Few treaty provisions have produced as much structuring, litigation and misinformation as one paragraph in the protocol between South Africa and the Netherlands. For roughly a decade it was possible to argue that dividends between the two countries bore no withholding tax at all, in either direction. Advisers built structures on that reading, the Dutch Hoge Raad and the South African Tax Court were both asked about it, and the taxpayer won both times.
The position today is different, and the change did not come from a court. It came from an unrelated protocol with a third country, and from a commencement provision that most summaries of the subject do not mention. Anyone still holding a structure designed around the clause needs to know which of those things applies to which year.
What the 2008 protocol put into article 10
The convention between South Africa and the Netherlands was signed at Pretoria on 10 October 2005. A protocol amending that convention, done at Pretoria on 8 July 2008, was published in Government Gazette 31795 of 23 January 2009, entered into force on 28 December 2008 and, under paragraph 2 of its article IX as notified by the revenue authority, had effect for taxable years and periods beginning on or after 1 January 2009.
Article II of that protocol deleted article 10 of the convention and replaced it. The replacement caps source taxation of dividends at five per cent of the gross amount where the beneficial owner is a company holding at least ten per cent of the capital of the paying company, and at ten per cent in all other cases.
The same replacement added a tenth paragraph. If, under any convention for the avoidance of double taxation concluded after the date of conclusion of the convention between South Africa and a third country, South Africa limits its taxation on dividends as contemplated in subparagraph a of paragraph 2 to a rate lower than the one provided there, including exemption from taxation or taxation on a reduced taxable base, the same rate, exemption or reduced base applies automatically in both contracting states as from the date of entry into force of the convention with that third state.
Two features of that wording decided everything that followed. It is limited to conventions concluded after the Netherlands convention. And it operates in both contracting states, which is why the leading case is about Dutch tax rather than South African tax.
A clause with a date limit, and a clause without one
The Netherlands clause could not reach directly to a treaty that predated it. The route ran through Sweden.
A protocol amending the convention between South Africa and Sweden was done at Pretoria on 7 July 2010, published in Government Gazette 35268 of 23 April 2012 and entered into force on 18 March 2012. Article I replaced paragraph 2 of article 10 of the Swedish convention with a cap of five per cent where the beneficial owner is a company, other than a partnership, holding at least ten per cent of the capital, and fifteen per cent in all other cases.
Article II of the same protocol inserted a new paragraph 6 immediately after paragraph 5. Its terms are wider than the Dutch equivalent. If any agreement or convention between South Africa and a third state provides that South Africa shall exempt outgoing dividends from tax, either generally or in respect of specific categories of dividends, or limit the tax charged on them to a rate lower than that in subparagraph a of paragraph 2, that exemption or lower rate applies automatically to dividends arising in South Africa and beneficially owned by a resident of Sweden, and to dividends arising in Sweden and beneficially owned by a resident of South Africa. There is no requirement that the third state agreement be later in time.
The agreement with Kuwait supplied the exemption. In its original form, published in Government Gazette 29815 of 20 April 2007 and in force from 25 April 2006, article 10 provided that dividends paid by a company resident in one contracting state to a beneficial owner resident in the other were taxable only in that other state. No source taxation at all.
What the Netherlands decided, and in which direction
The Hoge Raad ruled on 18 January 2019, in case 17/04584, reported as ECLI:NL:HR:2019:57. The taxpayer was a company established in South Africa holding all the shares in a Dutch private limited company. That company made a distribution on 22 March 2013 and withheld five per cent Dutch dividend tax. The South African shareholder asked for the tax back.
The court held that the Swedish protocol was a treaty between South Africa and a third state concluded after the date of the Netherlands convention, that it contained new obligations relating to outgoing dividends, and that at the time of the distribution its own most favoured nation clause meant South Africa had bound itself to levy nothing on outgoing participation dividends to Sweden. The condition in article 10, paragraph 10 was therefore met and the Dutch dividend tax fell away.
One passage of the reasoning is worth carrying into any similar analysis. The comparison required by the clause is against what domestic law allows or could allow in future, not against the treaty arrangement previously in force between the two countries. The appeal by the State Secretary of Finance was dismissed with costs.
What South Africa decided
The South African test case ran in parallel and reached the same answer. The Tax Court sitting at Cape Town gave judgment on 12 June 2019 in case 14287, in a matter the court itself described as turning on the agreements with the Netherlands, Sweden and Kuwait. The court found for the taxpayer and ordered the Commissioner to refund the dividends tax overpaid under section 64L of the Income Tax Act, with interest calculated under the Tax Administration Act and costs including the costs of two counsel.
