Withholding Tax Refunds: Unlocking 0.5% Increase in Fund Performance

While global markets continue to recover from the COVID-19 pandemic and uncertainty still lingers around the immediate future of dividends, investment firms should be looking for sound and innovative ways to boost investment performance. 

One such avenue should be unlocking withholding tax (WHT) refunds – an overlooked cash injection that in the past may have been considered immaterial. However, during challenging times, a 0.5% increase in investment performance can be a real silver lining and a way to reduce the effects of the current downturn.  

How can withholding tax recovery contribute to investment performance?

Institutional investors are eligible to recover some or all of the foreign tax suffered on foreign dividend and interest income. They can recoup as much as 20% of any foreign dividend income earned. WTax has found that the collective refunded amounts can contribute up to 0.5% to investment performance. 

Furthermore, the claiming periods are retrospective, making the opportunity even more attractive. The withholding tax statute of limitations varies according to local jurisdiction legislation but generally ranges between 2 and 5 years. 

Ultimately, investors can unlock an income injection today, based on historical foreign investments.

How to unlock withholding tax refunds for your fund

There are 3 methods that a foreign investor can use to recover withholding tax.

  • Double tax treaty WHT refunds:
    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 tax rate and double tax treaty rates.
  • WHT refunds through European Court of Justice Claims:
    Withholding tax is claimable in certain countries within the EU according to the legal precedents from ECJ case law. This claim methodology is based on the legal precedent of the free flow of capital (Article 63 of the Treaty of the Functioning of the EU).
  • 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.

WTax specialises in all three of the above claim methodologies and provides assistance to various investor types to explore withholding tax opportunities and to increase WHT refunds. 

It’s important to note that while claims are retrospective, they do come with an expiration date. Therefore, it’s crucial to address withholding tax recoveries with some sense of urgency so that investors can maximise such benefits. 
Every jurisdiction has its own statute of limitations. Some limitations match the dividend payment date throughout the year while others extend to the end of the year in which the dividend was paid.If these deadlines are not monitored closely, it’s very likely that recoverable withholding tax values may simply expire. 

Who is entitled to claim withholding tax refunds?

Both institutional investors and private investors can claim withholding tax if their investment structures  meet the relevant criteria. The following non-exhaustive list of entities may be entitled to withholding tax refunds:

Asset Managers Charities, Endowments & Foundations
Hedge Funds Sovereign Wealth Funds
Pension Funds Trusts
Collective Investment Vehicles (CIVs) Family Offices
Registered Investment Advisers (RIAs) High-Net-Worth Individuals
Insurance Companies

The challenges of the WHT refund process

Although the benefits of exploring withholding tax refunds are obvious, the process does come with some challenges that can pose a problem for those who attempt to navigate the reclaim process themselves. 
You may also find that although you may be claiming withholding tax using one methodology (the most common being double tax treaties), you may still have tax reclaim opportunities within other areas that have gone unexplored.
The overarching challenge of withholding tax recovery is that it’s an onerous process and requires a deep knowledge of each jurisdiction’s legislation as well as the local language. For any investor who is investing in multiple foreign jurisdictions, withholding tax recovery can become an administrative nightmare. Ultimately, this results in many investors simply foregoing their right to reclaim their withholding tax which can be costly – even in a stable climate –let alone during the current uncertain market climate.

However, withholding tax refunds can be maximised by enlisting the help of specialists and outsourcing the process to WTax. This way, you can leverage our collective expertise to maximize withholding tax recoveries, while you focus on your core business.

About WTax:

WTax is a foreign withholding tax recovery specialist that provides wholly-outsourced withholding tax refund solutions to all and any parties seeking to optimize their withholding tax processes and capabilities. WTax attends to all of the administrative, technical and practical tasks in the foreign WHT recovery process, providing leading solutions to unlock recovery opportunities in over 30 jurisdictions.

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