By now it is accepted that the payment of dividends to non-South African shareholders are subject to dividends tax which is levied at a rate of 15%, unless such rate is reduced by an applicable double tax agreement (DTA). To this end, most DTAs are drafted in such a manner that the rate of dividends tax is reduced to 10% or 5%, depending on the percentage of shares the beneficial owner holds in the South African company.
The Netherlands is no exception to the rule, and in terms of the Protocol published in Government Gazette on 23 January 2009, Article 10 of the DTA provides that dividends paid by a company which is a resident of South African to a resident of the Netherlands may be taxed at a dividends tax rate of 15% in South Africa. But if the beneficial owner of the dividends is a resident of the Netherlands, the tax charged should not exceed:
- 5% of the gross amount of the dividends if the beneficial owner is a company which holds at least 10% of the capital of the company paying the dividend; or
- 10% of the gross amount of the dividends in all other cases.
This all looks fine and well and most South African companies have been merrily withholding either 5% or 10% dividends tax on the dividends declared to their Dutch corporate shareholders.
However, what may have been overlooked is the fact that Article 10 of the Netherlands DTA is unique to any other DTA to which South Africa is party to. It provides that where South Africa has entered into a DTA with any other country after the date of the conclusion of the Convention between SA and the Netherlands (our emphasis) and where such DTA provides for either (1) the limitation by SA of the taxation of dividends to a rate lower than the rate provided in theSA/Netherlands DTA or (2) the complete exemption of dividends from dividends tax by SA then either:
- that reduced tax rate shall automatically apply in terms of the SA/Netherlands DTA; or
- that same complete exemption of the dividends from dividends tax shall automatically apply in terms of the SA/Netherlands DTA.
Simply put, despite Article 10 of the Netherlands DTA, if SA is party to a DTA with any other country which provides for the complete exemption of dividends from dividends tax, the provisions of such DTA will automatically apply to the Netherlands DTA, with the result that the dividends will similarly be exempt from tax in SA. In this regard, if one investigates the other DTAs, it will reveal that there are only 3 DTAs to which SA is a party to and which provide for the complete exemption of dividends tax, namely the DTAs between SA and Cyprus, Kuwait and Oman.
Article 10 further provides that the DTA between SA and that other country must have been concluded after the date of the conclusion of the Convention between SA and the Netherlands. On a literal interpretation of the wording, because the actual convention between SA and Netherlands was only concluded in 2005, the DTA between SA and Kuwait (which was concluded in 2007) will be the only one of these 3 DTAs that would automatically apply. However, as it is only one DTA that is required, the effect is that all dividends declared by a South African company to a Dutch shareholder as beneficial owner will be subject to a dividends tax rate of 0%.
A word of caution: whilst the application of Article 10 does in effect result in zero tax, it is likely that National Treasury will rectify this error as soon as possible. The risk for South African taxpayers is, accordingly, the possible retrospective application of any rectification imposed by National Treasury, as well as (in the event that the Article is being relied upon in the interim) the potential invitation to questioning by SARS into the actual beneficial holder of the dividends and the adverse consequences which may arise following such enquiry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.