficial owner of the dividend is a company holding at least 10% of the capital of the company paying the dividend. In all other cases, a maximum rate of 15% applies.
Article 10 of the DTA was further amended by the introduction of a most-favoured-nation (MFN) clause in Article 10(6). It states that if any agreement between South Africa and another country were to exempt dividends (generally or a specific category) or limit the tax to a lower rate than the above mentioned 5%, such exemption or lower rate would automatically apply to dividends arising in South Africa that are beneficially owned by a Swedish resident under the same conditions.
Binding Private Ruling 267
This ruling was issued to a South African tax resident company, which is a wholly owned subsidiary of a Swedish tax resident company.
The ruling states that Article 10(1) of the DTA between South Africa and Kuwait makes provision for dividends paid by a South African resident company to a beneficial owner in Kuwait to only be taxed in Kuwait. This treatment is more favourable than Article 10(2) of the SA/Sweden treaty and therefore triggers Article 10(6) to apply.
The ruling confirms that the South African company is not required to withhold any dividends tax provided that the necessary prescribed supporting documentation is kept (see section 64G(3)).
requirements in relation to reduced dividends tax
The ruling provides an indication to other South African companies with Swedish shareholders to consider the impact of the SA/Kuwait treaty on the dividends paid in their particular circumstances. Companies paying dividends in circumstances where Article 10(6) of the SA/Sweden treaty finds application should however be aware that the tax on these dividends may change should the SA/ Kuwait treaty be revised. In recent years, treaties with two other countries (Oman and Cyprus) that also did not allow South Africa to impose dividends tax were renegotiated.
A contentious matter around which this ruling may again stimulate some debate is the MFN clause contained in the dividends article of the treaty between South Africa and the Netherlands. Similarly to the SA/Sweden treaty, it makes provision for dividends to be taxed in the country where the company paying the dividend is a resident at a rate of 5% if the beneficial owner is a company that holds at least 10% of the capital of the company paying the dividends. Article 10(10) of that DTA, as inserted by the protocol, also makes provision for a reduction of this rate where any treaty concluded between South Africa and another state makes provision for a similar exemption or reduced rate to be applied by both states. Unlike Article 10(6) of the SA/Sweden DTA, this MFN clause however only applies where the other convention has been entered into by South Africa after the date of conclusion of the SA/Netherlands treaty. Differing views appear to exist around the interpretation of this requirement in relation to the date of conclusion of the SA/Kuwait treaty as well as the interaction between Article 10(10) of the SA/Netherlands treaty and Article 10(6) of the SA/Sweden treaty, read with the SA/Kuwait treaty. (March 2017)
Pieter van der Zwan, the author of this article,
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