February 21st, 2012
Are your dividends tax-free?
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Investors who hold foreign shares in their share trading accounts or even in their stocks and shares ISA’s as well as their self-invested personal pensions (SIPPs), but fail to reclaim the tax deducted from their dividends, are losing out heavily.
Thousands of private investors in overseas shares could be paying unnecessary amounts of dividend withholding tax ("DWT") by not claiming back excess deductions or not having filled out the correct paperwork prior to investment.
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 back foreign tax credit relief or reclaim part of the tax paid.
Some examples . . .
Following Bank Santander’s acquisition of Abbey National in 2004, thousands of UK investors who have hold on to their shares in Spanish bank Santander are entitled to reclaim 4 percent.
However, if your total income in Spain is less than €1500 in the year, then you can claim back the full amount (21 percent).
UK based shareholders in Swiss' Nestle are charged a massive 35 per cent dividend withholding tax, but they are entitled to claim back 20 per cent, with the added benefit that they can claim back tax for several previous years.
UK shareholders in French companies, such as France Telecom are entitled to claim back 10 percent (can go back to 2010), and; a UK investor in German companies, such as BASF, while being charged 26.375% dividend withholding tax, is entitled to claim 11.375% (can go back to 2008).
It is clear not reclaiming dividend withholding tax can substantially reduce the actual rate of return on your 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, as per the examples above, for investors owning foreign stocks and shares dividend withholding tax has a considerable impact on your dividend income and total returns, because it is very likely that you are paying too much tax than you 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.
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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 tax payers.
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 for all kinds of reasons, such as:
- Lack of reclaim opportunity awareness
- Can’t be bothered to do it
- 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 – Dividend Income Investor.com’s stockbroker - 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 specialist withholding tax reclamation firm Taxback only 7 percent of dividend withholding 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.
Are you 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:
- ISA and SIPP investors whose plans are exempt from UK tax but not from foreign dividend withholding tax
- Expat investors
- 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 do you reclaim dividend withholding tax?
Reclaiming dividend tax abroad is very much a specialist activity and is also rather laborious.
Often double taxation agreement dividend reclaim forms are only provided in the local language, with no English explanatory notes. Sometimes, they are only available in hard copy following a written request. Often, shareholders are required to submit several documents. Some countries even require a form for each dividend payment.
Many shareholders may decide not to bother at all due to these hurdles to claim back what is rightfully yours.
Luckily we have partnered with Taxback whose sole activity is to 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.
If you own dividend paying foreign shares we strongly suggest that you contact Taxback in order for them to ascertain what you are due, and for them to perform all the required steps to reclaim part of the dividend withholding tax you have already paid on a no success fee basis of 10 per cent of sums reclaimed (minimum applies).
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