Unless a specific exemption or reduction applies, South Africa (‘SA’) imposes dividends tax at a statutory rate of 20% on all dividends paid by SA companies (‘DWT’). The original SA/Kuwait double tax agreement (‘DTA’) provided for a 0% DWT rate. Even though the protocol with Kuwait was not yet in force (only ratified on 18 September 2024), the SA government imposed 5% DWT on dividends paid from SA to Kuwait from 1 April 2012.
On 18 January 2019, the Dutch Supreme Court delivered a Hoge Raad Judgment interpreting the most favoured nation (‘MFN’) clause in the DTA between SA and the Netherlands, dated 10 October 2005, as amended by the protocol dated 8 July 2008 (‘SA/Ned DTA’). The judgment concluded that if any other DTA that SA entered into provided a more favourable DWT rate than the SA/Ned DTA, that more favourable rate must automatically apply.
The MFN clause in the SA/Ned DTA suggested that the automatic application of a more favourable rate should apply to DTAs concluded after the SA/Ned DTA came into effect. However, the DTA concluded with Sweden on 25 December 1995 (as amended by the protocol on 18 March 2012) (‘SA/Swe DTA’) contained wording that extended its MFN clause to DTAs concluded before the SA/Swe DTA came into effect. This meant that if the SA/Ned DTA or the SA/Swe DTA were utilised, the most favourable DWT in the Kuwait DTA could be applied, resulting in a 0% DWT rate.
The matter was again considered in the Cape Town Tax Court judgment of ITC1925 82 SATC 144 delivered on 12 June 2019. The Tax Court found in favour of the taxpayer, ordering that the MFN clause would apply until the date of ratification of the SA/Kuwait protocol, and ordered SARS to refund the overpaid DWT with interest and to pay the taxpayer’s cost. This judgment provided significant relief to many taxpayers engaged in similar disputes with SARS and highlighted the importance of adhering to the clear terms of DTAs. Interestingly, SARS never appealed the Tax Court judgment, instead focusing their efforts alongside National Treasury on the ratification of the Kuwait protocol to close this 'loophole' and prevent taxpayers from utilising the MFN clause.
The Tax Court judgment indicates how SA courts may handle disputes related to the retroactive application of tax treaties. Given the contentious nature of the retroactive application of the SA/Kuwait protocol, similar legal challenges are likely to arise.
The ratification of the SA/Kuwait protocol represents a pivotal development in the tax relationship between the two countries. The changes introduced by the protocol, particularly those related to dividends, have far-reaching implications for Kuwaiti, Dutch and Swedish investors in SA companies. It is advisable that taxpayers reassess their tax positions, ensure compliance with the new provisions and seek professional advice to navigate the evolving landscape.
If you wish to discuss these topics, please contact:
WTS Renmere
