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Tax Court upholds most favoured nation clause in South Africa and Netherlands tax treaty

27 June 2019
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The judgment

On 12 June 2019, the Tax Court in Cape Town upheld the application of the most favoured nation clause in the double taxation agreement (DTA) concluded between South Africa and the Netherlands (SA-Netherlands DTA), which implies that South African Revenue Service (SARS) has to refund the dividend withholding tax imposed on the Dutch taxpayer.

The appellant in the case is a South African incorporated and tax resident company which is wholly owned by a Netherlands incorporated and tax resident company. In November 2014, the appellant sought a refund from the respondent (SARS) for 5% dividends tax paid to SARS on dividends declared to its Netherlands shareholder in April 2012 and October 2012. For the refund, the appellant relied, amongst others, on article 10(10) of the SA-Netherlands DTA, which is the so-called most favoured nation clause.

In terms of Article 10(1) and (2) of the SA-Netherlands DTA, the maximum rate of tax that may be imposed by South Africa is 5% where the recipient of the dividend holds at least 10% of the shares of the company paying the dividend. However, Article 10(10) of the SA-Netherlands DTA provides for an automatic application of a lower rate of tax on dividends if South Africa and a third country concluded a double taxation agreement which provides for a lower rate. In such case, the lower rate will apply to the SA-Netherlands DTA as from the date of entry into force of the double taxation agreement with the third country. It is important to note that the protocol of the SA-Netherlands DTA, which incorporated the most favoured nation clause, came into force in 2008. 

South Africa currently has one DTA that expressly provides that a zero rate of tax must be imposed by South Africa and this is in terms of the one with Kuwait (SA-Kuwait DTA). The SA-Kuwait DTA was, however, concluded in 2006. Still, the appellant argued the application of the most favoured nation clause on the basis of the application of the most favoured nations clause contained in the DTA concluded between South Africa and Sweden (SA-Sweden DTA). The SA-Sweden DTA’s most favoured nation clause is similar to the one in the SA-Netherlands DTA, but with one crucial difference, the clause applies irrespective of when the DTA with the third country was concluded.

As the protocol of the SA-Sweden DTA, which incorporated the most favoured nation clause, came into force in 2012, the appellant argued that on the basis that the most favored nations clause in the SA-Sweden DTA applied due to the prior provisions in the SA-Kuwait DTA, the application of the most favoured nation clause in the SA-Netherlands DTA is triggered. Thereby, the applicant argued, it is subject to a zero rate of dividends tax on dividends declared to its Netherlands shareholder. 

Evidence was brought in Court that before the change from secondary tax on companies to dividends tax, multiple DTAs were renegotiated by National Treasury to provide for tax payable in South Africa of 5% on dividends declared by a South African company to a wholly owned non-resident shareholder. However, due to unforeseen circumstances, although the negotiations to amend the SA-Kuwait DTA were finalised, Kuwait still had to take the final steps in terms of its domestic procedures to give effect to the amended SA-Kuwait DTA. Despite this fact, Kuwait has still not today taken these final steps and dividends tax came into effect on 1 April 2012.

On this basis, SARS argued that the Court must consider the intention of South Africa and all the other relevant parties to the various DTAs and then find that in interpreting the SA-Netherland DTA, there must be interpreted some words that the most favoured nations clause in the SA-Sweden DTA will only apply to a ‘future’ favourable DTA concluded with a third country. SARS further argued that the appellant was exploiting what is an entirely unanticipated, unforeseen and unfortunate occurrence to refuse to pay tax in South Africa, the consequences which are potentially financially disastrous for South Africa.

The Court, however, dismissed SARS argument and held that the provisions of the SA-Netherlands DTA is clear. There were no ground upon which the Court could find that certain words were missing from it, unless it abandons the parol evidence rule, something which could not be done. Accordingly, the Court ordered SARS to refund the appellant.


Although the Tax Court found in favour of the taxpayer, it is clear from the arguments SARS made that South Africa will lose a lot of tax revenue on the application of the most favoured nation clause and if this judgment stands. It is thus very likely that SARS would appeal the judgment.

In our view, the Court did not give proper consideration to the guidelines developed internationally to interpret treaties. The decision in the recent UK court of appeal in Ben Nevis (Holdings) Limited and Another v CHMRC [2013] EWCA Civ 578 considered these guidelines and made the following statement:

‘A strictly literal approach to interpretation is not appropriate in construing legislation which gives effect to or incorporates an international treaty: per Lord Fraser (at p 285) and Lord Scarman (at p 290). A literal interpretation may be obviously inconsistent with the purposes of the particular article or of the treaty as a whole. …Among those principles is the general principle of international law, now embodied in article 31(1) of the Vienna Convention on the Law of Treaties, that ‘a treaty should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’. A similar principle is expressed in slightly different terms in McNair’s The Law of Treaties (1961) p 365, where it is stated that the task of applying or construing or interpreting a treaty is ‘the duty of giving effect to the expressed intention of the parties, that is, their intention as expressed in the words used by them in the light of the surrounding circumstances.'[16].

In the decision of AB LLC and BD Holdings LLC v. CSARS (13276) [2015] ZATC 2, the Court reaffirmed the principle confirmed in the decision of the Supreme Court of Appeal in CSARS v Tradehold Ltd 2013 (4) SA 184 (SCA) at [21] that: ‘The need to interpret international treaties in a manner which gives effect to the purpose of the treaty and which is congruent with the words employed in the treaty is well established.’ and ‘As mentioned above the term must be given a meaning that is congruent with the language of the DTA having regard to its object and purpose.'[23].

If the purpose of Article 10(10) is considered, it was to ensure that South Africa would not grant a better tax dispensation to any other country under another DTA. Since SARS was in the process to renegotiate all its DTAs to remove the exemptions, it could be argued that this circumstance should have been taken into account by the Court, i.e. that it did not intend to give Kuwait a better dispensation since it had already negotiated a removal of the exemption.

Therefore, if SARS appeals the judgment, a higher court may rule in its favour. It is thus premature to start to claim dividends tax refunds on the basis of the application of the most favoured nation clause in the SA-Netherlands DTA. Furthermore, in terms of section 64L, the taxpayer who claims a refund of dividends tax needs to submit the required declaration within three years after the date of payment and no further claim for a refund can be made after the expiry of a period of four years after the date of payment of the withholding tax.

However, a taxpayer may take the view that it is worthwhile to submit an application now to ensure that the four year prescription period is not reached in respect of such refund claims.

For further information or assistance, please contact your usual contact at the Bowmans Tax Practice.