‘Most Favoured Nation’ Dividends Tax Treatment: A Tough Call for Dutch and Swedish Shareholders in South African Companies?

• Author: Robyn Berger,Esther Geldenhuys
• DOI: 10.10520/ejc-btclq_v13_n2_a2
• Published date: 01 June 2022
• Date: 01 June 2022
• Pages: 1-8

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‘Most Favoured Nation’

Dividends Tax Treatment:

A TOUGH CALL FOR DUTCH AND SWEDISH

SHAREHOLDERS IN SOUTH AFRICAN

COMPANIES?*

ROBYN BERGER† AND ESTHER GELDENHUYS‡

AbstrAct

Dutch and Swedish corporations holding 10% or more of the shares in a

South African company (qualifying shareholders) may currently receive divi-

dends without any dividends tax being withheld. This is because the respec-

tive treaties for the avoidance of double taxation (colloquially referred to as a

double taxation agreement (DTA)) concluded with South Africa each contain

a ‘most favoured nation’ (MFN) clause in respect of dividends tax.

On 12 June 2019 the Tax Court in Cape Town upheld the application of

the MFN clause in the DTA concluded between the Netherlands and South

Africa (Dutch DTA). It was clear from the arguments made by SARS in the

Tax Court judgment that South Africa would lose a signif‌icant amount of

tax revenue on the application of the MFN clause if the judgment was left

to stand. Therefore, on 1 April 2021, the South African Government f‌inally

entered into a protocol to the DTA between South Africa and Kuwait (Kuwaiti

Protocol). However, it seems that SARS actually intends for the Kuwaiti

Protocol to have retroactive effect.

This article deals with the current status of the MFN clause, considering the

Tax Court judgment and another case dealing with retroactive tax legislation,

and emphasises the current open questions which include the following:

• South African companies wanting to declare dividends to their qualifying

shareholders are asking whether dividends tax should be withheld on

those dividends.

• South African companies that in the past declared dividends to their quali-

fying shareholders and withheld dividends tax thereon, are questioning

whether a claim for a refund of dividends tax can be submitted, on the

basis of the Tax Court judgment.

• Other South African companies want to know what will happen where

dividends tax was actually withheld but a claim for a refund of dividends

tax was subsequently successfully submitted on the basis of the Tax Court

judgment.

* Originally published in Chambers.

† Tax Executive, Bowmans Attorneys.

‡ Senior Associate, Bowmans Attorneys.

2Volume 13 • Issue 2 • June 2022

Business Tax & Company Law Quarterly

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Introduction

Dutch and Swedish Shareholders holding 10% or more of the shares in a

South African company (qualifying shareholders), may currently receive

dividends without any dividends tax being withheld. In other words, the

rate of dividends tax is reduced to 0%.

This is because of the most favoured nation (MFN) clause as regards

dividends in the treaties for the avoidance of double taxation (DTA) entered

into between South Africa and the Netherlands (Dutch DTA), and South

Africa and Sweden (Swedish DTA).

It is well known that the primary purpose of DTAs is to prevent double

taxation between partner countries, by providing certainty on how and

when tax is imposed in the partner country. DTAs also serve as a useful

tool against tax evasion and assist tax authorities in collecting and sharing

relevant tax information. South Africa levies dividends tax in certain

circumstances, and most DTAs reduce the rate of dividends tax that is

payable on dividends paid to shareholders in partner countries.

However, qualifying shareholders will soon be unable to claim this 0%

dividends tax rate. More importantly, it is possible that qualifying share-

holders that have previously claimed this 0% dividends tax rate may f‌ind

this historical treatment challenged by the South African Revenue Service

(SARS).

The legal status of DTAs in South Africa

In order to explain why the 0% dividends tax rate for qualifying share-

holders will disappear going forward, and why their historical reliance on

the 0% dividends tax rate may be challenged, it is helpful to understand

the process through which DTAs become a part of South African tax law.

Section 108(2) of the Income Tax Act 58 of 1962 (Income Tax Act)

provides that the South African Government is empowered to enter into

DTAs with the governments of other countries. Soon after the DTA is

signed, it is then presented for approval by Parliament as contemplated

in section 231 of the Constitution of the Republic of South Africa, 1996

(Constitution).

If approved, the DTA is ratif‌ied through publication in a Government

Gazette, and its provisions are then effective as if they had been incorpo-

rated into the Income Tax Act.

Current status of the MFN dividends tax treatment

In terms of the Swedish DTA, qualifying shareholders are ordinarily not

subject to dividends tax of more than 5%, subject to the application of

the MFN clause. That MFN clause provides for the automatic application

of a lower dividends tax rate in respect of qualifying shareholders if South

Africa and a third-party country have concluded a DTA that provides for