The Netherlands has concluded (new) tax treaties with Kenya and Zambia Recently – last July 15 and July 22 respectively – the Netherlands has concluded new tax treaties with Zambia and Kenya. The treaties provide for arrangements to avoid income and gains are taxed multiple times by different countries. More specifically the treaties among other things lower withholding taxes on payments from the one state to qualifying beneficiaries in the other. The Netherlands has treaties with thirteen African countries, including Nigeria, Ghana and South Africa.
Most notable changes of the treaty with Zambia are the reduced withholding tax rates for royalty payments (further reduced to 7,5%) and the eligibility for the reduced dividend withholding tax rates in participation situations. A Dutch beneficiary company can be eligible to the reduced rate of 5% when it holds a 10% interest, instead of 25% before. Other beneficiaries are eligible to a reduced rate of 15% on dividends. The withholding tax rate for interest is reduced to 10% for all beneficiaries.
Most notable arrangement in the treaty with Kenya is the reduced dividend withholding tax rate for participatory share interests (0%). A beneficiary company can be eligible when it holds a 10% share interest (or when it is a qualifying pension fund under the treaty). Other Dutch beneficiaries are eligible to the reduced rates of 10% withholding tax on dividends. The withholding tax rate for interests and royalty payments is reduced to 10% for all beneficiaries.
Both under the Zambian and the Kenyan treaty the scope of taxable basis is created for performing services requiring presence for over a period of 183 days in the country of relevance or performed through a fixed base.
Only treaty benefits for qualifying beneficiaries
Both treaties include the main purpose test in relation to withholding taxes. The main purpose test aims to prevent the use of low substance Dutch intermediates and agents to lower withholding taxes on dividends, interests and royalty payments sourcing from the respective countries. As source countries, Kenya and Zambia can deny a Dutch beneficiary treaty benefits on withholding taxes when it does not meet the main purpose test.
In any case before denying treaty benefits, the source state will consult with the Dutch tax authorities. Elements of importance for the test are (not exhaustive) the nature and volume of the activities of beneficiary in relation to the nature and volume of the dividend (substance), the historical ownership of the company and the business reasons of the shareholders to interpose a Dutch holding.
Entry into force
Date of entry into force of the treaties is not yet known; they are awaiting ratification in the Netherlands and in the respective contracting states. The treaty with Zambia will in due time replace the current treaty that dates from December 12, 1977. The treaty with Kenya is completely new.
In case you would like to receive more information, you can contact on of our Members, Baker Tilly Berk, Africa Tax specialists Marijn Verhagen (firstname.lastname@example.org) or Maurits Vedder (email@example.com)