An update to the South Africa-Netherlands double tax agreement
Author: Ernest Marais
Service: Andersen Tax
You will often hear the saying that Amsterdam is the new London, referring to the tendency of South African-born Millennials to prefer the City of Sin to the capital of the British Empire, with the latter having been the preferred choice of a previous generation (the lesser-known generation X) upon expanding their horizons abroad.
The rationale for the shift to Amsterdam as a preferred destination of Millennials extends far beyond the scope of the Dutch culture, ease of travel from Schiphol into Europe and the general likability of the country and its people. The two countries have actively been encouraging cross-border investments through various trade incentives and bridging the ease of doing business cross-border. These incentives include, inter alia, the presence of the Netherlands Foreign Investments Agency (“NFIA”) an operational unit of the Dutch Ministry of Economic Affairs in South Africa assisting companies with their expansion into Europe via the Netherlands and a very favourable double tax agreement (“SA-NL DTA”) between the two countries. Although I tend to consider myself as a jack-of-all-trades and a Master of One (tax), I have been advised to the stick to the latter for the benefit of the reader.
Updates to the South Africa & Netherlands DTA
The SA-NL DTA contains a most favoured nations clause, which means that where any third country provides a more attractive tax rate then such rate shall automatically apply to the SA-NL DTA. This clause was structured to only apply to double tax agreements concluded after the conclusion of the SA-NL DTA; however, a double tax agreement concluded with Sweden containing a retrospective most favoured nations-clause extended the scope of the SA-NL DTA to any double tax agreement concluded before the SA-NL DTA. Enter Kuwait.
The double tax agreement between South Africa and Kuwait provided for 0% withholding tax on dividends paid between the countries, which meant that neither South Africa nor the Netherlands was allowed to withhold any tax on dividends payable between the two countries. A participation exemption as contained in section 10(B)(2) of the Income Tax Act 58 of 1962 (“the Act”) meant that any South African resident which holds at least 10% of the equity shares in a Dutch company will not be subject to any dividend tax on dividends received from a Dutch company.
However, a recent proposed amendment to South Africa-Kuwait double tax agreement interposed a dividend withholding tax of 5% if the shareholder owns at least 10% of the South African company. The protocol to the double tax agreement between South Africa and Kuwait has been badly drafted, which creates some uncertainty as to the effective date on the implication of dividend withholding tax between the two countries providing that: “The provisions of this Protocol shall thereupon have effect beginning on the date on which a system of taxation at shareholder level of dividends declared enters into force in South Africa.”
The practical implication of this protocol to the South Africa-Kuwait double tax agreement is that the SA-DTA will be impacted by operation of the most favoured nations clause. There will be withholding tax on dividends between residents of South Africa and the Netherlands with effect effective date of the South Africa-Kuwait double tax agreement.
The respective Governments of South Africa and the Netherlands will look favourably on the practical implication of this amendment, which seems to be aligned with the original intention of the contracting parties. To the extent that it's to the benefit of the fiscus, South Africa and the Netherlands will remain preferential trading partners. The SA-NL DTA remains a favourable agreement in comparison to that with most other countries.
For any tax or legal advice on any South African outbound investment into the Netherlands, or any European inbound investment into South Africa, please do not hesitate to get in touch. For all other types of advice, we would be happy to refer you to the respective masters of their terrain.Contact Ernest for more information