Dividend tax continues to erode net investment returns for cross-border pension portfolios. In principle, treaty-based WHT relief should mitigate that erosion. However, eligibility tests, anti-abuse provisions, and fragmented operational practices often cause avoidable losses. This article explores the direction of travel in global policy, identifies key regional trends, and highlights the operational steps pension funds must take to capture relief efficiently.
Why pension funds remain central to the dividend tax debate
Pension funds hold long-term, tax-exempt or tax-advantaged mandates, and treaties are designed to protect them from unnecessary withholding tax. For example, the 2016 U.S. Model Convention explicitly grants a 0% WHT rate on dividends to qualifying pension funds, provided the income is not tied to a commercial business. In addition, it restricts favourable treatment for income from RICs and REITs. Because this model has shaped many modern treaties, it illustrates the global trend towards codifying zero-rate relief for pensions.
The EU’s FASTER framework: from paperwork to digital systems
Europe has recognised that even when treaties provide relief, outdated paperwork undermines access. Consequently, the EU has introduced the FASTER Directive, which obliges Member States to adopt either relief at source or quick refund procedures. The centrepiece is a common digital tax residence certificate designed to streamline verification. Implementation deadlines extend to January 2030, but pension funds cannot afford to wait until then. They should already be preparing to align residency data, streamline reporting, and integrate with national quick-refund systems. In short, the EU is moving from fragmented processes to a digital-first model.
TRACE and the growing dominance of WHT relief at source
At the same time, the OECD’s TRACE framework has set a global standard for relief at source. Finland pioneered this approach in 2021, requiring custodians to act as authorised intermediaries and secure treaty benefits at the point of payment. Pension funds that invested in scalable dividend flows now benefit from lower friction and faster access to their treaty entitlements. Other jurisdictions are closely observing Finland’s example. As the EU’s FASTER programme matures, TRACE-style relief will likely expand, shifting the burden away from long, uncertain reclaim cycles.
Court-led reforms: when EU law overrides discriminatory WHT practices
Where governments have been slow to adapt, courts have intervened. In College Pension Plan of British Columbia (C-641/17), the Court of Justice of the European Union ruled that non-EU pension funds could be comparable to domestic funds. Blocking refunds to them breached the principle of free movement of capital. German courts recently confirmed that foreign pension funds improperly excluded from exemptions are entitled to repayments, subject to statutory time limits. Similarly, Spanish rulings have opened doors for non-resident investors. Step by step, litigation is levelling the playing field and forcing governments to refund discriminatory dividend tax charges.
Tightening eligibility rules: the rise of PPT, LOB and precise definitions
Nevertheless, pension funds cannot rely solely on favourable precedents. Modern treaties embed stricter eligibility tests. The Principal Purpose Test (PPT), introduced through the OECD’s Multilateral Instrument, empowers tax authorities to deny relief where transactions lack genuine economic purpose. Similarly, Limitation on Benefits (LOB) clauses set specific ownership and activity thresholds. On top of these, many treaties now define “pension fund” with surgical precision. Typically, funds must prove that they are non-commercial, genuinely retirement-oriented, and the beneficial owner of the income. Therefore, pension structures that rely on opacity or pooling face heightened scrutiny.
Execution discipline: operational prerequisites for WHT relief
Global reforms may look promising, yet execution determines outcomes. Pension funds should prioritise four core practices to secure WHT relief.
First, maintain up-to-date residency documentation. Even under FASTER’s digital framework, outdated certificates can block relief. Funds should establish recurring processes to refresh tax residency status and match treaty definitions precisely.
Second, strengthen intermediary partnerships. Relief at source requires authorised intermediaries to transmit accurate information in real time. Consequently, pension funds should negotiate robust service-level agreements with custodians to guarantee data accuracy and audit trails.
Third, compile comparability evidence. In jurisdictions where litigation drives refunds, funds must demonstrate that their tax and regulatory status aligns with that of local pension schemes. Evidence of retirement funding obligations, tax exemption, and liability matching often makes the difference.
Finally, implement anti-abuse controls. Regulators now scrutinise beneficial ownership and purpose more closely. Pension funds should document governance processes, decision-making substance, and funding flows to withstand PPT challenges.
Regional signals shaping dividend tax relief
In the European Union, the direction is set. Member States must adapt to the FASTER framework, and the only uncertainty lies in national implementation speed. Pension funds should already be testing their data flows and preparing for relief-at-source models.
In the Nordic region, Finland demonstrates that TRACE-style relief can function at scale. Other markets will eventually follow, making relief at source the norm rather than the exception.
In Germany and Spain, courts continue to reshape the landscape. For legacy periods, pension funds have credible refund opportunities if they can prove comparability. For current periods, however, expect authorities to demand more extensive documentation.
In the United States, treaty language increasingly incorporates zero-rate dividend provisions for pension funds, but always within the guardrails of LOB and strict pension fund definitions. This ensures that only genuine retirement funds qualify.
Looking forward: from fragmented reclaims to scalable relief
The trajectory is clear. Policymakers are building infrastructure to accelerate withholding tax relief, while courts continue to dismantle discriminatory practices. The outcome will be an environment where genuine pension funds obtain treaty-based relief at source in most developed markets. Reclaims will still exist, but they will become the exception rather than the norm.
For pension funds, the challenge is not just recognising these trends but operationalising them. A future-proof strategy requires live treaty mapping, relief-at-source enablement, and litigation-ready documentation. Those that move early will capture higher net yields and avoid unnecessary leakage.
At Global Tax Recovery, we work with leading pension investors to convert policy changes into tangible outcomes. By combining treaty analysis, intermediary integration, and compliance expertise, we help clients secure WHT relief on dividend tax quickly, cleanly, and at scale. If you want to turn shifting global rules into improved portfolio returns, our team is ready to assist.
