Supreme Court confirms exemption from dividend withholding tax to South Africa

18/01/19

Under the most-favored-nation clause in the tax treaty between the Netherlands and South Africa, a South African shareholder of a Dutch company can benefit from a withholding tax exemption under another tax treaty (i.e. between Sweden and South Africa). This was ruled by the Dutch Supreme Court in a procedure initiated by PwC. In the opinion of PwC, in this way justice is done to the aim of this most-favored-nation clause. The Court’s ruling has major consequences for many companies active between the Netherlands and South Africa: it means they can apply for a refund of Dutch dividend withholding tax under certain conditions. The same may apply to South African withholding tax on dividends.

Dutch tax treaty policy and 'most-favored-nation’ clause

In double tax treaties, countries agree on the way in which they share and divide the authority to tax profits in international situations. With regard to dividend payments, it is usually agreed that the country in which the distributing company is established may levy a withholding tax at a reduced tax rate. In its tax treaty negotiations, the Netherlands aims in principle for a 0% dividend withholding tax in in-group situations. Based on bilateral negotiations, however, a 5% withholding tax on dividends was agreed upon in the tax treaty with South Africa.

However, at the request of the Netherlands, a so-called ‘most favored nations clause', or MFN clause has been included. In short, this MFN clause implies that if South Africa subsequently concludes a tax treaty with third country that provides for a lower tax rate on dividends, this lower tax rate also applies in relation to the Netherlands.
South Africa subsequently renegotiated its treaty with Sweden, in which, because of a comparable MFN clause, a rate of 0% applies to dividends.

Supreme Court ruling

The taxpayer, a company established in South Africa, holds all the shares in a company established in the Netherlands. In 2013, this company made a dividend payment to its shareholder, with a deduction of 5% dividend withholding tax. In a litigation led by PwC, the taxpayer states that she is also entitled to a 0% dividend withholding tax based on the MFN clause in the tax treaty between the Netherlands and South Africa.

In its ruling, the Supreme Court confirms that the MFN clause is applicable indeed. The fact that the former tax treaty between South Africa and Sweden already contained a full exemption from dividend withholding tax in group relations before the conclusion of the amendment protocol in 2012, and that no change in the levying of dividend withholding tax between Sweden and South Africa took place in this respect, does not matter to the Dutch Supreme Court. What is important to the Supreme Court is that under the renewed tax treaty between Sweden and South Africa, the dividend withholding tax levy is reduced to a lower percentage than under the Netherlands - South Africa tax treaty.

What does this mean for you?

Companies that have paid dividends to their South African shareholder can, because of this ruling, reclaim dividend withholding tax. This involves payments made in the period between 18 March 2012 up to and including 2017. As of 2018, under Dutch law no more tax will have to be withheld from dividend payments made to corporate shareholders in South Africa. Applications for a refund of Dutch dividend withholding tax must be made within the statutory period. It is also advisable that Dutch shareholders of companies established in South Africa should consider possible refund applications for South African withholding tax. Although the ruling of the Supreme Court refers to the Dutch interpretation of the MFN clause, it is quite possible that the South African judge will support the same interpretation of the MFN clause. This ruling may also affect some other Dutch tax treaties that include a most-favored-nation clause. Your PwC advisor can inform you about this if you wish to.