As a simple example, Article 10(1) of the South Africa/Kuwait DTA effectively provides for a DWT rate of 0%. One can easily see that this is not something that sits well with National Treasury, particularly when one considers the implication of this provision when coupled with the so-called most-favored nation (MFN) clause in some DTAs. In simple terms, the MFN clause provides for the automatic application of a lower rate of DWT if South Africa and a "third country" conclude a double taxation treaty that provides for a lower rate. Without going into the technical arguments of how it is applied, the MFN clause, when read together with the South Africa/Kuwait DTA, means that the rate of 0% will apply to certain DTAs.
The MFN clause applies in the South Africa/Sweden DTA, the South Africa/Netherlands DTA and the South Africa/United Kingdom DTA. In the case of the South Africa/United Kingdom DTA, the MFN application is complicated by the fact that the DTA provides that the countries shall enter into negotiations with a view to providing comparable treatment as may be provided for in respect of a tax treaty with a third country.
The gist here, though, is that the opportunity exists to apply a 0% DWT rate and this is not something that National Treasury is happy with. For several years, the National Treasury has been pursuing a change in the DWT rate in the South Africa/Kuwait DTA. Per the National Treasury, the implementation of the DWT in 2012 was contingent on the renegotiation of ten tax treaties that had a zero withholding tax rate on dividends. All the protocols amending these tax treaties have been in force since 2008, except the South Africa/Kuwait Protocol, which, while eventually signed in April 2021 after fourteen years and ratified by South Africa, was still awaiting ratification by the Kuwait Government for it to come into effect. On 18 September 2024, Kuwait ratified the protocol. South Africa and Kuwait need to exchange ratification instruments but one can safely assume that the Protocol is in effect.
What is of concern is the intended effective date of the Protocol, being when "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".
This effectively means that the 0% would fall away retrospectively as of 1 April 2012, when the DWT replaced the Secondary Tax on Companies in South Africa. It would appear that this is merely an overhang from the renegotiations, given that they commenced in 2007, i.e., prior to the introduction of DWT, and so the intention would be for it to be a forward-looking provision. It will mean that we have the application of a retrospective provision, which then gives rise to very complex and far-reaching consequences in terms of the application of the MFN since 1 April 2012, and in those instances where South African companies have been applying a DWT rate of 0%. International treaty law will now have to be considered to determine a potential outcome; particularly the principle of non-retroactive application of law in the Vienna Convention.
South African companies should therefore be aware of these developments and clauses and seek advice as to the implications, both on historical dividends and future dividends, declared and paid before the DTA is ratified.
