Published Wed, 06 Jul 2016 14:00 CET by FSI Fiscal for TopYields.nl
Many investors in dividend distributing shares may regrettably have first hand experience with dividend withholding tax. However, in my day-to-day practice as a tax advisor, it is my experience that many investors are not aware that their tax burden can be somewhat relieved. A right to a tax refund may exist due to the workings of an applicable tax treaty between your country of residence and the source country of your dividend income. On average between 40-60% of withholding tax may be eligible for a refund.
What is withholding tax?
Withholding tax is a type of tax levy that occurs in many countries. Within Europe, basically all major economies apply a withholding tax on dividends distributed to non-resident investors (e.g. France 30%, Germany 26,375%, Switzerland 35%, Sweden 30%, Belgium 25%, and the list goes on). However, between all major countries tax treaties have been concluded that lower the right to tax those dividends for the source country of the dividends to 15%. A great resource to find the local tax rates and compare them with the tax rates concluded in the relevant applicable tax treaty is a publicly available resource by Deloitte International Tax Source.
How to apply for a refund?
Some countries, the most prominent one being the United States, apply the treaty tax rate on withholding taxes at source. Most investors who invest in the U.S. will not be subject to more than 15% withholding tax, despite the 30% rate that should apply to non-resident recipients of dividends. This is due to the so called Qualified Intermediary (QI) system that the U.S. offers to foreign custodians. If the non-U.S. financial institution collects certain information about its accountholders (usually via the so called W-8BEN form), the upstream financial entity is allowed to apply a 15% withholding tax. Other countries may offer similar schemes to custodians, but most financial institutions opt not to use the available procedures due to the administrative burden it may cause.
2. Standard procedure
Investors in inter alia European countries will have to use the standard “long form” procedure when too much tax has been wittheld on their dividends. In general, such an application consists of three components:
- the appropriate form(s) to apply for a refund in a particular country;
- certification provided by the tax authorities in the investors’ country of residence, confirming fiscal residence;
- proof of receipt of dividend income that was subject to dividend withholding tax (this proof typically has to be provided by the investors’ broker/custodian).
Be advised that in practice, it may be cumbersome to acquire the required documentation. Some countries require a complete trail of documentation/proof from each financial institution that has forwarded your dividend to the ultimate beneficial owner who is applying for the refund. Other countries require a signed statement from your custodian, confirming the payment of dividend. Additionally, in some countries it may prove to be difficult to obtain certification of fiscal residence from your national or local tax office. Finally, some countries require that paying agents who forwarded the dividend to you (like your custodian and local- or sub-custodians) validate certain forms.
Service levels of brokers/custodians
As a private investor, you may experience different service levels provided by your broker/custodian. Some brokers provide full-service, while others provide no service whatsoever. Full service may extend to providing your broker/custodian with the appropriate authorization or warrant to prepare and file all required documentation. Lesser service levels may extend to your bank (upon your request), setting you up with the required documentation to file for reclamation yourself. Most brokers/custodians will charge extra fees for these services, making it not economically viable to file for refunds of relatively small dividends. In case your broker provides no service at all, this may leave you without the possibility to successfully apply for a refund in some countries. It is advisable for dividend investors to inquire after the services provided before choosing your custodian. Not having the possibility to file for tax refunds obviously has a serious impact on the earnings of your portfolio, especially when you intend to reinvest your dividends.
In the future, possibly on request, I might set out the procedures for one or more countries in more detail. In the mean time, I keep myself recommended as a tax advisor in inter alia withholding tax matters. Also, I am very interested in your experiences with matters of withholding tax. Should you run into any specific issues or should you have any questions regarding the above, feel free to contact me at firstname.lastname@example.org, or visit fsifiscal.com.
Please be advised that this article is no legal or investment advice. If you run into specific issues that may influence your financial position, you should obtain advise from a qualified advisor.