Revised agreements cast the cross-border dividends tax net wider

Staff Reporter|Published 1 month ago

Managing Director at Sovereign Trust, Ralph Wichtmann, said in terms of this 2021 protocol, Kuwaiti, Dutch and Swedish companies that are beneficial owners of South African companies, and which hold at least 10% of the capital of these South African subsidiary companies, are now subject to dividends tax of 5%. Picture: Supplied.

STAFF REPORTER

WHEN South Africa implemented withholding tax on dividends in 2012, the broad requirement was that all foreign shareholders who earn dividends from South African-owned companies would be taxed on these earnings.

However, the 2004 Double Tax Agreement (DTA) between South Africa and Kuwait granted complete exemption to Kuwaiti shareholders, and Dutch and Swedish shareholders have enjoyed exemption by way of most favoured nation (MFN) clauses in their DTAs with South Africa.

These exceptions have been addressed by the recent implementation of a new protocol that South Africa and Kuwait signed in December 2019 and April 2021 respectively, and which Kuwait ratified on 18 September 2024.

In terms of this 2021 protocol, Kuwaiti, Dutch and Swedish companies that are beneficial owners of South African companies, and which hold at least 10% of the capital of these South African subsidiary companies, are now subject to dividends tax of 5%. Such companies that hold less than 10% of the capital are now required to pay dividends tax of 10%.

These changes were published by the South African Revenue Service on 22 November 2024 and implemented as from October 2, 2024. However, in a controversial ruling, South Africa aims to apply the protocol retrospectively to 1 April 2012. It is expected that this aspect will be challenged in court as it goes against the well-established tax principle that advocates against amendments to agreements being backdated. It also flies in the face of 2019 legal agreements confirmed by the Dutch Hoge Raad and a Cape Town Tax Court, which safeguarded tax exemption for Dutch and Swedish shareholders as defined above. At the time, both courts ruled in favour of the taxpayers.

Managing Director at Sovereign Trust, Ralph Wichtmann, said DTAs exist to regulate and ensure fair cross-border taxes, and that the implementation of the 2021 protocol will result in South Africa’s economy benefitting from increased inflows of tax. But he cautions that the protocol will significantly reduce the attractiveness of cross-border transactions with South Africa for Kuwaiti, Dutch and Swedish companies.

“With the introduction of these new dividends tax rates, Kuwaiti, Dutch and Swedish shareholders face increased tax liabilities on dividends paid by South African subsidiary companies. We advise all businesses and investors that will be affected, to reassess their tax positions and existing investment structures in order to ensure compliance with these new provisions.”