Big announcement about dividends tax changes in South Africa

The South African government has made some big changes to the rules about taxing dividends paid to foreign shareholders.

These changes come from something called the 2021 dividends protocol and are meant to update how South Africa handles taxes on money earned by foreign companies from South African businesses.

In 2012, South Africa started taxing dividends paid to foreign shareholders. However, some agreements with other countries called double tax agreements (DTAs), made exceptions.

For example, people in Kuwait didn’t have to pay this tax because of a 2004 agreement, while Dutch and Swedish shareholders benefited from exemptions tied to most-favoured-nation (MFN) clauses.

Legal rulings, including decisions from the Dutch Hoge Raad and a Cape Town Tax Court cemented these exemptions.

Things changed with the 2021 protocol. This new agreement was signed by South Africa and Kuwait in 2019 and 2021 and was approved by Kuwait on 18 September 2024.

Now, companies in Kuwait, the Netherlands, and Sweden that own South African businesses will have to pay dividends tax.

Companies holding at least 10% of the capital of a South African subsidiary are taxed at 5%, while those with smaller stakes are taxed at 10%.

These rates took effect on 2 October 2024, following their publication by the South African Revenue Service on 22 November 2024.

One big issue is that South Africa wants to make these rules apply all the way back to 1 April 2012.

This retrospective application challenges established legal principles against backdated tax amendments and contradicts prior court rulings upholding the exemptions.

Legal experts believe this aspect of the protocol will face legal challenges, especially since previous court cases supported the old exemptions.

Ralph Wichtmann, Managing Director at Sovereign Trust, highlights the dual implications of these changes.

On the positive side, the revised tax framework is expected to boost South Africa’s revenue by capturing taxes previously lost due to exemptions.

However, he warns that increased tax liabilities for Kuwaiti, Dutch, and Swedish shareholders could dampen South Africa’s appeal as an investment destination.

“With the introduction of these new dividends tax rates, Kuwaiti, Dutch, and Swedish shareholders face higher costs on dividends from South African subsidiaries.

“Businesses and investors affected by these changes should reassess their tax positions and investment structures to ensure compliance,” he said.

While the protocol aims to create a fairer tax environment, its potential to discourage cross-border investments and the contentious retrospective enforcement raise important questions about South Africa’s balancing act between economic growth and fiscal policy.