After years in limbo, it appears that the days of 0% dividends tax applying to Kuwaiti, Dutch and Swedish shareholders investing in South Africa are numbered. Only two steps remain before the rate will be increased to 5%.

‘The issue is back in the spotlight now that South Africa’s National Assembly has approved the protocol amending the country’s tax treaty with Kuwait – which will be the trigger to increase the rate for Dutch and Swedish shareholders as well,’ says Robyn Berger, Tax Executive at leading African law firm Bowmans.

South Africa and Kuwait signed the so-called Kuwaiti Protocol on 1 April 2021 and the National Assembly approved it at the end of August 2022. The final step on South Africa’s side is for the agreement to be approved by the National Council on Provinces (NCOP).

But the matter is not in the hands of South Africa alone. It is understood that Kuwait must still ratify the Protocol.

‘The text of the Kuwaiti Protocol provides that each of the contracting states shall notify the other in writing of the completion of the procedures required by their respective laws to bring the protocol into force. The Kuwaiti Protocol should then enter into force on the date of the latter of these notifications,’ says Berger.

The trigger effect of the Kuwaiti Protocol

Once the Double Tax Agreement (DTA) between Kuwait and South Africa is formally amended, this will automatically trigger changes in the dividends tax rates of Dutch and Swedish shareholders holding 10% or more in South African companies.

This is in line with all the other DTAs that South Africa renegotiated since switching from secondary tax on companies to dividends tax about 15 years ago.

National Treasury and SARS have been wanting to implement 5% dividends tax for Kuwaiti, Swedish and Dutch companies for some time, arguing that the 0% rate is detrimental to the South African fiscus. However, they were thwarted by two court judgments in 2019 – one by the Netherlands Supreme Court and another by the South African Tax Court in Cape Town.

The two rulings effectively confirmed that, in terms of the existing Most Favoured Nation (MFN) clause in the DTA that the Netherlands has with South Africa, the applicable rate of dividends tax is 0%.

What would change this – together with the tax position of Swedish and Dutch shareholders – is the coming into effect of the Kuwaiti Protocol. ‘Given the latest developments in South Africa’s Parliament, it is probably a matter of time before that happens,’ says Berger.

A question that still needs to be answered, though, is whether or not the implementation of the Protocol will be backdated.

The legalities of backdating legislation

‘The text of the Kuwaiti Protocol further indicates that the Protocol will have effect beginning on the date on which a system of taxation of dividends declared at shareholder level enters into force in South Africa. Dividends tax came into effect on1 April 2012, meaning a change in the dividends tax rate retroactively,’ says Esther Geldenhuys, senior associate in Bowmans’ Tax Practice.

This may mean that Dutch and Swedish shareholders to which the MFN clause currently applies could find SARS knocking on their doors and demanding that they pay 5% dividends tax – plus interest and penalties – on past dividends that benefited from 0% tax.

She points out that there is a legal difference between legislation that is ‘retroactive’ and ‘retrospective’. Retrospective legislation only comes into effect on the date of commencement, while retroactive legislation takes effect before the commencement date and affects rights and obligations that existed before that date.

While legislative amendments in South Africa are usually prospective and not retroactive, the courts have previously ruled on retroactive tax legislation.

In Pienaar Bros v CSARS 2017, the Gauteng High Court found there were circumstances where tax legislation could be applied retroactively.

‘The case is not authority for the proposition that retroactive tax legislation will always be rational and consistent with the rule of law,’ she says. ‘The court still found that the proper approach would be to decide the legality of retroactive amendments on a case-by-case basis. However, this case does confirm that retroactive tax legislation may not automatically be regarded as unconstitutional.’

This view is further supported by the fact that in respect of the circumstances of the Pienaar Bros case, Treasury issued sufficient warning of its intention to close that specific tax loophole.

‘This is very similar to the circumstances around the Kuwait treaty. National Treasury publicly expressed its unhappiness in respect of the application of the MFN clauses in the DTAs that the Netherlands and Sweden have with South Africa,’ says Geldenhuys.

‘In this instance, companies potentially affected by developments around the Kuwait Protocol would be well advised to seek guidance on the facts of their specific cases.’