There is a great deal to be gained from understanding the inner workings of international withholding tax (WHT) recovery – especially when it comes to dividend income. Institutional investment firms stand to increase their clients’ ROI on foreign investments by up to 0.5% by simply unlocking the various dividend WHT reclaim methodologies. If you want to know more about international withholding tax recovery, this article will provide a good foundation.
What is international withholding tax?
Most tax authorities see an event that generates income as an opportunity to levy a tax on that income.
International withholding tax is incurred when an investor domiciled in one country receives income from dividends or interest paid by an entity domiciled in another (foreign) country. In this situation, there are two tax authorities interested in the income event. Put simply, both tax authorities would want to tax the same income. Therefore, double taxation (i.e. in two jurisdictions) becomes probable.
How does double taxation on dividend and interest income work?
The government in the country in which the dividend-paying entity is domiciled is the first to identify the income event. Therefore, it applies withholding tax at a domestic level.
The withholding tax in the originating country is usually withheld by the dividend-paying agent and paid to the government’s financial agents directly. Subsequently, the recipient declares the income in their own local country, as this may attract domestic income tax. Consequently, double taxation may arise on a single income event.
Each investment jurisdiction has its own withholding tax rates, which may differ for dividend and interest income.
How to recover foreign withholding tax on dividend or interest income
There are 3 methods that can be used to recover withholding tax.
- Claiming withholding tax based on double tax treaties
A refund is claimable in terms of a treaty between two countries. This claim methodology is based on the differential between the investment country’s statutory tax rate and double tax treaty rate. These claims are available for all jurisdictions where a double tax treaty is in place between the country paying the income and the country receiving the income. To find out more detail about double tax treaties and WHT recovery, read our essential guide here.
- Claiming withholding tax based on domestic tax legislation
Withholding tax may be refundable in terms of an investment country’s domestic tax legislation, which may dictate a full or partial exemption from taxes. Certain countries afford particular groups of taxpayers (investors), such as pension funds or investment funds, more favourable tax treatment.
- Claiming withholding tax based on European Court of Justice Case Law / legal precedent
Withholding tax is claimable from certain countries within the EU according to the legal precedents established in ECJ case law. This claim methodology is based on the principle of the free flow of capital (Article 63 of the Treaty of the Functioning of the EU). These claims are only available from limited EU countries, where discrimination between local and foreign investors exists. Notably, these claims may be submitted by both EU and non-EU investors which meet the relevant criteria.
Who is eligible for international withholding tax recovery?
The following entities (or related indirect investors) may be entitled to submit foreign withholding tax refunds:
|Charities, Endowments & Foundations
|Sovereign Wealth Funds
|Collective Investment Vehicles (CIVs)
|Registered Investment Advisers (RIAs)
If you want to know more about international withholding tax recovery, then it’s best to speak to a specialist. The recovery process is usually long and requires an in-depth knowledge of multiple jurisdictions, each with their own legislation and reclaim requirements. Ultimately, investment firms stand to maximise their refund opportunities by outsourcing the process to specialists as opposed to diverting in-house resources. Contact WTax to find out more about foreign withholding tax and how we can help boost ROI and cash flow for your business and your clients.