Thousands of private investors in overseas shares could be paying unnecessary amounts of dividend tax and dividend withholding tax by not claiming back excess deductions or not having filled out the correct paperwork prior to investment.
For instance, although shares listed on a foreign stock exchange do not incur UK stamp duty or stamp duty reserve tax - though some countries may charge their own local equivalents of our stamp duties - once you start receiving dividends, as a UK tax payer, you will usually need to declare this on your self-assessment tax return.
As a UK tax payer you may find that you have been charged tax twice: in the country of origin and in the UK. Often, you may be able to claim foreign tax credit relief or reclaim part of the tax paid.
For instance, UK investors owning shares in Spanish bank Santander (STD) are entitled to reclaim 4 percent. However, if the investor's total earnings in Spain are less than €1500 in the year, they can claim back the full amount.
UK based shareholders in Swiss' Nestle (OTCPK:NSRGY) are charged 35 per cent dividend withholding tax, but they are entitled to claim back 20 per cent, with the added benefit that one can claim back several years.
UK shareholders in French companies, such as France Telecom (NYSE:TEF) are entitled to claim back 10% (can go back to 2010), and, a UK investor in German's BASF (OTCQX:BASFY), while charged 26.375% dividend withholding tax is entitled to claim 11.375% (can go back to 2008).
It is clear not reclaiming dividend witholding tax can substantially reduce the actual rate of return on investment in a dividend paying company.
What is dividend withholding tax?
Withholding tax is paid on income that you have earned overseas
Income from dividends are taxable at source in most countries. Clearly, for investors owning foreign stocks and shares dividend tax or dividend withholding tax as it's called can have a considerable impact on their dividend income and total returns, because it is very likely that they are paying too much tax than they should.
Many investors around the globe are unfortunately blissfully unaware that they are not protected from DWT even if their investments are shielded from local tax, such as in the UK if their dividend paying shares are 'parked' in an ISA or SIPP.
Foreign tax revenue agencies will deduct dividend withholding tax, irrespective.
What is unfortunate is that most investors do not know that some foreign dividend tax can be reclaimed in full or at least in part.
Dividend withholding tax - a closer look
While a minority of countries do not deduct withholding tax on dividends paid, most countries require dividends to have a proportion withheld for tax - the taxable component is withheld by the foreign revenue agency.
The amount taken varies per country, for instance:
- France deducts 25%
- The United States takes 30% (this may even increase to 39.6 per cent if President Obama's fiscal 2013 budget plan for higher taxes on dividends is accepted)
- Switzerland deducts already a massive 35%
Luckily, at least for UK tax payers, the United Kingdom has signed over 100 so-called double taxation agreements (DTA) with other countries, which usually set out a maximum rate of withholding tax that a given country can charge on payments to UK residents.
Unfortunately, these rates vary per country. Typically, only up to 15 percentage points of these overseas deductions can be reclaimed.
Where the UK has a DTA with the country in question, investors are entitled to reclaim the difference between the foreign tax rate and that deducted here in the UK.
The allowable amounts that can be claimed back from the foreign tax revenue agencies are restricted to pre-agreed levels between the UK Treasury and their overseas counterparts.
For example, a Swiss listed company's dividends would be paid to UK tax payers minus a 35 percent withholding tax. But, under the DTA with Switzerland, investors can reclaim 20 per cent of that.
Non-US Investors in US-listed stocks and shares can complete a W-8BEN (certificate of foreign status) prior to investing (to be refilled every three years). This will ensure that if the signatory is a UK tax payer, only 15 percent rather than the (current) standard 30 percent withholding tax is deducted from source.
Why is dividend withholding tax not been reclaimed by my stockbroker or financial adviser?
None of the stockbrokers we have contacted in the UK, nor many UK local tax advisors, are involved in reclaiming dividend withholding tax on behalf of their clients.
In most cases the only way to obtain your legal entitlement is to file a reclaim at the local foreign tax authorities. But many investors shy away from this due to:
- Lack of reclaim opportunity awareness
- No standardised reclaim process
- Varying timeframes
- High fees erode value of refund
- Fragmented chain of intermediaries
- Proliferation of errors
- Language barriers
Also, while some stockbrokers, such as TD Waterhouse insist that UK investors complete a so-called W-8BEN form (for US investments) before clients can trade many other brokers leave this important paperwork for the investor to sort out.
According to Taxback at www.ERI.lnk.taxback.com - a specialist withholding tax reclamation firm - only 7 percent of dividend tax is reclaimed globally, meaning that, "if you translate this to those in the UK with overseas assets in their portfolios, the loss could be upwards of GBP1bn a year".
Many people either don't know they can reclaim dividend withholding tax or think it is too much hassle.
Who may be eligible to reclaim dividend withholding tax?
Taxback argues that there are many different types of investors who could be entitled to dividend tax reclaims, including:
- expat investors
- in the UK: ISA and SIPP investors whose plans are exempt from UK tax but not from foreign dividend withholding tax
- members of share plans where the parent company is a foreign entity
- investors in UK companies that are subsequently taken over by foreign companies
- high-net-worth individuals with geographically diversified share portfolios
- pension companies and life insurance companies
How to reclaim dividend withholding tax?
Reclaiming dividend tax abroad is very much a specialist activity and is rather laborious. Often, shareholders are required to submit several documents, such as certificates of tax residence and a lengthy DTA treaty claim form, often in the local language. Some countries even require a form for each dividend payment.
Only very few international tax reclamation companies exist who perform the highly complex task of reclaiming income, value added tax and dividend withholding tax, a process which has to incorporate varying data, formats and procedures from a multiplicity of different legislatures around the globe.
We recommend Taxback at ERI.lnk.taxback.com to assisy you in any divididend witholding tax value added tax or income tax reclamations.