Germany and South Africa signed a new protocol to amend their 2008 income and capital tax treaty on 6 March, 2024. This protocol, which has yet to come into force, marks the first amendment to the original treaty and introduces several changes to align with international standards and address specific bilateral tax issues.
Key updates
- Revised preamble and scope: The treaty’s preamble has been updated to reflect the standards set by the Base Erosion and Profit Shifting (BEPS) initiative. Additionally, Article 2 now explicitly covers various South African taxes, including normal tax, withholding tax on royalties and interest, dividends tax, and taxes on foreign entertainers and sportspersons.
- Definition of permanent establishment: Article 5 has been revised to exclude certain fixed places of business from being considered permanent establishments if their activities are solely of a preparatory or auxiliary nature, aligning with BEPS guidelines.
- Withholding tax on interest: Article 11 has been entirely replaced, and introduces a 5% withholding tax rate on interest payments. However, exemptions apply in specific cases, such as interest paid to or by governmental entities, central banks, banks, and institutions wholly owned by a contracting state. Interest from debt instruments, listed on recognised stock exchanges, including the Frankfurt Stock Exchange (FWB) and the Johannesburg Stock Exchange (JSE), is also exempt.
- Withholding tax on royalties: Article 12 has been updated to establish a 5% withholding tax rate on royalty payments.
- Taxation of gains: Paragraph 2 of Article 13 now permits taxation of gains from the alienation of shares or comparable interests by a resident of a contracting state if more than 50% of the value of those shares or interests is derived from immovable property located in the other state, within the 365 days preceding the alienation.
- Elimination of double taxation: Article 21 has been modified to provide updated guidelines on the exemption method by Germany and the credit method for certain income items, ensuring the avoidance of double taxation.
- Information exchange and assistance: Article 25 has been replaced to comply with OECD standards for information exchange. Additionally, a new Article 25A introduces provisions for assistance in the collection of taxes.
- Limitation of benefits: A new paragraph has been added to Article 26, stipulating that treaty benefits will not be granted if one of the main purposes of an arrangement was to obtain such benefits, unless it aligns with the treaty’s objectives.
- Technical services payments: The final protocol now includes a provision that payments for technical services, including scientific, geological, or technical studies, engineering contracts, and consultancy or supervisory services, will be treated under Article 7 (Business Profits).
The amended treaty and protocol will take effect after the exchange ratification instruments. The provisions will then apply from 1 January of the year following their entry into force, replacing the existing 1973 tax treaty between Germany and South Africa.
This updated protocol is a significant step towards modernising tax relations between Germany and South Africa, ensuring compliance with international standards and addressing contemporary tax challenges.
