Dividends Tax and Double Taxation Agreements: 'Dutch Most Favoured

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Dividends Tax and Double Taxation Agreements: ‘Dutch Most Favoured Nation’ Clause

January 29, 2019

In brief

The double taxation agreement (DTA) between the Netherlands and South Africa (the SA-Netherlands DTA) provides for a minimum rate of 5% on dividends paid by Dutch resident companies to South African residents (and vice versa). However, the dividends article in the SA-Netherlands DTA also includes a ‘most favoured nation’ clause (the Dutch MFN clause). For some time, the position taken by many taxpayers is that this clause, when read with at least two other DTAs, can effectively result in an exemption from Dutch or South African dividends tax.

In its judgment issued on January 18, 2019, the Dutch Supreme Court held that the exemption applies in respect of dividends paid by Dutch resident companies to their South African shareholders. In this matter, a Dutch resident company had paid dividends to its South African shareholder. The Supreme Court ruled that as a result of the application of the Dutch MFN clause, the dividend payment is exempt from Dutch dividends tax.

With regard to dividends paid by South African companies to Dutch shareholders, the South African Revenue Service (SARS) has held (at least until the decision of the Dutch Supreme Court) the position that the Dutch MFN clause is not applicable and that the lowest rate possible in respect of dividends is 5%.

The Dutch Supreme Court decision may have important implications for dividends paid by South African residents to their Dutch shareholders.

In detail residence of the company automatic application of a lower paying the dividend) is 5% if the rate of tax on dividends if South Operation of the Dutch MFN recipient of the dividend is the Africa and a ‘third country’ clause beneficial owner of the dividend conclude a DTA that provides and holds at least 10% of the for a lower rate. If this is the Paragraphs 1 and 2 of the capital of the company paying case, the lower rate will apply dividends article (article 10) of the dividend. for the purposes of the SA- the SA-Netherlands DTA states Netherlands DTA. the maximum rate of tax that However, paragraph 10 of may be imposed by the source article 10 (i.e., the Dutch MFN state (i.e., the country of clause) provides for the

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The Dutch MFN clause was clause was introduced into that DTA legally bound by the decisions of the introduced into the SA-Netherlands by way of a protocol that was signed Dutch Supreme Court. The decision of DTA by way of a protocol that was in 2010 and that entered into force the latter (and the reasons therefor), concluded (simultaneously with the and became effective in 2012. The however, could be of persuasive SA-Netherlands DTA itself) in 2008 protocol (the Swedish protocol) — authority in South Africa. (the SA-Netherlands protocol). This is which (as a result of the zero rate important because one of the other applicable in terms of the SA-Kuwait requirements for the Dutch MFN DTA) provides for a zero rate of tax on clause to apply is that the treaty with dividends paid by South African the ‘third country’ has been concluded companies to Swedish residents — after the conclusion of the SA- was concluded after the conclusion of Netherlands DTA and protocol (i.e., the SA-Netherlands DTA. 2008). Consequently, as was successfully South Africa currently has one DTA argued by PwC on behalf of the (with Kuwait) that expressly provides taxpayer before the Dutch Supreme for a zero rate in respect of dividends. Court and as is the position of many However, that DTA (the SA-Kuwait South African companies that pay DTA) was concluded in 2006. As a dividends to Dutch shareholders, (1) result, Kuwait cannot be the ‘third South Africa has concluded a DTA country’ contemplated in the Dutch (i.e., the Swedish protocol) with a third MFN clause. country (i.e., Sweden); (2) that DTA was concluded after the conclusion of How then is the Dutch MFN clause the SA-Netherlands DTA (and the triggered? The answer lies in the DTA protocol that introduced the Dutch between SA and Sweden (the SA- MFN clause into the SA-Netherlands Sweden DTA), which also contains an DTA); and (3) the Swedish protocol MFN clause (the Swedish MFN provides for a rate of tax on dividends clause) in its article regarding lower than the rate provided for in dividends. article 2 of the SA-Netherlands DTA As is the case with the Dutch MFN (i.e., it provides for a zero rate). As a clause, in terms of the Swedish MFN result, all of the requirements for the clause, if South Africa has a DTA with Dutch MFN clause to be triggered are any other country (the other country) met, and the zero rate applies for the in which a lower rate of dividends tax purposes of the SA-Netherlands DTA. applies, the lower rate will apply for The takeaway the purposes of the SA-Sweden DTA. The critical difference between the The impact of the decision of the Swedish MFN clause and the Dutch Dutch Supreme Court is that Dutch MFN clause is that the Swedish MFN taxpayers may be entitled to a refund clause applies irrespective of when of dividends tax levied upon the the treaty with the other country was payment of dividends to a South concluded. Consequently, the fact that African shareholder. Eligible the Kuwait DTA might have been taxpayers should file a request for a concluded before the conclusion of refund as soon as possible given the the Swedish DTA is irrelevant in statutory limits that are applicable. determining whether the lower rate applies for purposes of the SA- With regard to dividends paid by Sweden DTA. South African companies to a Dutch shareholder, the matter has not yet Although the SA-Sweden DTA was come before a South African court, concluded in 1995, the Swedish MFN and South African courts are not

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Let’s talk For a deeper discussion of how this issue might affect your business, please contact:

Tax Controversy – the Netherlands

Ronald van Scharrenburg, Rotterdam Albert Elzinga, Rotterdam (0031) 88 792 39 19 (0031) 88 792 34 71 [email protected] [email protected]

Tax Controversy – South Africa

David Lermer, Cape Town Osman Mollagee, Johannesburg (0027) 21 529 2364 (0027) 11 797 4153 [email protected] [email protected]

Tax Controversy and Dispute Resolution Global Leader

David Swenson, Washington DC +1 202 414 4650 [email protected]

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