Most countries have a withholding tax on dividends that are taxed in the hand of the shareholder. In some instances, the rate of tax that is withheld on dividends can be as high as 35%.
However, double taxation agreements make provision for a lower rate than the official rate of the country from where the dividend is issued. In most instances the maximum withholding tax rate is 15%, but it can be as low as 5%.
Double taxation agreements are generally aimed at relaxing tax rules in order to stimulate trade and investments between countries, and although these treaties are negotiated bilaterally, they remain subject to different interpretations.
The treaty between South Africa and the Netherlands has been to the courts in both countries this year, mainly to determine when a country is allowed to withhold dividend tax when companies pay dividends to foreign shareholder companies.
Ari Davidowitz, MD of WTax who specialises in getting withholding tax refunds for individuals, asset managers and pension funds, says in many instances tax authorities withhold tax at their country’s official rate instead of what the double taxation treaty provides for.
He referred to Richemont, a Switzerland-based luxury goods holding company. South Africans who directly held shares in Richemont found that 35% of their dividends was being withheld by the Swiss tax authority, despite the double taxation agreement between the two countries providing for a dividend withholding tax of 15%.
In France the withholding tax rate is 30%, yet the double taxation agreement with South Africa sets the rate at 15%.
Davidowitz says because of the cumbersome and complex process that has to be followed to claim a refund for the excess amount of dividend tax that was withheld, many individuals just let it go.
Large corporates generally do have claim forms on their websites, but it can be hard to find the correct forms. Many of the forms are in the language of the country you are investing in.
Keith Engel, CEO of the South African Institute of Tax Professionals, says the ideal will be to contact the foreign company directly and ensure that the right amount of tax (in accordance with the treaty) is withheld.
“The burden of proof of the treaty is placed on the investor, and if a company does not know where the investor is from, then the default amount is withheld.”
Osman Mollagee, international tax partner at PwC, explains that South Africa did not have a dividend withholding tax up until 2012. Therefore, its double taxation agreements did not make provision for it.
Before implementation in 2012 all the existing treaties – roughly 80 – had to be renegotiated to make provision for a withholding tax on dividends when there was a flow between the treaty countries.
Mollagee says the South African government was reluctant to allow a zero per cent withholding rate. “Our basic rule is 20% (initially 15%) withholding and the most lenient rate is 5%.”
Currently there is only one country – Kuwait – with whom South Africa has renegotiated its treaty that still directly qualifies for the zero withholding rate on dividends. The treaty has not been ratified since it was signed about five years ago.
However, the court cases in South Africa and the Netherlands have shone the light on the “most favoured nation” concept. The treaties between two other countries – Sweden and the Netherlands – do not provide for a tax exemption on dividend payments, but they have the most favoured nation clause in their treaties with South Africa.
“This is basically a treaty provision where the treaty countries agree that they have negotiated and agreed on the treaty provisions, but if any country (either South Africa, Sweden or the Netherlands) gives another country a better deal they also want that better deal,” says Mollagee.
Since Kuwait gets the better deal on the dividends withholding rate, Sweden and the Netherlands also insist on the better deal.
Engel says the Kuwait treaty with the zero rate by itself is of little consequence. Hence the lack of urgency for change. “However, a most favoured nation clause in the Netherlands treaty – in conjunction with the Swedish treaty – turned deadly for South Africa given the potential large outflows,” says Engel.
Davidowitz advises South Africans who are investing internationally to be aware of withholding tax, what the double taxation treaty rate is between South Africa and the country they are investing in, what the official withholding tax rate in the investment country is and what has actually been withheld.
This post is also available in: Afrikaans