Keeping withholding tax at bay

How WHT works

In many cases, when a dividend is paid by a company resident in one country to an investor resident in another, WHT is deducted from the dividend before a net amount is paid over. Rates of WHT vary from country to country.

However, the gross value of the dividend will remain taxable in the UK (at the relevant rate) for UK tax resident investors. For a higher rate taxpayer this could mean suffering WHT at say 35 per cent (from a Swiss investment) and then suffering tax at up to 32.5 per cent in the UK. Fortunately, the UK has double tax agreements (DTAs) in place with most other jurisdictions to reduce the rate of WHT to a maximum amount and to give credit for the WHT against UK tax. Where it is possible to obtain advance clearance, a company can apply this WHT rate to dividend payments it makes to its UK resident shareholders. If clearance is not obtained, the taxpayer will need to apply for a refund of the excess WHT.

The bad news is that for many basic rate taxpayers, the tax withheld overseas on a dividend usually exceeds the tax due on it in the UK because even overseas dividends now qualify for the UK’s 10 per cent notional tax credit when received by a shareholder with – broadly speaking - less than 10 per cent of the company’s issued share capital (see example).

WHT is also deducted from interest payments to non-residents on bonds or deposits by certain countries. Details and rates vary by country but the principle remains the same - the payer either obtains advance clearance to withhold at the treaty rate or amounts in excess of the treaty rate can possibly be reclaimed by the recipient from the overseas tax authority

Here's an example of how it works, comparing UK resident and German resident companies (ignoring currency exchange costs):

A UK resident and domiciled higher rate taxpayer receives a 5 per cent dividend (£250) from a company on a holding worth £5,000.

Source: BDO

It is possible to claim a refund of the excess WHT suffered over and above the treaty rate from the German authorities but an individual claim for the £28.44 (£250 x 26.375% = £65.94, less £37.50) is unlikely to be cost effective (especially with currency conversion costs). So, unless you are making substantial investments, to make it worthwhile investing in German resident companies, prudent UK investors are likely seek a yield that is at least 0.57 per cent higher than for a directly comparable UK company (and another 1 per cent or so higher if you take into account currency exchange costs).

Where larger amounts of WHT are at stake, some specialist WHT refund firms offer to manage the claim for you. However, it may still be sensible to claim for several years at once to reduce the cost of the claim: most jurisdictions allow claims to be backdated but check how far back you can go for each country.

For non-UK domiciled individuals the position may be more complex. Such individuals who formally claim to be taxed on the remittance basis for their non-UK income (whether recently arrived in the UK or paying the annual remittance basis charge) need only pay UK tax on income brought into the UK. Therefore, whether (and how) such individuals claim back WHT deducted from investments in other jurisdictions will depend on a number of factors including the location in which shares are held, where the income is returned for tax purposes, the respective tax rates and ease of administration in the countries involved.

Use a wrapper?

Investors can certainly reduce their paperwork by investing through funds and other UK wrappers but remember that rules applying in the UK are often irrelevant elsewhere. For example, although you can hold foreign listed stocks in an individual savings account (Isa), it has no tax advantages outside the UK: WHT will still be deducted from overseas dividends and, because you hold the stock through a nominee, reclaiming excess WHT can be more difficult in practice because your name will not be on the share register.

With OEICs, insurance bonds, investment trusts and unit trusts, the registered holder of any foreign shares held is the company. It will get credit for WHT paid on foreign dividends and will make any necessary refund claims where excess WHT has been paid as part of managing the investment. Of course, the opportunity to invest in specific overseas stocks is minimal.

However, holding foreign stocks through a SIPP may be advantageous. The UK’s DTAs with some countries exempt holdings of pension funds from WHT at source so the fund can receive gross dividends.While there are few legal restrictions on holding foreign stocks in a SIPP, in practice, your SIPP provider may not allow it and you may have to shop around.

Source: BDO

Claiming a refund of WHT

In theory, it is possible to reclaim WHT on investment income from most countries but the procedures involved vary considerably and, in some cases, it can be impractical for an individual investor to make a claim. Compare the following examples:

Spain

Many former Abbey National investors now have shares in Santander. Spanish WHT is deducted at 21 per cent from their dividends with only 15 per cent creditable against UK tax. The excess 6 per cent can be reclaimed but (in all cases) you will need to obtain a certificate of UK residence from HMRC.

Fortunately you can apply for this online at https://online.hmrc.gov.uk/shortforms/form/PT_CertOfRes. Note that some other countries also require an ‘apostille’ from the Foreign and Commonwealth Office to confirm that the residence certificate has been signed by an authorised HMRC official.

The certificate must be submitted to the Spanish tax authorities along with a completed Form 210 (declaring Spanish income of non-residents). However, this can only be submitted through an approved Spanish tax representative (a ‘gestoria’).

The alternative option of sending a certificate of UK residence direct to the registrar to claim a refund is not available forSantander shares because its registrar does not offer that service to individuals.

US

To reclaim US WHT you must submit a Form 1040NR U.S. non-resident alien income tax return. There is a simplified filing procedure for those using the form simply to claim back WHT on investment income as a resident of another country. However, before any refund can be made, you will need to obtain an individual taxpayer identification number (ITIN). You can apply for this when sending in the return but will need to submit identity documents and a certificate of UK residence: it is often easiest to do this through a certifying acceptance agent if you don’t want to post your ID documents to Austin, Texas.

Although the excess WHT on US investments is 15 per cent, the costs of going through this procedure could be significant. However, once you have obtained an ITIN, it is possible to apply for tax relief at source by applying for a W-8BEN (certificate of foreign status of beneficial owner for United States tax withholding). Once such a certificate is granted, it can be supplied to all paying agents/investment managers authorising them to deduct WHT at only 15 per cent so there is no excess WHT. You have to renew the W-8BEN every three years.

Summary

Investing directly in overseas stocks and shares is not for the casual investor. As always, it pays to do your tax homework and focusing on companies based in countries where no excess WHT arises, or where there is no dividend WHT (such as Singapore), may be the simplest option. If you do invest elsewhere, you may have to accept that WHT is just another tax cost of investing.

Key points

1.WHT can make a significant dent in your investment returns so do your research before investing.

2.Consider companies based in countries where the WHT does not exceed the UK credit claimable.

3.A few countries allow relief at source but for most a refund claim is needed for excess WHT.

4.Claiming WHT refunds for several years at once may reduce the administrative cost.

5.Investing overseas through an ISA may make the WHT refund process more difficult.

6.Using other investment wrappers reduces the paperwork but means management charges and more restricted investment choices.