In a binding private ruling, dated March 1 2017, the South African Revenue Service (SARS) confirmed that as a result of the most favoured nation (MFN) clause in the double tax treaty held between South Africa and Sweden, South African dividends tax is not payable on dividends declared by a local company to a Swedish resident shareholder.
Article 10 of the South Africa-Sweden tax treaty, read together with the 2012 Protocol to that treaty, provides that if South Africa concludes a treaty which allows for a lower rate of dividends tax than the South Africa-Swedish treaty does, that lower rate will apply to dividends paid from South Africa to Sweden. The Swedish treaty rate is 5%, subject to certain criteria being met.
A number of South Africa's tax treaties originally provided for a zero rate of dividends tax. Over time, the South African authorities have been renegotiating these treaties and only one treaty now remains that still provides for a zero rate. The tax treaty between South Africa and Kuwait provides that dividends paid from South Africa to a beneficial owner that is tax resident in Kuwait are taxable only in Kuwait. The Kuwait treaty, therefore, triggers the MFN provision in the Swedish treaty.
Although not directly relevant, the acknowledgement by SARS in this recent ruling of the beneficial impact of the MFN provisions in the South Africa-Swedish treaty is encouraging for South African taxpayers who have been requesting refunds from SARS of dividends tax paid on distributions made to the Netherlands. These claims are based on the fact that the South Africa-Netherlands tax treaty also contains a MFN provision. To date, SARS has not conceded that these refunds are due.
The MFN provision in the Dutch treaty applies if a treaty entered into after the Dutch treaty was concluded provides for a lower South African dividends tax rate than the Dutch treaty does. Differing interpretations exist as to the meaning of "concluded" in this context. On the assumption that the Kuwait treaty was concluded earlier than the relevant Dutch treaty provisions, it cannot be invoked directly to claim a zero dividends tax rate under the Dutch treaty. However, it is argued that the Swedish Protocol, which on all interpretations was concluded later than the Dutch tax treaty, has the effect of eliminating South African dividends tax on distributions to Dutch shareholders.
The argument runs as follows:
- The Dutch-South Africa MFN provision is triggered if a treaty concluded by South Africa after the Dutch treaty provides for a lower rate of dividends tax;
- The Swedish-South Africa Protocol was concluded after the Dutch treaty;
- As result of the interaction of the Swedish and Kuwait tax treaties, as discussed above and confirmed by SARS, no dividends tax is payable under the South Africa-Swedish treaty; and
- Consequently, qualifying Dutch resident shareholders are not liable for South African dividends tax.
These arguments have been upheld in the context of Dutch withholding tax by a decision of a Dutch lower court. It is only a question of time before a South African court rules on the same issue.
How long this opportunity exists (for Swedish and possibly also Dutch residents) is debatable. South Africa is in discussions with Kuwait to amend the treaty, presumably to increase the dividends tax rate and thereby close all MFN related windows.
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