The advent of dividends withholding tax (DWT) on 1 April 2012 shifted the liability for tax on dividends from the company to the shareholder. Under the previous system, a Secondary Tax on Companies (STC) was imposed on the company declaring the dividend, while the DWT system imposes the tax on the shareholder, with the company declaring the dividend being responsible for withholding the tax and paying it over to SARS.

With effect from 22 February 2017, the DWT rate in South Africa increased from 15% to 20%. However, dividends paid to foreign shareholders would qualify for relief in the form of a reduced rate of withholding in line with the relevant double tax agreement. Common relief, although this may differ from DTA to DTA, provided for in double tax agreements between South Africa and other nations would state that should the foreign shareholder have a shareholding greater than 10%, the rate of withholding tax on dividends declared by the South African tax resident company would be reduced to 5%.

The DTA between South Africa and Sweden was amended, by way of a Protocol, to include a “most favoured nation” clause which reads as follows:

“If any agreement or convention between South Africa and a third state provides that South Africa shall exempt from tax dividends (either generally or in respect of specific categories of dividends) arising in South Africa, or limit the tax charged in South Africa on such dividends (either generally or in respect of specific categories of dividends) to a rate lower than that provided for in subparagraph (a) of paragraph 2, such exemption or lower rate shall automatically apply to dividends (either generally or in respect of those specific categories of dividends) arising in South Africa and beneficially owned by a resident of Sweden and dividends (either generally or in respect of those specific categories of dividends) arising in Sweden and beneficially owned by a resident of South Africa, under the same conditions as if such exemption or lower rate had been specified in that subparagraph.”

In essence, this means that should South Africa have a DTA with another country, which allows the rate of dividends withholding tax to be reduced to a rate of less than 5%, then the South African resident company declaring the dividend to the Swedish shareholder, would withhold the DWT at the reduced rate (assuming all relevant conditions and documentary requirements are met).

The current DTA between South Africa and Kuwait provides for the complete exemption from DWT under similar circumstances and is noted as follows in Article 10(1) of the DTA between South Africa and Kuwait:

“Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State who is the beneficial owner of such dividends shall be taxable only in that other Contracting State”.

Kuwait would thus be seen as the “third state” and the dividends declared by the South African resident company to the Swedish shareholder would thus be exempt from DWT. This principle was confirmed in Binding Private Ruling 267 issued by the South African Revenue Services earlier this year subject to compliance with the documentary requirements in Section 64G(3) of the Income Tax Act.

Taxpayers should therefore take note of the potential relief available but at the same time be aware of the anti-avoidance provisions which state that the above clause will not apply where the intention or main purpose is to take advantage of the benefits of this clause as well as ensuring that all documentary requirements are met.

Further, the DTA’s with Oman and Cyprus which previously also provided for outright exemption, were amended to grant partial taxing rights to the country of source. As the current agreement with Kuwait is being re-negotiated, taxpayers should take note of any amendments (ie. removal of outright exemption) which would affect the application of the MNF principle noted in the South Africa Sweden double tax agreement.

Ozeyr Ahmed

Associate | Corporate Tax, Johannesburg

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