Cohen Brothers Furniture (Pty) Ltd and Another v Minister of Finance

• Jurisdiction: South Africa
• Judge: Mahomed CJ, Eksteen JA, Harms JA, Scott JA, Zulman JA
• Judgment Date: 23 March 1998
• Citation: 1998 (2) SA 1128 (SCA)
• Docket Number: 615/95
• Hearing Date: 12 March 1998
• Counsel: M D Kuper (with him L B H Tonkin) for the appellants P B Holes ( with him T S Emslie) for the respondents
• Court: Supreme Court of Appeal

Harms JA:

This appeal concerns the payment of withholding tax in terms of the provisions of the Income Tax Act 44 of 1984 (herein referred to as the 'Act') of the erstwhile Republic of Ciskei for companies which had their C place of effective management outside Ciskei. Because of the tortuous route the case took, it is advisable to set out the history of the matter in greater detail than would otherwise have been necessary. D

[1] The Act in chap 4 contained provisions relating to withholding tax. At this stage it is only necessary to note that a withholding tax was to be paid in respect of, inter alia, dividends declared or paid by a Ciskeian company at the rate of 15 cents in the Rand (s 12). According to s 13(a)(iii) as originally enacted E 'the withholding tax (had to) be paid in respect of the amount of . . . any dividend declared or paid by a Ciskeian company . . . if the person to whom such amount has been paid or is payable is . . . an external company'. An 'external company' was defined in s 1 to mean 'any company other than a Ciskeian company' and a Ciskeian company, in turn, was defined to encompass a company incorporated or deemed to be incorporated in the Ciskei. F

[2] The first appellant, Cohen Brothers Furniture (Pty) Ltd (hereinafter 'Cohen Bros'), was a company incorporated in South Africa, and thus an external company according to the definition. The second appellant, Allied Re-insurance Co (Pty) Ltd ('Allied'), on the other hand, was a Ciskeian company as G defined. Allied was a wholly owned subsidiary of Cohen Bros.

[3] On 4 February 1991 and again on 3 September 1991 Allied declared dividends of, respectively, R21 H 006 799 and R16 500 000. Allied deducted withholding tax amounting to R3 151 019,85 and R2 475 000 in respect of these dividends from the amount due to Cohen Bros and paid the tax over to the Receiver of Revenue on 4 March 1991 and 27 September 1991. This was done pursuant to the provisions of s 16(a) of the Act to which I shall revert. The balance of the dividends was paid to Cohen Bros shortly after having been declared. I

[4] In Income Tax Case No 1544 (case No 9409) 54 SATC 456, Melamet J, sitting as President of the Special Income Tax Court (Transvaal), held on 10 March 1992 that the imposition of a similar withholding tax in terms of South African legislation on a Dutch company amounted to a discrimination based solely on the ground J

Harms JA

of nationality and, consequently, was a breach of the double taxation agreement between the Republic of A South Africa and the Kingdom of the Netherlands.

[5] The double taxation agreement between South Africa and Ciskei was in terms similar or identical to the agreement referred to in para [4]. Alluding to that fact and Melamet J's judgment, Cohen Bros requested B the Receiver to refund the withholding tax paid by Allied. The Commissioner took legal advice and in consequence, one can safely presume, the Government of Ciskei amended the Act by way of the Income Tax Amendment Decree 2 of 1993. The Decree deleted the definition of 'external company' from the Act C and amended s 13(a)(iii) to state that 'the withholding tax shall be paid in respect of the amount of . . . any dividend declared or paid by a Ciskeian company . . . if the person to whom such amount has been paid or is payable is . . . a company which has its place of effective management outside Ciskei'. D Furthermore, s 3 of the Decree stated that it 'shall be deemed to have come into operation on 1 March 1985'. (The other amendments to the Act by the Decree need not be mentioned.)

[6] It is common cause that the place of effective management of Cohen Bros was outside Ciskei at E Germiston. Prima facie, the withholding tax paid by Allied was legalised by these amendments and neither Cohen Bros nor Allied could reclaim from the Government of Ciskei the payments made. Undeterred, the appellants applied to the Supreme Court of Ciskei (General Division) for an order declaring that the Decree was in conflict with certain fundamental rights enshrined in the Republic of Ciskei Constitution F Decree 45 of 1990, alternatively declaring that it was invalid to the extent that it had retrospective effect because it (still) violated the double taxation agreement between South Africa and Ciskei. Relief was sought against the Government of Ciskei and its Commissioner for Inland Revenue.

[7] In due course the relief sought in terms of both these formulations was abandoned by the appellants, G and the relief claimed was limited to an order declaring that the Decree, properly interpreted, 'did not operate so as to reopen or resuscitate the question of the recoverability of the taxes (already) paid'. Later it was extended to incorporate a declaration to the effect that the Decree did not entitle the respondents to retain the moneys in question. Later still a prayer for repayment was introduced. H

[8] Because of the demise of the Republic of Ciskei on 27 April 1994, the...