Although a couple of brokerages give investors direct access to foreign stock exchanges, home bias is still a wide-spread phenomenon. Its downside is the cluster risk in the portfolio. Foreign withholding tax is a common obstacle that prevents dividend investors from diversifying their portfolio across different geographies.
My portfolio comprises dividend-paying stocks from around the globe. Holding stocks like BWT, Coloplast (OTCPK:CLPBF), Enagas (OTCPK:ENGGF), Investor AB (OTCPK:IVSXF) and Novartis (NYSE:NVS) meant I had to reclaim excess withholding tax from Austria, Denmark, Spain, Sweden and Switzerland. This is my (subjective) overview on how easy or difficult it has been for me as an investor based in Germany to reclaim excess withholding tax from these five countries.
While investors are liable to pay taxes on dividends in their home country, dividends are automatically taxed in the country where they are paid. Double-tax treaties between countries make sure investors do not have to pay taxes twice on the same dividend. Taxes withheld abroad lower the tax burden at home up to a certain level which is often at 15%. For example, if there is a 15% tax on a dividend abroad and you have to pay 25% tax on the same dividend in your home country, your tax liability stays at 25%, of which you pay 15% abroad and 10% at home.
In some cases, the tax agency abroad charges a tax on dividends exceeding the amount deductible from your domestic tax rate. If, for example, the foreign tax rate is 20% and your local rate is at 25%, from which you can only deduct 15% paid abroad, you are entitled to reclaim the remaining 5% from the foreign tax agency.
The process of reclaiming excess withholding tax was rather similar in Austria, Denmark, Spain, Sweden and Switzerland:
- Get hold of the respective tax agency's reclaim form
- Complete the form and attach the supporting certificates from your brokerage
- Get your tax residency confirmed by your local tax agency
- Submit the form and the confirmation to the foreign tax agency
- Receive payment.
Dealing with the Austrian Bundesministerium für Finanzen was very smooth. They required slightly more paper work than most of the other agencies, but their four-page reclaim form was easy enough to complete. The waiting time for the repayment was less than three months, which is very acceptable by comparison.
My first contact with the Danish agency SKAT in 2014 was rather impressive. All I had to do was to fill out one page, and less than two months later, the payment hit my bank account. Maybe their process was a bit too straightforward, because in August 2015, SKAT stated they had trouble with potentially fraudulent claims. They subsequently put all repayments on hold, but resumed payment of refunds in March this year. However, given the backlog, the process has slowed down noticeably. SKAT is paying interest on overdue refunds if case-processing time exceeds six months. I am likely to fall under that rule this year.
Reclaiming excess withholding tax from the Spanish Agencia Tributaria was a bit of a challenge. I remember contacting the Spanish embassy that provided me with 26 pages of background information and instructions on how to obtain first an electronic key and then an identification code before I could complete the three pages of "Form 210" that included two further pages of instructions. Then it took me some patience, but after eight months of waiting time, I received the payment.
Skatteverket from Sweden was the only agency that contacted me to ask some clarification questions. The contact was professional and their case handling quick. Their reclaim form consisted of only two pages and gave the opportunity to opt for different currencies. Payment including interest on the excess withheld amount (counting from the day after the taxation had become effective) was made within 5 months.
Switzerland is an expensive country by many standards and dealing with their tax agency Eidgenössische Steuerverwaltung reinforced that perception. The Swiss tax on dividends is 35%, giving the country the undisputed top position in my sample followed by Sweden (30%) and Denmark (27%). Completing their two-page reclaim form was easy and I received the repayment some three months after submission. However, the payments from Switzerland caused hefty bank transfer fees on my end - a painful reminder that Switzerland was the only non-EU member state among the five.
Lowest withholding tax: 21% in 2012 (Agencia Tributaria/Spain)
Least bureaucratic reclaim form: 1 page (SKAT/Denmark)
Quickest repayment: <2 months (SKAT/Denmark in 2013)
Most accommodating compensation policy (interest): Skatteverket/Sweden (2016)
Most currency options: SEK, EUR or "currency in recipient country" (Skatteverket/Sweden)
In summary, reclaiming excess foreign withholding tax is absolutely doable, even for DIY investors. As a side effect, the process itself proves to be a useful indicator for the business climate in the respective country. Foreign tax agencies can be both accommodating to foreign investors or slightly bothersome to deal with. I am pretty sure the former indicates a business-friendly environment in general, which in turn can be reassuring with regard to the stocks in question. Spain did not quite fit that bill. The Swiss agency was rather easy to deal with. However, the hidden costs of holding Swiss dividend stocks were an unpleasant surprise.
Interesting enough, I figured that as a rule of thumb, withholding tax tends to be less of an issue the farther away I am invested. Since overseas tax agencies withhold no more than precisely the amount that is deductible where I live, I have been dealing exclusively with tax agencies from neighboring countries and/or other EU-member states. Talking about business climate indicators, this does not show Europe in too positive a light.
Disclaimer: This article does not constitute any form of advice and in particular no tax advice.
Disclosure: I am/we are long CLPBF, IVSXF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.