On January 18, 2019, the Dutch Supreme Court ruled in favor of a South African company that claimed a refund of 5 percent Dutch dividend withholding tax based on the most favored nation clause in the South Africa – Netherlands tax treaty (Dutch Tax Treaty).
Supreme Court ruling
In 2013, a Dutch tax resident company paid a dividend to its sole shareholder, a South African tax resident company. In general, dividend payments by a Dutch company are subject to 15 percent dividend withholding tax. Based on the Dutch Tax Treaty, the 15 percent rate was reduced to 5 percent because the shareholder owned at least 10 percent of the capital. The shareholder requested a refund of the 5 percent Dutch tax based on the most favored nation (MFN) clause in the Dutch Tax Treaty, as amended in 2008. This MFN clause rules that if South Africa limits its dividend withholding tax rate to less than 5 percent under another tax treaty concluded after a conclusion of the Dutch Tax Treaty, the applicable withholding tax should also be reduced to that lower rate.
In 2012, South Africa and Sweden (Sweden Treaty) amended their tax treaty and included an MFN clause. This MFN clause rules that dividend tax exemption continues to apply until South Africa would no longer have any tax treaty providing for such exemption. Because South Africa had at that time (and still has) a treaty in force with Kuwait that provides for a dividend tax exemption, the MFN clause in the Sweden Treaty applies. As a result, South Africa concluded or amended a tax treaty after the (amended) Dutch Tax Treaty that provides for a more favorable withholding tax rate than 5 percent.
The Dutch tax authorities refused the refund and the South African shareholder started a court proceeding. The Dutch Supreme Court confirmed the position of the shareholder and ruled that it is entitled to a refund of the 5 percent Dutch dividend withholding tax.
Dividend payments made in 2014-2017
The above ruling means that South African companies that have received dividend payments from Dutch tax resident companies in which they own 10% or more of the capital and on which payments Dutch dividend tax was withheld, in principle should be eligible for a refund of dividend withholding tax. A refund is still possible if a company submits a request within three years after the expiration of the calendar year in which the tax was withheld. Based on published policy, the Dutch tax authorities may ex-officio extend the term to five years. If a South African shareholder received a dividend from a Dutch company after January 1, 2014, then a refund request can be timely submitted in 2019.
Dividend payments on or after January 1, 2018
Dividend payments made by Dutch tax resident companies on or after January 1, 2018 to a company that is resident in a state that has concluded a tax treaty with the Netherlands and which treaty contains a dividend article - such as the treaty with South Africa - may be eligible for an exemption of Dutch dividend withholding tax based on domestic law, provided that the foreign company:
- Owns at least 5 percent of the nominal paid-up share capital of the Dutch company;
- Is the beneficial owner of the dividend;
- Cannot be compared with a (tax exempt or 0 percent) Dutch collective investment fund; and
- Has not been interposed to avoid the dividend tax which otherwise had been due, or, if that was one of the main purposes of the interposition, the foreign company has been established for valid commercial reasons that reflect economic reality.
If a Dutch company claims the above domestic exemption, then the Dutch company must file a dividend tax return form within one month following the date on which the dividend was put at the disposal of the shareholder, in which it confirms that all the above conditions are met.
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.