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July 1, 2011 6:09 pm
Investors who hold foreign shares in their portfolios and self-invested personal pensions (Sipps), but fail to reclaim the tax deducted from their dividends, are missing out on more than £250m every year, new research has found.
Most countries impose a withholding tax before dividends are paid to overseas shareholders and leave it up to those investors to ensure they pay the right tax, and reclaim anything they are owed.
Where the UK has a double taxation treaty with the country where the shares are listed – and there are 100 such treaties in force – investors are entitled to reclaim the difference between the rate the foreign country normally applies and the reduced rate specified in the treaty.
However, research from Taxback.com, an international tax specialist, reveals that just 7 per cent of all withholding tax on company dividends is currently reclaimed globally. Taxback estimates that investors lose around 13 per cent of overall dividend returns as a result.
“Investors expect markets to rise and fall, but the loss of up to 35 per cent of their dividend income through withholding tax can be an unexpected and unwelcome shock,” says Seamus Murphy, senior personal tax manager at Taxback.com.
For example, a Swiss company’s dividends would be paid to UK residents minus a 35 per cent withholding tax. Under Switzerland’s double taxation treaty with the UK, however, investors can reclaim 20 per cent of that. So, on a £1,000 dividend, £200 of the £350 tax paid can be recouped.
US shares – which tend to be the most popular overseas holdings among UK investors – have 30 per cent tax deducted from their dividends, but investors are entitled to receive back 15 per cent. For French shares, the tax rate is 25 per cent with 10 per cent reclaimable.
As cross-border shareholdings increase, the failure to reclaim tax can have a significant impact on total returns. Taxback estimates that 30-35 per cent of UK-based share portfolios and Sipps hold foreign shares and, while some of these will be held via funds, many are still in the form of single direct holdings.
“More people are investing in foreign companies but many are unaware of the tax factors that come with doing so,” says Ian Young, technical manager at the Institute of Chartered Accountants in England and Wales. “The problem is that people don’t yet understand the mechanics. A lot of shareholders will assume that the dividend they are paid is simply how much they are owed, and won’t query it, if it looks official.”
Examples of overseas shares popular with UK investors are Richemont, the luxury goods group, BMW and Electrolux, as well as Santander, and Kraft. “We have a lot of clients who are working in the UK for multinational companies and have been paying into company share plans,” says Murphy. “They still need to reclaim tax on those dividends.”
Taxback, which charges €75, or 10 per cent of the refund, to handle tax reclaims, says investors trying to process claims themselves can find it laborious – as it requires an in-depth knowledge of different tax regimes across different geographies and legislatures.
Shareholders are often required to submit several documents, such as a certificate of tax residence and a lengthy treaty claim form. Some countries even require a form for each dividend payment.
An easier way for investors to avoid double taxation of dividends is to apply for ‘relief at source’ and so avoid the reclaim process. But not all countries allow this – the US does, but Switzerland doesn’t.
When purchasing US shares, for example, investors can fill out a W-8BEN certificate of foreign status form to ensure the right amount of tax is deducted at source. This way only 15 per cent rather than the full 30 per cent will be taken from dividends.
But some experts don’t anticipate much of a change in investor behaviour. “For a lot of investors, it just isn’t worth the hassle,” says Mike Warburton, tax director at Grant Thornton. “Unless shareholders have substantial holdings overseas, they could find the amount of money they can claim is eaten into substantially by the charges involved in a refund process.”
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