THE NETHERLANDS - Dutch Supreme Court rules on application of dividend withholding tax exemption in relation to South Africa and The Netherlands
Recently, the Dutch Supreme Court confirmed that under certain circumstances a dividend withholding tax exemption can be applied under the application of the Tax Treaty between the Netherlands and South Africa. Under this tax treaty, the levy of dividend withholding tax is in principle limited to 5% in relation to a shareholder’s interest of 10% or more. However, under the so-called ‘most-favoured-nation’ (MFN) clause, the Dutch Supreme Court ruled that the exemption can nevertheless be applied.
Refund of Dutch dividend
An entity established in South Africa owns 100% of the shares in a Dutch BV. In 2013, the BV made a dividend distribution to the South African entity. Based on the tax treaty between the Netherlands and South Africa, 5% Dutch dividend withholding tax was withheld. However, under the application of the MFN clause, the South African company took the position that no Dutch dividend withholding tax should have been levied.
Following previous decisions of the Dutch District Court and the Court of Appeal, the Supreme Court ruled in favour of the South African entity. A proper tax treaty application of the MFN clause should lead to a refund of the Dutch dividend withholding tax.
The Most Favoured Nations Clause
A reclaim of dividend withholding tax is possible in relation to a shareholder’s interest of 10% or more. In principle, the tax treaty between the Netherlands and South Africa limits dividend withholding tax to 5%. However, under the application of the MFN clause, no dividend withholding tax should be due.
The MFN clause implies that if South Africa has concluded any other tax treaty with a lower dividend withholding tax rate, the same tax treatment can be invoked under the tax treaty between The Netherlands and South-Africa.
As of 18 March 2012, the Protocol of the tax treaty between Sweden and South Africa led to the conclusion that South Africa committed itself not to levy any dividend withholding taxes on qualifying dividend payments. Subsequently, qualifying dividend payments in relation to the Netherlands and South Africa should be reduced to a tax rate of 0% accordingly.
As long as South Africa still has tax treaties that provide for 0% dividend withholding tax, no dividend withholding tax is due on qualifying dividend payments (i.e. in relation to a shareholder’s interest of 10% or more) from the Netherlands to South Africa and vice versa. If qualifying dividend payments were distributed in your (multinational) group between an entity in the Netherlands and South Africa after 18 March 2012, you might be entitled to a refund of the levied dividend withholding tax. BDO is more than willing to advise and assist you with regard to this process.
Niek de Haan