Frequently Asked Questions: Dividend Withholding Tax
If you are searching for more information regarding dividend tax withholding, you have come to the right place. We hope we have addressed any questions or concerns you might have. Global Tax Recovery is here to help regardless of the complexity of the withholding tax recovery process.
Does every nation apply a withholding tax to dividends and interest paid to non-residents?
No. Each country has its own set of regulations that apply to non-resident investors. However, dividends are more likely to be subject to withholding tax than interest on bank deposits or bonds. The information below is relevant to dividend income.
Why does a nation withhold tax from dividend payments made to non-residents?
For tax authorities to collect tax after non-residents receive dividend payments would be extremely challenging. Therefore, countries withhold tax on dividends before investors receive dividend income. The tax authorities remove the tax before the dividend payment is credited to the non-resident investor to secure its collection.
What percentage of dividend payments made to non-residents get subtracted due to withholding tax?
The rate depends on the country. Non-resident dividend tax withholding rates range from 0% to 35%. Many factors might affect the subtracted withholding tax amount. Some countries have different dividend tax withholding rates that apply to different types of payments (e.g., dividends from privatised companies versus non-privatised companies). Other times, in certain nations, the rate of applicable withholding tax depends on the period that the non-resident investor has owned stock of the dividend-paying company. An investor that pays any amount of WHT could find that it has a significant bearing on their investment positions.
What are the fundamental effects of dividend tax withholding on a non-resident investor?
Assume a non-resident investor owns shares of Nestle, a Swiss company, which distributes a CHF 1,000 gross (without WHT) dividend. The 35% withholding tax is subtracted from the dividend income before the non-resident investor is credited the gross dividend income. Therefore, the non-resident investor will only receive CHF 650 in credit. The net dividend is the total after taxes.
Is it feasible for a non-resident to get their withheld dividend tax back?
The amount of reclaimable tax depends on several variables, including:
- The non-resident investor tax residency
- The investor tax status, such as whether they are an individual, corporation, pension fund, partnership, etc
- The proportion of shares of the dividend-paying company that they own
If the non-resident investor is a resident for tax purposes in a nation with an income tax treaty with Switzerland. It allows for a dividend tax withholding rate lower than 35%. In the case of the Nestle dividend, after meeting requirements, all or part of the tax withheld is reclaimable.
What are Double Tax Treaties?
Double tax treaties are shared bilateral agreements between nations. The purpose of a tax treaty is to prevent certain dividend income from being fully taxed in two nations. Dividend income is subject to tax in the company’s domiciled country and the country in which the investor resides. In other words, A treaty defines taxing rights between the two nations. Treaty tax rates concerning dividend income differ and depend on the agreed-upon rate between the two countries. However, in some instances, pension funds are eligible for domestic tax exemption from withholding tax on dividends. These funds are exempt as long as they satisfy specified requirements.
Why do governments not withhold taxes at the treaty rate when paying dividends so that non-residents do not have to deal with over-withholding and submit tax refund claims?
Relief-at-source is the term used to describe the process where the tax authorities apply the lowest applicable withholding tax rate to the dividend payout. While many nations do not use relief-at-source techniques, some do, like the United States.
Even in nations that provide relief-at-source, it is a requirement to provide specific documents for the dividend payer to validate the country of residency of the non-resident investor. Therefore, determining their eligibility for a lower dividend tax withholding rate. The withholding tax rate will be applied to the dividend payment. Hereafter, a reclaim application will be necessary to qualify for a lower tax rate if the applicant cannot supply properly presented documentation before the dividend payment.
For instance, the U.S. demands the beneficial owner of the dividend submit a W8-BEN IRS Form to the dividend recipient. The 30% U.S. statutory non-resident withholding rate for dividend payments will be applied if such documentation is not in place by the time the investor receives the dividend income.
What is a beneficial owner?
A beneficial owner is an individual or business that would include the disputed dividends on their income tax return. The beneficial owner would usually declare the dividend payment they received as income and pay taxes on it in their country of tax residency.
How long would it generally take for a non-resident investor to get paid a tax refund?
Each country has a different timeframe; therefore, the duration relies on the tax authorities involved.
Can a non-resident investor recoup taxes withheld from profits paid out over more than a year?
The statute of limitations established by each nation specifies the time frame for submitting a non-resident tax reclaim. Statutes of limitations vary from one country to another. The window for submitting claims is typically between two and six years, starting on the calendar year when the investor received the dividend income. Therefore, the potential reclaim could be significant if a non-resident investor has been collecting dividends for several years.
How does Global Tax Recovery help?
Global Tax Recovery is a specialist in Tax Reclaims. Our tax specialists can successfully navigate the challenging procedures necessary to apply for withholding tax relief in any country thanks to their technical knowledge and hands-on experience. Global Tax Recovery handles all your tax reclaim requests in a manner that is effective, efficient and economic. GTR will gather the necessary documentation from the required parties. GTR takes care of the entire administrative burden so you don’t have to. Get in touch with Global Tax Recovery to ensure you get the most out of your international dividend income.