For investment funds, reclaiming international withholding tax is a necessity as many of these funds are subject to double taxation. However, many insurance funds do not recover withholding tax sufficiently. Let’s discuss why.

Investment funds have been successfully recovering tax on dividends and interest since the “Fokus bank” case almost two decades ago. Besides the much clearer performance reporting of investment funds, as opposed to insurance companies, there is no doubt that increased pressure from stakeholders has also played a significant role in encouraging this behaviour. Where investment funds only have limited access to certain double tax treaties, insurance companies have no such constraints. This makes the fact that insurance firms do not recover to the full extent possible all the more surprising. In Italy, for example, foreign investment funds are subject to a 15% withholding tax. Whereas, after Relief at Source, foreign insurance companies are only taxed 1,2% withholding tax on dividends.

Withholding Tax Reclaims are a must

Double taxation agreements have been around for a long time, and their scope continues to grow. The majority of analysts predict a maximum withholding tax of 15% on dividends and 10% on interest. In most circumstances, however, the domestic tax rate is significantly greater, particularly for dividends.

Double taxation treaty-based withholding tax recovery works similarly to conventional repayments. It takes between six and twelve months to process. Recovering 20% of Swiss withholding tax and 15% of United States withholding tax will boost portfolio performance significantly. Therefore, it is an absolute requirement to retrieve these taxes, as well as a fiduciary responsibility.

With the exception of Switzerland and Germany, many nations allow for a reduction in withholding tax at source. As a result, the company and the insured are not at a financial disadvantage. This alternative is even better than the tax refund itself. In some markets, such as Italy, companies should not overlook Relief at Source, as recovery refunds might take several years.

Reclaiming on the basis of EU law

Reclaiming on the basis of European Law has become prevalent in the fund business, although not on a regular basis. However, the insurance industry is significantly less familiar with the concept.

In numerous decisions, the European Court of Justice (ECJ) has recognized the prejudice faced by insurance companies and pension funds of member nations.

The ECJ looked into the Commission vs. Finland case in November 2012. It found that the Finnish statute is incompatible with free capital movement. In fact, if sums are transferred to special reserves or provisions. Then  Finnish resident pension funds can deduct them from their taxable income. With a taxable basis of zero or very low, the Finnish pension fund is unable to credit any domestic withholding tax that will be reimbursed by the Finnish government. The Finnish tax system, however, does not provide comparable reimbursement methods for foreign taxpayers exposed to Finnish withholding taxes. This is an approach that the ECJ deemed to be discriminatory and an infringement on basic freedoms.

EU member states require life insurance companies to set up provisions to which investment income is allocated. This is to ensure minimal effect from double taxation and a return of withholding tax in the country of residence. As this option is not often available to foreign insurance companies, they are taxed on a gross basis. This results in unequal treatment and potential for reclaims in various EU member states based on the net-taxation argument. 

Why is it critical to act now?

Insurance firms have previously been hesitant to claim overseas withholding tax, however, the following factors should prompt them to reconsider:

  • Successful reclaims boost performance by 10% to 20%, while interest margins are still minimal.
  • Investors are more knowledgeable and aware of such opportunities and therefore request additional service offerings without financial risk.
  • Networks of double tax treaties are growing, and investments are becoming more diverse.
  • New ECJ decisions in support of net-taxation reclaims have been presented. Authorities will be dealing with these issues more regularly in the future.
  • Failure to file or analyse withholding tax reclaims will result in significant financial consequences. This is due to amounts being set each year, or in some countries even more frequently.
  • Insurance companies can protect themselves by providing an annual analysis to their stakeholders.
  • Historically, custodians have taken many years to submit documentation. Many reclaims will be disqualified due to not having been submitted within the period allowed by the statute of limitations. 
What now?

At the very least, a life insurance company should conduct an annual comprehensive examination of its stock and bond investments. They should identify double taxation occurrences and reclaim opportunities. In addition, a one-time review of the previous five years will aid in the reduction of the reclamation backlog. A thorough examination of these factors is critical for all stakeholders. It will provide a significant financial benefit to insurance firms and their insureds. 

Global Tax Recovery (GTR) is a global specialist that provides all types of investors, including insurance companies, with a simple solution to recovering excess withholding tax on foreign dividends. GTR manages the entire administrative burden and ensures a hassle-free claim process by handling the recovery from beginning to end.

Global Tax Recovery provides complementary data analytics to identify all the available recoverable opportunities and to ensure optimal recovery efficiency. Where an alternative service provider was in place, Global Tax Recovery will perform a comprehensive review and reconciliation. GTR will ensure that all historic dividends were both identified and recovered. 

Get in touch today.