Goodbye to the last dividends withholding tax “loophole”?

By Hylton Cameron, Director

On a somewhat subdued note, on 18 September 2024 Kuwait ratified the amending Protocol which was signed on 1 April 2021 by South Africa and Kuwait.

To briefly recap:
  • South Africa introduced dividends withholding tax on 1 April 2012. For present purposes the import of this was that dividends paid to non-resident beneficial owners then became subject to dividends withholding tax (DWT), which at that time was levied at a standard rate of 15% (now 20%).
  • A Double Taxation Agreement (DTA) between South Africa and another jurisdiction could reduce the standard rate. It should be noted that such reduction in the standard rate is subject to compliance with various administrative requirements.
  • Prior to the introduction of such legislation, SA and various other jurisdictions agreed to amend the DTA’s to ensure that the minimum rate that applied was 5%. Prior to such amendments, SA’s DTA’s with some counties contained a rate of 0%.
  • Fortunately or unfortunately, such an amendment was not concluded between Kuwait and SA. The rate in this DTA therefore remained at 0%.

One would think that this would not affect the SA fiscus to a large degree because there do not appear to be many significant Kuwaiti resident shareholders of SA resident companies.

What did affect the fiscus to a much larger degree, was that due to the SA-Kuwait DWT rate being at 0% and through the interplay of the SA-Sweden/SA-Netherlands/SA-Kuwait DTA’s, dividends payable to beneficial owners resident in the Netherlands and Sweden would also be subject to the 0% DWT rate. In our view this was an unintended consequence.

The Netherlands is often used as the jurisdiction in which to house intermediate holding companies, which may hold shares in various companies, including SA resident companies.

To stop such zero percent withholding, either the DTA with the Netherlands needed to be amended or the DTA with Kuwait needed to be amended. 

As mentioned above, DWT was introduced in 2012, and while we do not know what inter-jurisdictional negotiations were being held, nothing changed in this regard, until 2021.

In terms of the Protocol between SA and Kuwait that was signed on 1 April 2021, dividends would be taxed at 5% and, rather unusually, the Protocol would be backdated to be effective from the date that SA introduced DWT (1 April 2012).

The Protocol would effectively introduce a back-dated 5% DWT for dividends payable to beneficial owners who were resident in Kuwait and arguably would do the same for dividends payable to beneficial owners who were resident in the Netherlands. However, the Protocol will only be brought into force (including the backdating) when it has been ratified by each state and each state has exchanged the ratification instruments. The date of notification of the last state to notify will provide the date when the Protocol is brought into force. 

Two issues became apparent when we had sight of the Protocol. Firstly, is the backdating of the protocol to 2012 constitutional? Secondly, while it was signed by both parties, it will only be brought into force when it has been ratified by each state and each state has exchanged the ratification instruments. Therefore, if one declared a dividend on say 30 July 2021 to a beneficial owner resident in the Netherlands, in terms of the law as at 30 July 2021 (when the Protocol was not in force), effectively no DWT applied.

Legally no DWT was due, but what would happen if the Protocol later came into force? One may have taken the view that the Protocol at the time when DWT was due was not in force or that it was not yet in force and that it may never be brought into force and therefore no DWT applied. 

At last, we have some finality, and it appears that the Protocol will be brought into force, so DWT will need to be paid on dividends payable to beneficial owners who are resident in the Netherlands. At least on the face of it, there would be a good argument that such DWT would be due.

We have not heard if the necessary notifications have been exchanged which, as stated above is required before the Protocol will come into force, but this would seem to be imminent.

The question to taxpayers who have paid or who want to pay a dividend to beneficial owners who are resident in the Netherlands, is when the Protocol would be effective from: 1 April 2012 (introduction of DWT), 1 April 2021 (date the Protocol was signed), 18 September 2024 (when Kuwait ratified the Protocol) or the future date when the last of the required notifications is made?

One can advance arguments supporting each of the above dates. However, in my view, due to the Protocol having been ratified in Kuwait it would be a bold taxpayer who now pays a dividend to beneficial owners who are resident in the Netherlands and applies a zero withholding rate, although there are arguments for such a position if the relevant notifications have not been provided. At the very least, a view should be taken regarding the interplay of the various DTAs, Protocols and on whether the relevant notifications have been received.

On the positive side, it would seem that foreign shareholders should very soon be on a more equal playing field in that DWT will be levied at a minimum of 5% irrespective of their jurisdiction of residence.