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Complex and transparent funds: make the most of your investment returns

Transparent funds are becoming increasingly popular amongst investors. Are they the best vehicle for reclaims on international investments? Let’s take a look at transparent fund structures – also called look-through funds – and see how they could impact your withholding tax (WHT) returns.

What we will discuss in this article:

● Complex and transparent fund structures
● Transparent fund structures and WHT refund eligibility
● How Global Tax Recovery can help you maximise your WHT refund

Complex and transparent fund structures

When it comes to setting up an investment, two types of funds come into play – complex funds and transparent funds. Transparent investment structures put the local tax burden on the investor and not the investment vehicle itself. On the other hand, with complex investment fund structures, the liability is built into the investment itself.

You could choose which structure to use based on a variety of factors, such as the complexity of the investment set-up, local and international regulations, and tax implications, to name a few. Ultimately, the investor would choose the structure that maximises their investment returns and has the lowest tax impact.

Often, investors forget that foreign withholding tax plays a significant role in their investment decisions. They have to pay larger portions of their returns to the tax man. Many investors are opting for transparent funds in an attempt to simplify their investments. However, it often means that their returns are severely impacted by foreign WHT. If this applies to you, we can help you to recover withholding tax on your foreign investments. Learn more about foreign dividend withholding tax.

Transparent fund structures and withholding tax refund eligibility

The investor takes on the tax liability when they chose a transparent fund structure. International tax authorities deem an investment to be transparent if it qualifies as such in the region where it is registered. Transparent funds become an important consideration in situations where double taxation applies. In the majority of cases where an investment is held in a different country, the shareholder will be liable to pay a significant amount of WHT. However, having a transparent investment fund structure provides withholding tax relief due to double taxation agreements. These agreements (sometimes called treaties) reduce the negative effects of double taxation.

The investment fund structure isn’t the only factor that plays a role in WHT refund eligibility, the investor profile is equally important. Pension funds and NPOs (non-profit organisations) are some of the most common investor types in transparent structures. These entities can benefit even further, often recovering full WHT refunds, thanks to the specific exemptions to that they are entitled.

A Withholding Tax Reclaim Example

An example would be US limited partnerships (LPs). In the US, a limited partnership is where one partner manages the daily operation and takes on unlimited responsibility, while the other partners carry limited financial liability (they can only lose as much as they invested). A common example of a US LP is a real estate development project.
US LPs are considered transparent investment structures, and therefore the tax duty falls on the individuals. It’s important to note that, if a tax authority has a full view of WHT refund eligibility, which is the case when a transparent fund exists, the investors have a much better chance of qualifying for a tax refund.

Here’s what a potential WHT reclaim could look like:
Assuming a limited partnership exists in the United States, and five investors hold a total of 100,000 shares in company XYZ, based in Europe. They each have equal ownership, holding 20% of the LP. Three of the investors are individuals that live in the US, one is an NPO and the other is a pension fund.

If the dividend is €13.5 per share, the total dividend payout will be equal to €1 350,000. Assuming the WHT percentage is 26.375%, the investors will have to pay a withholding tax of €356 063. However, a DTT exists between the US and the EU and the individuals qualify for a 15% treaty rate, while the NPO and pension fund are exempt from WHT. Reclaim figures would look something like this:
NPO €71 213
Pension fund €71 213
Each Individual €33 413
Total €242 663

As you can see from this example, following through with a WHT reclaim has a significant impact on investment returns.

How Global Tax Recover can help you maximise your WHT refund

Having a reputable tax recovery partner isn’t a luxury – it’s essential. Dealing with international tax requires thorough knowledge of foreign tax laws, processes, documentation requirements and more. Using a professional tax recovery specialist will save you time, resources and frustration when it comes to dealing with global tax authorities. Remember, the tax landscape is always changing, making it even more challenging to keep up with local and global regulations.

Global Tax Recovery act on behalf of more than 50 000 beneficial owners globally, many of which are top-tier financial institutions such as Banks, Asset Managers, Pension Funds, Brokerages and Custodians. We manage the entire administrative burden from beginning to end and ensure that the maximum recovery is reclaimed in the shortest possible time. GTR’s service offering is entirely risk-free in that our fee is success based. If for whatever reason, we are unable to recover funds on behalf of our client – the client pays nothing, regardless of the amount of time, effort or resources applied in the pursuit of such funds. Our clients never lay out any money; our fee is simply deducted from the successful recovery.

Learn more about Global Tax Recovery, as well as our cutting-edge technology. Get in contact today

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