The entry into force of the Protocol to the double tax agreement between South Africa and Kuwait means tax free cross border dividends are no longer possible.
The double tax agreement (DTA) concluded between South Africa and Kuwait (Kuwait DTA), prior to its amendment, provided for dividends declared by a company of either state to the beneficial owner of such dividends, being a resident of the other state, to be subject to dividends tax only in the state in which the beneficial owner of the dividend is a resident. This meant that South African dividends tax was not payable on dividends declared to a beneficial owner of dividends who is a resident of Kuwait.
Due to the most favoured nation clauses contained in the DTA’s between South Africa and Sweden (SA/SWE DTA) and South Africa and the Netherlands (SA/NED DTA) the same tax treatment applied to dividends declared by a South African company to a beneficial owner of dividends who is a resident of either the Netherlands or Sweden (for a more detailed explanation as to the application of the most favoured nation clauses in the relevant DTA’s, see our previous bulletin on the subject accessible here.
The Kuwait DTA was the sole remaining DTA to provide for a rate of dividends tax lower than 5% and which could therefore fall within the provisions of the MFN clauses in the SA/Swe DTA and SA/NED DTA’s. However, a protocol to amend the Kuwait DTA and increase the dividends tax rate to:
- 5% where the beneficial owner is a company which holds at least 10% of the equity in the company paying the dividend; and
- 10% in all other cases,
was agreed between South Africa and Kuwait and signed by South Africa 17 December 2019 and by Kuwait on 1 April 2021 (Protocol).
On 22 November 2024 the Protocol was published in the Government Gazette and provides for a date of entry into force of 2 October of 2024.
The effect of the entry into force of the Protocol is inter alia that dividends paid by a company to a beneficial owner of such dividends which is a resident of Kuwait will now be subject to dividends tax at a rate of either 5 or 10%. It further means that the MFN clauses in the SA/Swe and SA/NED DTA’s will no longer apply and dividends tax at either 5% or 10% will be payable on dividends paid by South African companies to beneficial owners of such dividends who are residents of Sweden or the Netherlands.
One controversial issue which remains unresolved is whether the amendment to the Kuwait DTA effected by the Protocol will have retroactive effect. This is so as article 7(2) of the Protocol provides that the Protocol shall have effect ‘beginning on the date on which a system of taxation at shareholder level of dividends declared enters into force in South Africa’. This wording suggest that the increased rate of dividends tax applies from the date dividends tax were introduced into South African domestic law, being on 1 April 2012. If so, it will have a material adverse tax effect for companies which paid dividends to beneficial owners who were resident in Kuwait or which applied the most favoured nation clause provisions to dividends paid to beneficial owners in Sweden and the Netherlands.
It remains to be seen whether the South African Revenue Service will attempt to apply the Protocol with retroactive effect. The explicit statement in the Protocol that its entry into force shall be on 2 October 2024 however seems to indicate the contrary.
Taxpayers should carefully consider the effect of the entry into force of the Protocol on their dividends tax obligations in related to dividends paid to or received from Kuwait, Sweden or the Netherlands.
