New protocol to South Africa-Kuwait treaty ends dividends exemption for Swedish and Dutch shareholders

The 2021 protocol to the 2004 double tax agreement (DTA) between South Africa and Kuwait finally entered into force on 2 October 2024. As a result, dividends declared by a South African company to Dutch or Swedish qualifying shareholders will no longer qualify for the 0% withholding rate and will be subject to dividends tax at the rate of 5%.

Article 10 of the 2004 South Africa-Kuwait DTA originally provided for a dividends tax rate of 0% for Kuwaiti qualifying shareholders who beneficially owned dividends declared by South African companies. This exemption was extended to qualifying Dutch and Swedish shareholders through the so-called “most favoured nation” (MFN) clauses in South Africa’s DTAs with the Netherlands and Sweden.

However, certain provisions of the South Africa-Kuwait DTA, particularly those related to the taxation of dividends, became matters of contention and subject to renegotiation. The new protocol to amend the DTA was signed by the governments of South Africa and Kuwait on 17 December 2019 and 1 April 2021 respectively.

Kuwait finally ratified the protocol on 18 September 2024, and it was published by the South African Revenue Service (SARS) on 22 November 2024 with the date of entry into force being 2 October 2024. It introduces a 5% tax rate on dividends where the beneficial owner is a company holding at least 10% of the capital of the company paying the dividends, and a 10% tax rate in all other cases.

This change effectively removes the dividends tax exemption previously enjoyed by Kuwaiti, Dutch and Swedish shareholders, and aligns the South Africa-Kuwait DTA with South Africa’s broader tax policy of levying a minimum of 5% dividends tax.

Controversially, the protocol is also retrospective in its application. It stipulates that its provisions will have effect from 1 April 2012, the date on which dividends’ tax came into effect in South Africa. If carried through, this is likely to lead to legal challenges because it will undermine the well-established tax principle of non-retroactivity.

The extension of the exemption to eligible Dutch and Swedish shareholders through the MFN clauses in South Africa’s DTAs with the Netherlands and Sweden were both confirmed by the Dutch Hoge Raad and a Cape Town Tax Court in 2019. In both cases, the courts found in favour of the taxpayer.

With the introduction of the new dividends tax rates, Kuwaiti, Dutch and Swedish shareholders will face increased tax liabilities on dividends paid by South African subsidiary companies. It would be prudent for businesses and investors to reassess their tax positions and existing investment structures to ensure compliance with the new provisions.