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South Africa: Summary of Measures in Recent Income Tax Treaties, Protocols with the Netherlands, Switzerland, Mozambique, and Portugal
Protocol to Income Tax Treaty with the Netherlands
The new renegotiated income tax treaty between the Netherlands and South Africa became enforceable on 1 January 2009. This new treaty replaces the 1971 treaty. The income tax treaty applies to taxes on income and capital and is intended to avoid double taxation.
Further to the new income tax treaty, a Protocol was negotiated. It is anticipated that once the Protocol enters into force, the effective date of its provisions will be 1 January 2009. The Protocol specifically updates the withholding tax treatment on dividends and interest and is aimed at improving and facilitating the investment by Dutch enterprises into South Africa and vice versa.
Among the benefits of the new Protocol would be:
- A withholding tax rate of 5% on dividends when shareholders hold at least 10% of the voting rights in the company (under the former treaty, the participation requirement was 25%)
- A withholding tax of 10% to all other dividend distributions (under the former treaty, a 15% withholding tax was applicable)
- No withholding tax on interest (under the former treaty, a 10% withholding tax was applicable)
- A source state taxation on pensions, including lump sum payments, an arbitration clause and a residence provision for pension funds
Income Tax Treaty with Switzerland
Following the expiration of the 1967 income tax treaty between Switzerland and South Africa, an entirely new tax treaty was negotiated and entered into force on 27 February 2009.
Further to this treaty, Switzerland and South Africa amended the new treaty by signing a Protocol, and the effective date of the treaty (including the Protocol) is 1 January 2010. The new treaty follows the OECD model convention and the Swiss treaty policy.
From a South African tax perspective, the previous treaty eliminated the effect of double taxation by granting an exemption to a South African tax resident of the income already subject to Swiss tax (excluding dividends and interest). This is commonly referred to as the “exemption method” of double tax elimination. The so-called “credit method” of double tax elimination is applied to dividend and interest income (i.e., allowing a deduction of the foreign tax payable).
Many South Africans planned their affairs around the use of this exemption method to take advantage of the relatively low tax rates applied in Switzerland.
Under the new income tax treaty, South Africa adopts the “credit method” consistently to all income which is subject to both South African and Swiss tax. The treaty provides that Swiss tax payable by a South African resident is allowed as a deduction against South African tax payable by that resident—the deduction being limited to the South African tax that would have been payable on that income. This fundamental change is anticipated to have far reaching affects for South Africans that have historically structured their affairs to take advantage of this exemption.
The Protocol specifically amends Article 18, 22 and 25 of the income tax treaty as follows:
- With regard to the taxation of retirement benefits, the Protocol defines the term “other retirement benefits” to include in South Africa, payments made by retirement annuity funds, and in Switzerland, payments made from tied individual accounts. The term “payments” referring to both periodic and lump sum payments.
- If Secondary Tax on Companies (STC) is levied in South Africa on dividends declared to a Swiss resident, Switzerland must grant relief (on request) to that resident by either allowing a deduction from the Swiss tax on the income of that person equal to the amount of South African tax levied on that amount (restrictions apply), a lump sum reduction of the Swiss tax, or a partial exemption of such dividends from Swiss tax. This relief is further restricted and cannot exceed the lower of the amount of STC levied in South Africa and 15% of the gross amount of dividends.
- Measures provide for an exchange of information necessary to carry out the provisions of the tax treaty which relates specifically to the treatment of “tax fraud”.
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Income Tax Treaty with Mozambique
The first income tax agreement between South Africa and Mozambique entered into force on 19 February 2009. The treaty’s provisions are effective with respect to taxes withheld at source (i.e., withholding taxes) as from 20 February 2009 and effective with respect to all other taxes from tax years commencing on or after 1 January 2010.
Without the income tax treaty, dividend, interest, and royalty payments flowing from Mozambique to South Africa would be subject to a withholding tax of 20% imposed by Mozambican authorities.
Among the provisions under the new income tax treaty are the following measures intended to ease the tax burden:
- Imposing a reduced 15% withholding tax on dividends declared by a Mozambican company to a South African resident (further reduced to 8% when the South African resident is a company which holds a minimum participation of 25% of the share capital of the Mozambican company)
- Imposing a reduced 8% withholding tax on interest paid by a Mozambican company to a South African resident
- Imposing a reduced 5% withholding tax on royalties paid by a Mozambican company to a South African resident
On the other hand, South Africa does not currently impose any withholding tax on interest or dividend payments leaving South Africa’s borders; however, South Africa does impose a 12% withholding tax on royalty payments. This rate would be reduced to 5% in terms of the new income tax treaty with Mozambique. If a new dividend tax in South Africa were to be enacted, the proposed general rate of 10% would be reduced to 8%.
Management fees payable by a Mozambican resident to a South African resident would typically not give rise to any Mozambican withholding taxes as it would fall within the ambit of “business profits.” This provision in the income tax treaty grants the taxing right to South Africa unless the South African resident carries on business through a permanent establishment in Mozambique—in which case, the management fees would give rise to both South African and Mozambican taxes. Relief from double tax in this regard, would be available in terms of the tax treaty, or alternatively in terms of South African domestic tax law.
Income Tax Treaty with Portugal
Although the income tax treaty between Portugal and South Africa entered into force on 22 October 2008, its measures only became effective as from 1 January 2009 when all the procedures required in bringing into force the treaty (under Article 28 of the treaty) were met.
In brief, the treaty provides for the following tax benefits:
- A withholding tax of 15% on dividend payments to South Africa by Portuguese companies (reduced to 10% when the South African company directly holds at least 25% of the share capital in the Portuguese company for an uninterrupted period of two years)
- A withholding tax of 10% on interest paid by a Portuguese company to a South African resident
- A withholding tax of 10% on royalties paid by a Portuguese company to a South African resident and visa versa
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For more information, contact a tax professional with KPMG in South Africa:
Robyn Nathan, +27 (0) 11 647 5714, robyn.nathan@kpmg.co.za
Katherine Boel, +27 (0) 11 647 6492,
katherine.boel@kpmg.co.za
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