The context matters for the amounts at stake. Dividends tax applies to any dividend declared and paid from 1 April 2012, replacing secondary tax on companies, and the rate increased from fifteen to twenty per cent for any dividend paid on or after 22 February 2017 unless an exemption or reduced rate applies. What a successful most favoured nation claim was worth therefore depends on when the dividend was paid, not on when it was declared.
Neither judgment, it should be said plainly, created a permanent exemption. Each decided what the treaty network provided at a particular time, and the Dutch court framed its own finding by reference to the position at the time of that distribution. The network then changed.
The Kuwait protocol, and the date it chose
A protocol amending the agreement with Kuwait, done at Kuwait City on 1 April 2021, was published in Government Gazette 51637 of 22 November 2024 and entered into force on 2 October 2024. Its article 3 deleted article 10 of the Kuwait agreement and replaced it with the familiar formula: five per cent where the beneficial owner is a company holding at least ten per cent of the capital, ten per cent in all other cases. The exclusive residence state taxation that fed the whole chain is gone.
Article 7 is where the sting sits. Paragraph 1 provides for entry into force on the date of the later of the two notifications. Paragraph 2 provides that the provisions of the protocol shall thereupon have effect beginning on the date on which a system of taxation at shareholder level of dividends declared enters into force in South Africa. That system is dividends tax, and it entered into force on 1 April 2012.
The Swedish protocol was drafted the same way. Its article III provides that its provisions apply for amounts paid or credited on or after the date of entry into force of the South African system of taxation at shareholder level, with the earliest date being the first day of the month next following entry into force of the protocol itself. Both instruments were hooked to the same event, but only one of them carries the earliest date proviso.
Read together, the Kuwait protocol does not simply close the route going forward. On its own terms its effective date is more than twelve years before the day it entered into force, and it reaches back to the first day on which the tax it affects existed. Whether a state may retroactively remove a treaty benefit relied on in completed years is a real question, and it is not one a company wants to be answering for the first time in an audit.
Where the rate stands today
For a distribution now, the analysis is short. South African dividends tax runs at twenty per cent domestically. The convention with the Netherlands caps source taxation at five per cent for a corporate beneficial owner holding at least ten per cent of the capital and ten per cent otherwise. In the other direction Dutch dividend withholding tax is fifteen per cent under article 5 of the Wet op de dividendbelasting 1965, subject to the domestic exemption in article 4, paragraph 2 of the same act for a holding to which the participation exemption or the participation credit would apply where the recipient is established in a member state of the European Union or the European Economic Area, or in a state with which the Netherlands has concluded a double taxation treaty providing for dividends.
The most favoured nation clause has not been repealed. It remains in the treaty and it remains capable of operating again if South Africa concludes a later convention limiting its taxation of participation dividends below five per cent. The clause is dormant rather than dead, which is a different thing from either of the positions usually asserted about it.
Whether it is dormant on any given date is a question about the whole South African treaty network on that date, and it is answered from the instruments rather than from a summary. The revenue authority publishes a summary of treaty dividend rates, and the version of it currently offered is Version 9 of June 2023, which still records the Kuwait agreement at nil on the strength of the original article 10. It predates the 2024 protocol by more than a year. A rate table published by a revenue authority is not the rate.
A protocol that has not been signed
The SARS summary of bilateral agreements and protocols, updated to 22 November 2024, records a further protocol with the Netherlands in the column for agreements in the process of negotiation, or finalised but not yet signed. It is not in the columns for signed, ratified in South Africa or ratified in the other jurisdiction, and it has no gazette reference or date of entry into force.
That status has a practical meaning. There is at present no published text and no commencement date, so no structure can be planned against it, and any adviser describing its likely content is describing a negotiation rather than a rule. It is also a reminder that the treaty is on the negotiating table again, and that the published status is the only thing known about it.
What to do with a structure built on the clause
Three things follow, and they are separable. For open years, a claim that rests on the clause needs to be reassessed against article 7 of the Kuwait protocol rather than against the two judgments, because the judgments describe a network that no longer exists and the protocol purports to reach the period they covered.
For current distributions, the treaty rates apply and they are not zero. A holding structure whose only rationale was the exemption has lost its rationale, and the cost of keeping it is now visible: a Dutch entity that exists solely to receive dividends will meet the beneficial ownership requirement in article 10, paragraph 2, the main purpose test in article 10, paragraph 8 of the same convention, and the artificial arrangement test in article 4, paragraph 3, subparagraph c of the Dutch act no better than it meets them anywhere else.
For the future, the lesson is about clause design rather than about South Africa. A benefit that arrives automatically through a chain of other people’s treaties can leave the same way, without notice, when one link is renegotiated for reasons that have nothing to do with either country. Structures should be able to survive the loss of the clause. The ones built between 2012 and 2024 mostly were not.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.