By the Tax team

Here we briefly outline the general tax implications when dividends are declared by a company that is a tax resident of South Africa to a shareholder that is not a tax resident of South Africa, as well as dividends declared by a company that is not a tax resident of South Africa to a shareholder that is a tax resident of South Africa.

In terms of dividend income, a state will generally provide for the tax implications of dividend income via that state’s domestic legislation. In South African domestic legislation, for example, dividend withholding tax is now levied at a rate of 20% on the dividends paid to a shareholder by a South African company. It is the responsibility of the South African company to withhold the tax on dividends “paid”.

Double Taxation Agreements (“DTA’s”) effectively allocate taxing rights amongst contracting states and, therefore, according to South African case law, DTA’s modify domestic law and will apply in preference to domestic law if there is a conflict. For this reason, if a South African company were to declare a dividend to a shareholder residing in a state with which South Africa has a DTA, then that shareholder would be subject to the dividend withholding tax rate as per the DTA between South Africa and that state instead of the rate as per South Africa’s domestic legislation. The same principle applies where a company that is not a tax resident of South Africa, and which has a DTA with South Africa, pays a dividend to a South African shareholder.

Most of South Africa’s DTA’s provide for a specific dividend withholding tax rate, however there are some that provide that the applicable rate will equal the most favourable rate that South Africa has agreed to with another state. Such a provision is typically referred to as a most-favoured nation clause.

The DTA between South Africa and Sweden, as amended by the protocol in April 2012, provides that If any DTA between South Africa and a third state provides that South Africa shall exempt dividends arising in South Africa from tax, or limit the tax charged in South Africa on such dividends to a rate lower than that provided for in this DTA, then such exemption or lower rate shall automatically apply to dividends arising in South Africa and beneficially owned by a resident of Sweden (and arising in Sweden and beneficially owned by a resident of South Africa) under the same conditions as if such exemption or lower rate had been provided for in that DTA.

The DTA between South Africa and Kuwait provides that should dividends be paid by a company that is a resident of South Africa to a resident of Kuwait who is the beneficial owner, then those dividends would be exempt from tax in South Africa and only be taxable in Kuwait. This means that a South African resident company will not be required to withhold dividends tax from the dividends declared to a shareholder that is resident in Sweden. This was confirmed in Binding Private Ruling 267.

The DTA between South Africa and the Netherlands also contains a most-favoured nation clause, however it is subject to a date limitation in that the clause only finds application if there is a DTA between South Africa and a third state that has been entered into after the date of the DTA between South Africa and the Netherlands being promulgated (January 2009). Interestingly, a district court in the Netherlands, in interpreting the DTA between South Africa and the Netherlands, held that the tax rate on dividends paid by a South African resident company to a shareholder that resides in the Netherlands is exempt. This, the court held, was because the most favoured nation clause in the Dutch DTA was triggered by the DTA between South Africa and Sweden. As you will recall from the discussion above, the most-favoured nation clause in the DTA between South Africa and Sweden, as amended by the Protocol in 2012, when read with the exemption in the DTA between South Africa and Kuwait, provides for an exempt tax rate on dividends. This decision was recently confirmed by the Dutch High Court in August 2017 after an appeal by the Dutch revenue authorities.

Although not a South African judgment, the Dutch Court decision is certainly of persuasive value and arguably makes it difficult for a South African court to deviate from its interpretation of the DTA between South Africa and the Netherlands.

Conclusion

South Africa’s DTA with Kuwait is South Africa’s only DTA that explicitly provides a complete exemption in respect of dividends which, by virtue of the most-favoured nation clauses in the Swedish DTA and the Dutch DTA, also applies to the DTA between South Africa and Sweden as well as the DTA between South Africa and the Netherlands. It must, however, be noted that South Africa is in the process of renegotiating the DTA with Kuwait and many anticipate that the tax exemption for dividends will be replaced by a 5% withholding tax. Taxpayers need to be aware that such a legislative amendment would have a ripple effect and alter the impact of the Swedish DTA as well as the Dutch DTA.