The Treatment of deemed dividends under South Africa’s double Tax agreements

• Pages: 29-40
• Record Number: btclq_v8_n2_a4
• Author: E.D. Liptak
• Published date: 01 June 2017
• Date: 01 June 2017
• DOI: 10.10520/EJC-7e03aaeee

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© SIBER INK

The Treatment of Deemed

Dividends under South Africa’s

Double Tax Agreements

ED LIPTAK*

ABSTRACT

The Income Tax Act, 1962 (the Act), contains a number of anti-avoidance

provisions that deem certain amounts paid and received to be dividends in

specie, namely section 8F, 8FA and 31(3)(i) of the Act. The issue that arises is

whether a non-resident recipient of the deemed dividend in specie may claim

any double taxation relief under the double taxation agreement (DTA) entered

into between South Africa and the country of residence of the non-resident

recipient of the deemed dividend in specie? The article notes that four issues

arise in regard to this conundrum. Firstly, does an amount that is deemed to

be a dividend in specie for the purposes of the Act, also constitute a ‘dividend’

under the relevant DTA? Secondly, if the answer is yes, is the recipient of

the deemed dividend in specie the ‘benef‌icial owner’ of the ‘dividend’ — a

prerequisite to being able to claim treaty relief in most instances? Thirdly,

if the answer to the second issue is also a yes, then may the South African

Revenue Service (SARS) still deny treaty relief on the basis that the relevant

provisions of the Act are anti-avoidance provisions and therefore override the

DTA? Fourthly, if the provisions of the Act and the DTA are in conf‌lict, how is

this to be resolved?

These four issues are considered in the context of the USA/SA DTA and the

OECD Model Tax Convention on Income and on Capital (Model Convention).

As regards the f‌irst issue, the article concludes that an amount derived by

a resident of the USA that is deemed to be a dividend in specie for South

African tax purposes will be treated as a ‘dividend’ under the USA/SA DTA.

By contrast, the position under the Model Convention is not that clear, as the

deemed dividends may not meet the ‘corporate rights’ requirement under

the Model Convention.

As regards the second issue, namely whether the recipient of the amount

that is deemed to be a dividend in specie can be said to be the benef‌icial owner

of the ‘dividend’, the weight of authority and wording of the relevant provi-

sions in the Act support the view that the recipients would be regarded as

benef‌icial owners of the deemed dividends in specie for purposes of the DTA.

Notwithstanding that the provisions that deem certain payments to be

dividends in specie are specif‌ic anti-avoidance provisions, the article concludes

that while there does not appear to have been any judicial pronouncement in

regard to this issue, there does not seem to be any reason why the recipient

cannot claim DTA relief merely because the deemed dividends in specie arose

in an anti-avoidance context.

Finally, even if the provisions of the Act and DTA are in conf‌lict, there is

little doubt that the courts would adopt a contextual and purposive interpre-

tation approach to resolve any conf‌lict there may be.

* Independent tax specialist.