Transparent funds are becoming increasingly popular amongst investors. Are they the best vehicle for international investment reclaims? Let’s look at the structures of transparent funds – 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 setting up an investment, two types of funds come into play. These include complex funds and transparent funds. Transparent investment structures put the local tax burden on the investor instead of 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 multiple 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 more significant portions of their returns to the tax man. Many investors are opting for transparent funds to simplify their investments. However, it means that foreign WHT severely impacts their returns. 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 tax liability falls on the investor when they select 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 a vital consideration in situations where double taxation applies. In most cases where a shareholder holds an investment in a different country, they 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 impact of double taxation.
The investment fund structure is not the only factor that plays a role in WHT refund eligibility. Investor profiles are 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 is United States limited partnerships (LPs). In the US, a limited partnership is where one partner manages the daily operation and takes on greater responsibilities. Meanwhile, the other partners carry limited financial liability (they can only lose as much as they invested). One example of a US LP is a real estate development project.
US LPs are considered transparent investment structures. Therefore the tax duty falls on the individuals. It is 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.
Below is an example of 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 of 20% of the LP. Three of these investors are individuals who live in the US, one is an NPO, and one is a pension fund.
If the dividend is €13.5 per share, the total dividend payout will equal €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, which results in the individuals qualifying 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 significantly impacts investment returns.
How Global Tax Recovery can help you maximise your WHT refund
A reputable tax recovery partner is not a luxury – it is essential. Dealing with international tax requires thorough knowledge of foreign tax laws, processes, and documentation requirements. Using a professional tax recovery specialist will save you time, resources and frustration when dealing with global tax authorities. Remember, the tax landscape is ever-changing, making it even more challenging to keep up with local and international 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 investors receive the maximum recovery in the shortest possible time. Our service offering is risk-free as our fee is success based. If we cannot recover funds on behalf of our client – the client pays nothing, regardless of the amount of time, effort or resources applied. Our clients never lay out any money; our fee is deductible from the successful recovery.
Learn more about Global Tax Recovery, as well as our cutting-edge technology. Get in contact today.