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South African Tax Court Holds MFN Clause in Tax Treaty with the Netherlands is Triggered by MFN Clause in Tax Treaty with Sweden

The South African Tax Court reportedly issued a ruling on 12 June 2019 that the dividends MFN clause added by the 2008 protocol to the 2005 Netherlands-South Africa tax treaty was triggered by way of the dividends MFN clause added by the 2010 protocol to the 1995 South Africa-Sweden tax treaty.

The case involved a South African company that was wholly owned by a Dutch parent. The South African company distributed dividends to its Dutch parent in April and October 2012, on which 5% tax was withheld. However, the South African company later determined that the 5% tax should not have been withheld by virtue of the MFN clause and claimed a 0% withholding tax on a subsequent distribution in 2013, as well as a refund for the tax withheld in 2012.

The claim was made on the basis of the MFN clause added to the 1995 South Africa-Sweden tax treaty, which became effective on 18 March 2012 and was triggered by the 2004 Kuwait-South Africa tax treaty. As claimed by the South African company, this also indirectly triggered the MFN clause added to the 2005 Netherlands-South Africa tax treaty. The South African Revenue Service has confirmed that the MFN clause with Sweden was triggered by the treaty with Kuwait (previous coverage) but did not accept the claim at the time that this also indirectly triggered the MFN clause in the Netherlands-South Africa tax treaty.

In its ruling, the Tax Court found that the wording of the respective treaties is clear, and that the condition for the Dutch MFN clause was met by the signing of the protocol introducing the MFN clause with Sweden, and that the conditions for the MFN clause with Sweden were met by the already existing tax treaty with Kuwait. As such, the MFN clause of the 2005 Netherlands-South Africa tax treaty as amended by 2008 protocol was triggered and the exemption for dividends should apply.

Note - Dutch Courts have made similar decisions in similar cases where dividends are distributed by Dutch subsidiaries to South African parents.

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