On 18 September 2024, Kuwait ratified the pending protocol (Protocol) to the 2004 South Africa-Kuwait double tax agreement (DTA). The Protocol was signed on 1 April 2021 and was approved on 31 August 2022 by the National Assembly of South Africa. This latest development has far-reaching implications for the application of South Africa's dividend withholding tax (DWT).

DWT is levied at 20% unless an exemption applies or, in the case of dividends distributed to a nonresident shareholder, the dividend rate is reduced under an applicable DTA. Most of South Africa's DTAs require a minimum percentage shareholding to qualify for a maximum reduced rate of 5%. While the reduced rate is generally 10% or 15%, there are limited circumstances in which the DWT rate can be reduced to 0%. For example, Article 10(1) of the South Africa-Kuwait DTA effectively provides for a DWT rate of 0%.

The most-favored nation (MFN) clause in a DTA effectively provides for the automatic application of a more favorable rate if South Africa and a "third country" subsequently conclude a DTA that provides for a lower rate. Without delving into the technical merits of how it is applied, the MFN clause, when read together with the South Africa-Kuwait DTA, causes the 0% DWT rate to apply to certain other DTAs. DTAs to which this applies are the South Africa-Sweden DTA and the South Africa-Netherlands DTA.

For several years, the National Treasury has pursued a change in the DWT rate in the South Africa-Kuwait DTA. According to National Treasury, the implementation of DWT in 2012 was contingent on the renegotiation of 10 tax treaties that had a 0% withholding tax rate on dividends. All the protocols amending these tax treaties have been in force since 2008, with the exception of the Protocol, which had been awaiting Kuwait's ratification, despite having been signed in April 2021.

In principle, the Protocol will enter into force once ratified in full by both countries and the ratification instruments are exchanged between South Africa and Kuwait through the necessary channels. However, Article 2(2) of the Protocol 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."

This wording seems to imply that the intention is for the Protocol to apply retroactively, as of the introduction of DWT on 1 April 2012. This would effectively mean that, if ratified, the 0% would fall away as from 1 April 2012, when the DWT replaced the Secondary Tax on Companies in South Africa.

One school of thought is that the quoted wording is merely residual from the Protocol's renegotiations, which commenced in 2007, prior to the introduction of DWT, and hence the intention was for it to be a forward-looking provision, rather than retroactive. This position would also seem to align with the approach taken by the South African Revenue Services (SARS) over the past few years in terms of allowing the 0% DWT rate to be applied and also refunding DWT in situations where a higher rate of withholding was erroneously applied under South Africa's DTAs with Sweden and the Netherlands.

The alternate view is that the SARS will rely on this wording and seek to apply the Protocol retroactively, resulting in a higher DWT rate being applicable under both the South Africa-Sweden DTA and the South Africa-Netherlands DTA back to 1 April 2012. Whether a retroactive application would be constitutional is certainly up for debate and is not something that has been tested by the South African courts.

Given the importance of the Protocol's ratification with respect to the application of two key DTAs, and the uncertainty surrounding the potential for the Protocol's retroactive application, South African companies should be aware of this ratification by Kuwait and continue to monitor ongoing activity in this regard.