Same law, different lawyers

“Protocol between Sweden and South Africa qualifies as new tax treaty.”

Anton Louwinger

Tax Partner

On 18 January 2019 the Dutch Supreme Court has ruled that a protocol entered into between two countries, amending an existing tax treaty between those countries, qualifies as a new tax treaty for purpose of the 2005 Netherlands – South Africa tax treaty ("Neth-SA treaty").

Based on article 10 of the Neth-SA treaty a corporate shareholder owning a participating investment of at least 10% in a company residing in the other treaty state is entitled to a reduction of local withholding tax rates on dividends to 5%. A South African corporate shareholder argued that The Netherlands was actually not entitled to impose any withholding tax on dividends it had received from a Dutch company. In this respect it referred to article 10, paragraph 10 of the Neth-SA treaty that determines that if pursuant to a double taxation agreement concluded between South Africa and a third country entered into after the date on which the Neth-SA treaty is concluded, South Africa is required to reduce its domestic withholding tax rate to one below 5% (including a full exemption), such lower rate automatically also applies to the Neth-SA treaty (a most favoured nation clause; "MFN clause").

Following the conclusion of the Neth-SA treaty in 2005, South Africa and Sweden entered into a protocol amending the existing (1995) treaty between these countries, reducing the dividend withholding tax rate to zero, on the basis that the MFN clause in that protocol did not only consider new South African tax treaties but also existing ones, some of which provided for a zero South African withholding tax on dividends.

At the date of the relevant profit distribution by the Dutch company to the South African shareholder, the protocol between South Africa and Sweden had already entered into force.

The Supreme Court agreed with this reasoning of the South African shareholder and treated the new protocol between South Africa and Sweden as a new tax treaty for purpose of the MFN clause in the Neth-SA treaty.

Source: decision of the Supreme Court of 18 January 2019 (no. 17/04584)