How To Avoid Double Taxation on International Investments?
How To Avoid Double Taxation
A diversified, global investment portfolio can help you spread your risk – but it could also mean that you are taxed twice on the same investment income. The good news is that you can recoup a significant amount of that tax paid on cross-border investments. We’ll help you find out how.
What is double taxation?
Double taxation is when you are taxed twice on your investment income (such as dividends, royalties or interest). You are taxed in two countries – the foreign jurisdiction (internationally) from which the returns are paid, as well as your country of residence (domestically).
The result? Your investment income will be significantly reduced due to double taxation. However, there are ways to recover a substantial portion of the lost income and capital by having the preferential double tax treaty (DTT) rate applied.
How does a double tax treaty (DTT) work?
A double tax treaty (DTT) is an agreement between two countries which are designed to eliminate the risk of double taxation where the same income is taxed in two different countries. It works by limiting the amount of tax which can be withheld on the income. The rate applied could be reduced to as low as 0% tax.
DTT’s are based on the framework provided by the Organization for Economic Cooperation and
Development (OECD). The rules may differ slightly depending on the type of income received. The most common types of investment income include dividends, royalties and interest. The double tax treaty benefits both the investor and the foreign country – the lower the tax paid by an individual, the higher the likelihood that they’ll continue to invest in the region.
The basics of withholding tax (WHT) reclaims
Withholding tax (WHT) is the tax withheld by a company in the foreign country where the investment is held. You could qualify for a WHT refund if there is a difference between the tax rate paid and the rate agreed on in the double tax treaty.
Let’s look at this simple example of how you could reclaim Swiss withholding tax on dividends. When Nestlé (Swiss Domiciled Companies) pay a dividend of CHF 1000 – it immediately gets taxed at the Swiss Statutory Tax Rate of 35% (CHF 350) irrespective of who the shareholder is.
However due to a Double Tax Agreement between the United Kingdom and Switzerland, British residents are entitled to the Double Tax Agreement Rate of 15%. Therefore – the differential of CHF 200 (350-150) is recoverable in its entirety but is retained by the Foreign (Swiss) Tax Office until all the necessary procedures and conditions are met.