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30 Jul 2019
BY Jarred van der Westhuizen

Dividends tax: most-favoured nation clause in double tax agreement

On 12 June 2019, the Tax Court of South Africa delivered its judgment in ABC (Pty) Ltd v C:SARS (case no. 14287). The court was tasked with determining the application and interpretation of South African double taxation agreements (“DTAs”) entered into with the State of Kuwait (the “SA-KW DTA”), the Kingdom of the Netherlands (the “SA-NL Protocol”), and the Kingdom of Sweden (the “SA-SE Protocol”).

In brief, the case involved a South African company (“SACo”) which was a wholly owned subsidiary of a Dutch company (“NLCo”). In 2012, SACo had paid dividends to NLCo at a reduced rate of 5% by relying on the SA-NL Protocol. In 2014, SACo sought a refund from the Commissioner of the South African Revenue Service (“SARS”) on the basis that it was of the view that it had incorrectly interpreted the SA-NL Protocol and that it ought not to have withheld any tax on the dividends paid. SARS rejected SACo’s revised interpretation.


To understand SACo’s argument in the court, one needs to consider the timeline of the date of entry into force of the DTAs:

  • the SA-KW DTA, effective as of 25 April 2006;
  • the SA-NL Protocol, effective as of 28 December 2008; and
  • the SA-SE Protocol, effective as of 18 March 2012.

The SA-KW DTA provides that exclusive taxing rights on dividends from a South African company are allocated to Kuwait. A protocol amending the SA-KW DTA had been negotiated, but not yet ratified, by the State of Kuwait at the time of this judgment.

The SA-NL Protocol provides that dividends may be taxed in the state of the beneficial owner thereof but may also be taxed in the state of the company paying the dividends; where the beneficial owner of the dividends holds at least 10% of the capital of the paying company, the latter state may only tax such dividends at 5% of the gross amount of the dividends. The SA-NL Protocol also included a most favoured nation treatment (“MFN”) clause covering any DTA “concluded after the date of conclusion this [SA-NL Protocol]” where “South Africa limits its taxation on dividends … to a rate lower, including exemption from taxation”.

The SA-SE Protocol provides a similarly reduced rate of withholding tax on dividends of 5% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds at least 10% of the capital of the company paying the dividends. The SA-SE Protocol also includes a MFN clause on dividends, but this MFN clause was not only forward-looking. Instead, this MFN clause covered any DTA between South Africa and a third state.

SACo’s argument

SACo’s argument was that the SA-SE Protocol’s MFN clause was immediately triggered when that DTA became effective on the basis that South Africa was providing preferential treatment to Kuwaiti residents. On the basis that the SA-SE Protocol had become effective after the SA-NL Protocol, this in turn triggered the MFN clause in the SA-NL Protocol. This meant that South Africa did not have the right to tax dividends declared to shareholders resident in the Netherlands.


The Tax Court held in favour of the taxpayer and required SARS to refund the Dutch shareholder all dividends tax paid since April 2012 with interest on such amounts. In this regard, the taxpayer had submitted revised declarations under the Netherlands DTA to SARS within the three-year period contained in section 64L of the Income Tax Act, 1962.

Reviewed by Peter Dachs, head of ENSafrica’s tax department