SOUTH AFRICA: MOST FAVOURED NATION DIVIDENDS TAX TREATMENT – THE END IS NEAR(ER)
Dutch and Swedish corporates holding 10% or more of the shares in a South African company (Qualifying Shareholders), may currently receive dividends without any South African dividends tax being withheld. However, the end is now in sight.
The Double Tax Agreements (DTAs) between South Africa and The Netherlands, and South Africa and Sweden (the Dutch DTA and Swedish DTA respectively), each contains a ‘most favoured nation’ (MFN) clause in respect of dividends tax.
In terms of the Swedish DTA, Qualifying Shareholders will not be subject to dividends tax of more than 5%, subject to the MFN clause which provides for an automatic application of a lower dividends tax rate in respect of Qualifying Shareholders, if South Africa and a third country have concluded a DTA which provides for a lower rate. The Dutch DTA contains a similar MFN clause, subject thereto that this will only apply if the third country DTA was concluded after the Dutch DTA.
As the DTA between South Africa and Kuwait (Kuwaiti DTA) currently provides for a dividends tax rate of 0% for Kuwaiti Qualifying Shareholders, the MFN clause in the Swedish DTA confers the same benefit upon Swedish Qualifying Shareholders. Although the Kuwaiti DTA was concluded after the Dutch DTA, the MFN clause in the Swedish DTA was concluded after the conclusion of the Dutch DTA and Dutch Qualifying Shareholders can thus also rely on the 0% dividends tax rate.
However, the end of this benefit is now in sight, as Kuwait and South Africa have finally, on 1 April 2021, signed an amending protocol. A copy of the protocol has not yet been released, but it is expected that the amended Kuwaiti DTA will provide for a 5% withholding tax for Kuwaiti Qualifying Shareholders and 10% in all other cases.
Accordingly, once the amending protocol to the Kuwaiti DTA comes into effect, dividends declared by a South African company to a Dutch or Swedish Qualifying Shareholder will no longer qualify for the 0% withholding rate, but will be subject to dividends tax at the rate of 5%.
We will report on further details of the amending protocol as they become available, including the effective dates.