Johannesburg — A HIGH court bid by Volkswagen SA to get a refund from the South African Revenue Service (SARS) for Secondary Tax on Companies (STC) paid on dividends declared to its German parent has failed.

The court held that the double tax agreement between SA and Germany could only apply to a tax on dividends in the hands of the shareholder receiving the dividends, whereas STC was a tax on the company.

Volkswagen tried to get a refund on the difference between the 12,5% that was paid and 7,5% which it claimed was the maximum sum it ought to have paid.

Under the double tax agreement SA has with Germany, in the case of a shareholding of at least 25%, the maximum tax on dividends from a South African company that SA can impose (and likewise the maximum tax Germany can impose on dividends accruing to a South African resident) is 7,5%.

Volkswagen SA argued it was a tax on dividends and the 7,5% maximum should apply. The court ruled that STC is not a tax on dividends or taxation of dividends, it is a tax on the company declaring the dividends.

The court said STC is levied on all South African companies when they declare dividends.

Ernst Mazansky, a director at Werksmans Tax, said yesterday there has been an argument made that where a subsidiary in SA declared a dividend to an offshore holding company which holds at least 70% of the equity, that the parties could elect not to pay STC under a group relief provision. This is available to a South African holding company and its subsidiary, he said.

Mazansky said as a result of this dispute the STC provisions were changed a few years ago, but the Volkswagen challenge continued.

Once STC is abolished and the withholding tax replaces it, the contentious issues will fall away and the double tax agreements will, once again, become applicable.

The forthcoming withholding tax payable to a German parent, will reduce from the announced 10% to 7,5% (although the double tax agreement with Germany is being renegotiated), so that such companies would then be satisfied with that rate, he said.

In the case of other countries the rate would reduce to 5%.