Tax treaties and investment in Africa
South Africa and The Netherlands have been dedicated business partners for centuries and the volume of trade is still growing. The two nations foster and encourage a greater trade intimacy with such legislation as the convention between The Netherlands and South Africa for the avoidance of double taxation and the prevention of fiscal evasion.
Tax policy, as important in South Africa as in The Netherlands, is of great influence concerning bilateral trade relations and investment programmes for the following reasons:
• To prevent double taxation
• To apply treaties, as there are:
Tax treaties
Bilateral investment treaties
Advance pricing agreements
• To reduce withholding tax on dividends, interest and royalties.
The Dutch corporate income tax is well known for its participation exemption. This is the practice by which if a Dutch based company (with capital divided by shares) holds at least 5% of the shares in a domestic or overseas company, the dividends received from this company and the capital gain resulting from disposal of these shares are exempted from corporate income tax.
The number of shareholders, their status (corporate or individual) and/or their tax residence (South Africa for instance) does not alter the Dutch based company’s right to apply for the participation exemption.
South Africa uses a slightly similar fiscal instrument with the HQC-regime, the main premise of which is that investments originated and redeployed offshore should not attract South African tax because the investments are routed through South Africa.
Both the Dutch and the South African acts provide their domestic tax residents the possibility to avoid double taxation: profits raised in an (overseas) subsidiary will not be taxed for the second time as taxable profit of the (ultimate) shareholder in his tax residence.
International tax treaties can boost cross-border trade/investments and profit allocation between two or more countries. They provide legal certainty, stimulating economic relations and preventing illegal tax avoidance by exchanging information to mutual national tax authorities. In addition to preventing double taxation, a bilateral tax treaty gives clarity about the country of tax residence, provides the possibility of arbitrage in case of a tax dispute and relieves the withholding of dividend tax.
The Netherlands have created a worldwide network of about 100 tax treaties since 1940, among these on the African continent with South Africa, Egypt, Morocco, Nigeria, Uganda, Zambia and Zimbabwe. South Africa's own tax treaties cover nearly all of sub-Saharan Africa, and include Botswana, Egypt, Ghana, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Nigeria, Rwanda, Seychelles, Swaziland, Tanzania Uganda, Zambia and Zimbabwe.
The withholding of dividend tax has caused a lot of “tax shopping” around the world. South Africa with the HQC-regime, as a “gateway to Africa”, could provide international companies with a perfect “tax friendly” place to expand their investments into sub-Saharan Africa, the same role The Netherlands plays as a “holding-country”. In some specific cases the tax routing between sub-Saharan African countries via South Africa to The Netherlands can make a effective routing without being in conflict with OECD-regulations and nevertheless achieve relief for withholding tax on dividends.
The tax convention between The Netherlands and South Africa refers, as do most tax treaties, to direct income tax; nevertheless, South Africa also has customs agreements on mutual administrative assistance with Algeria, China, France, India, Mozambique, The Netherlands, the United Kingdom and the USA. These treaties are of great importance for imports and exports of consumer- and producer goods.
Tax treaties play an important role in bilateral cross-border trade and investments. They also serve to give a feeling of security about methods of international taxation to companies that are involved in international business, as this article shows in the case of South Africa and The Netherlands.
