Dutch Court Confirms The Most-Favored-Nation (MFN) Clause Under The Treaty Between The Netherlands And South Africa

; posted on
January 22nd, 2019

On 18 January 2019, the Supreme Court (Hoge Raad der Nederlanden) rendered its decision in case No. 17/04584 on the application of the most-favored-nation (MFN) clause contained in the Netherlands - South Africa Income and Capital Tax Treaty (2005) (as amended through 2008) (the Treaty).


The taxpayer, X Ltd. (the Taxpayer), is a company that is tax resident in South Africa. The Taxpayer held all of the shares in a limited liability company (L B.V.) that is tax resident in the Netherlands. In 2013, L B.V. made available to the Taxpayer a dividend of EUR 10,851,096. As such, L B.V. withheld the withholding tax on dividend at rate of 5% as provided in the treaty.  

In 2014, L B.V. requested a refund of EUR 542,554 on the basis of the MFN clause contained in article 10(10) of the Treaty. Generally, the MFN term means the country, which is the recipient of this treatment, must nominally receive equal trade advantages as the "most favored nation" by the country granting such treatment.


Under article 10, paragraph 10 of the Treaty, it states that to the extent a double taxation agreement concluded between South Africa and a third country entered into after the date on which the Treaty is concluded, South Africa is required to reduce its domestic withholding tax rate to one below 5% (including a full exemption), such lower rate automatically also applies to the Treaty (a most favored nation clause; "MFN clause").

Following the conclusion of the Treaty in 2005, South Africa and Sweden entered into a protocol amending the existing (1995) treaty, reducing the dividend withholding tax rate to zero, on the basis that the MFN clause in that protocol did not only consider new South African tax treaties but also existing ones, some of which provided for a zero South African withholding tax on dividends. At the date of the relevant profit distribution by the Dutch company to the South African shareholder, the protocol between South Africa and Sweden had already entered into force.

As a result, the Supreme Court agreed with the Taxpayer argument that the Netherlands was actually not entitled to impose any withholding tax on dividends it had received from a Dutch company due to the MFN clause. The court treated the new protocol between South Africa and Sweden as a new tax treaty for purpose of the MFN clause in the Netherland-South Africa treaty.

Source: Dutch Supreme Court

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