South Africa’s MFN clause offers dividend withholding tax exemption in Netherlands and Sweden

Multinational groups may be entitled to claim a refund of dividend withholding tax paid on qualifying dividend payments from the Netherlands to South Africa and vice versa under the so-called ‘most-favoured-nation’ (MFN) clause in the double tax agreement between the Netherlands and South Africa.

Under this tax treaty, the levy of dividend withholding tax is in principle limited to 5% in relation to a shareholder’s interest of 10% or more. But last year, both the Tax Court in Cape Town and the Dutch Supreme Court ruled in two separate cases that, for as long as South Africa still has tax treaties that provide for zero dividend withholding tax, under the application of the MFN clause, no dividend withholding tax should be due.

The MFN clause implies that if South Africa has concluded any other tax treaty with a lower dividend withholding tax rate, the lower rate will apply to the SA-Netherlands DTA as from the date of entry into force of the DTA with the third country. The protocol to the SA-Netherlands DTA, which incorporated the MFN clause, came into force in 2008.

South Africa currently has one DTA that provides that a zero rate of tax must be imposed by South Africa – the DTA concluded with Kuwait in 2006 – but South Africa also included another MFN clause in the protocol of the DTA it concluded with Sweden. This came into force on 18 March 2012 and crucially the MFN applies irrespective of when the DTA with the third country was concluded.

It was argued that on the basis that the MFN clause in the SA-Sweden DTA applied due to the prior provisions in the SA-Kuwait DTA, the application of the MFN clause in the SA-Netherlands DTA had been triggered. Both courts agreed and held that qualifying dividend payments in relation to the Netherlands and South Africa should be reduced to a tax rate of zero accordingly.

As a result, if qualifying dividend payments were distributed in a multinational group between an entity in the Netherlands and South Africa after 18 March 2012, and withholding tax was paid, the taxpayer might be entitled to a refund of the dividend withholding tax paid.

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