What is Foreign Dividend Withholding Tax?
Foreign dividend withholding tax (WHT) is a tax withheld from dividends paid to shareholders of companies. The law of the country where the company is domiciled determines the amount of the foreign withholding tax. It can vary significantly from one jurisdiction to another. Foreign tax authorities charge withholding tax on dividend income, royalties, interest and services.
An entity domiciled in one jurisdiction pays dividends or interest to a non-resident beneficial owner. The income is taxed in both the investor’s resident country and that of the foreign entity. Two tax authorities are concerned about the income event. Therefore, both tax authorities want the tax from that income. This results in a single income occurrence being taxed twice. This process is called double taxation.
For example, withholding tax is charged on dividends paid to non-resident investors in Australia. The Australian government requires Australian financial institutions to withhold a portion of interest or dividend payments made to non-residents. Then they remit this portion directly to the Australian Taxation Office (ATO). The purpose is to ensure that foreigners are taxed appropriately on income earned in Australia.
The withholding tax rates can vary for each investing jurisdiction and differ further for dividend and interest income. This tax is withheld at the source of the investment. Often, many clients are unaware that their income is taxed.
Why do you pay Withholding Tax?
Countries impose withholding taxes on dividends paid to non-residents. This is because it is immensely challenging, if not impossible, for tax authorities to collect the tax once dividends have been paid. Therefore, tax authorities deduct taxes from dividend payments before they pay the investor.
Withholding tax is implemented to safeguard the source nation’s legal authority to tax revenue generated under their control. However, it contradicts the idea of tax neutrality by adding an extra expense for investors who use collective investment vehicles (CIVs) and other funds for their investments.
Luckily, this additional tax withheld from your income can be reclaimed and can significantly influence your portfolio investment income. Understanding how your investments will be taxed is essential for maximising your investment returns and achieving your long-term financial goals.
What are Double Tax Treaties?
Governments negotiate double taxation agreements (DTAs) with various nations to lower the tax investors pay. Under a Double Tax Treaty (DTT) between the country of the income and the country the beneficiary resides, a portion of the tax may be reclaimed and reimbursed.
For example, the US government levies a 30% withholding tax on dividend income received by non-residents from US investments. A DTT is in place. Therefore, it often lowers the tax to an effective rate of 15%. The recoverable portion of 15% of the dividend can be reclaimed by following the reclaim process. Filing requirements and administrative procedures differ from nation to nation. As a result, the reclaim process is immensely onerous for investors. Learn more about How To Avoid Double Taxation On International Investments.
How to Reclaim Withholding Tax.
There are three ways to recover withholding tax on international investment income. These include:
- European Court of Justice claims,
- Double Tax Treaties and
- Using domestic law.
Learn more about how to Reclaim Withholding Tax Successfully.
Beneficial owners can frequently reclaim WHT when relief is offered to the fund or the investors. Unfortunately, the time constraints and reclamation processes add administrative and compliance costs making the recovery process economically unviable.
By recovering international withholding tax, investors significantly boost their ROI (Return on Investment). However, specialised skills, resources and relationships are required.
Who Can Reclaim International Dividend Withholding Tax?
There are various investors and investment vehicles entitled to withholding tax refunds. These include: Pension Funds, Asset Managers, Trusts, Sovereign Wealth Funds, Collective Investment Vehicles (CIVs), Registered Investment Advisers (RIAs), Family Offices, Insurance Companies, Hedge Funds, Charities, Endowments, Foundations, High-Net-Worth Individuals and general individuals alike.
How the WHT to reclaim process works.
The process of filing a claim can be intricate. There are distinct procedures, foreign languages, specific filing requirements and cultural nuances in virtually every country. The good news is when appointing Global Tax Recovery to recover your dividends, all we need is data and documentation. With these two resources, we can apply our expert knowledge and vast experience to your claims, allowing you to focus on what is most important – your business.
Global Tax Recovery is an expert in WHT Recovery. Our service offering covers all the relevant investment jurisdictions and has an international network of specialists waiting to assist. These teams can meet all our clients’ specific needs and are experts in their jurisdictions.
You work hard to earn dividends. Get in touch with Global Tax Recovery today to ensure you receive the total amount due to you.