A taxing chore

Had Unilever’s restructuring been completed then it would have become a foreign company and, under some circumstances, former shareholders of the Plc part could have received just £85 of dividend income for every £100 that they used to receive. The missing £15 would have been taken by the Dutch tax authorities as a so-called ‘withholding tax’.

True, it looks most likely – though still not certain – that Dutch withholding tax will be scrapped in January 2020. Almost everywhere else, though, withholding tax is a miserable fact of life for almost all UK investors in overseas shares and that remains so even if their capital is invested in a tax-free wrapper such as an (individual savings account (Isa) or a self-invested personal pension (Sipp).

The withholding tax – as the name implies – is deducted at source, much the same as PAYE in the UK. So, by the time a dividend reaches, say, an Isa, it is lighter by the amount of the tax. And, depending on the country from where the payment comes, that can be a substantial amount. Four of the countries shown in the table below levy withholding tax at 30 per cent or higher; for Swiss companies, the rate tops out at 35 per cent.

Withholding tax - rates & refunds

Source: faxback.com, Clearstream, relevant state tax websites. *Due to be scrapped in January 2020

Over the long haul that can have a marked effect on investment returns. Imagine that, at the turn of the millennium, you had bought £10,000-worth of shares in Nestlé (SWX:NESN), one of the best income-generating equities on the planet, which has paid a dividend every year since 1959, has never cut the payout and has increased it each year since 1995.

Even before factoring in movements in the exchange rate between sterling and the Swiss franc, the capital value of your investment would now be worth £28,728, showing a gain of £18,728. Meanwhile, the cumulative return from dividends received would be £9,143, virtually half the capital gain. But if you had received all of those payouts net of withholding tax then the dividend contribution would only have been £5,943. In all, you would have been £3,200 – or 13 per cent – better off but for those pesky withholding taxes; an amount not to be scoffed at, especially if you also factor in the opportunity cost of less dividend income to reinvest for all those years.

So withholding tax matters. However, the good news is that UK investors can claim back some of it; better still, under some circumstances they can get exemption from paying it at all. The bad news is that achieving those aims is easier said than done. The hassle of claiming back withholding tax can be more bother than it’s worth. Some Investors Chronicle readers we spoke to threw up their hands in despair at the labyrinthine ways of some countries’ tax authorities and the difficulties of proving that they were actually entitled to receive the dividend income for which they were claiming a tax refund. It was easier to forget the refund or to sell the shares. Investors are also likely to discover that they will get precious little help from the UK brokers through whom they bought their overseas shares in the first place.

Take a break: Do the paperwork correctly and you will receive back 20 percentage points of the 35 per cent tax levied on your Swiss shares

With that health warning in place, we’ll start. First, let’s spell out what withholding tax is, what refunds are available and why. Almost every country levies such taxes on income that is sent outside its own boundaries; this includes interest and royalties as well as dividends. Oddly, the only exception among major nations is the UK, although in a sense even that’s not true. The UK used to have a dividend withholding tax, which was called ‘advance corporation tax’ (ACT), but this was scrapped back in 1997 as an underhand way to raise revenue for the government. The effect was that investing institutions that used to be able to claim back the ACT in effect got a dividend cut of about 30 per cent, while private investors were largely sheltered by a tax credit. Gradually all this has faded from memory so that it now appears that the UK is unusually generous – not a bit.

Meanwhile, other states continue to levy withholding taxes at rates shown in the table. However, to avoid penalising taxpayers by taxing the same stream of income twice, almost all nations have a network of double-taxation treaties. These are – as our Bearbull columnist said when discussing this topic (Investors Chronicle, 7 September 2018) – “exercises in fiscal back-scratching agreed between any two countries… In effect, these treaties reimburse taxpayers in country A – wholly or, more likely, in part – for taxes paid on income derived from country B so long as country A treats country B’s taxpayers in the same way”.

Thus, provided that investors can supply the required information, refunds are available for withholding tax at the rates also shown in the table. So, using Switzerland as the example, the refund rate is 20 per cent, meaning that 20 percentage points of the 35 per cent tax levied will be refunded, leaving a net tax payable of 15 per cent. For every £100 of gross dividend that Nestlé pays, a UK shareholder who has done the paperwork correctly will get a £20 refund and end up with £85 of net dividends.

Even if this feature is chiefly about how to secure refunds, it is obvious that it is better not to pay the withholding tax in the first place. That can be achieved, though perhaps more in theory than in practice. The countries where the practice comes closest to the theory are the US and Canada.

That’s good because the US is the most likely destination for equity capital in search of an overseas home anyway – it offers by far the biggest equity markets with the most choice. It also has in place a simple means to minimise withholding tax. This revolves around the W-8BEN form that UK investors must complete and the qualified intermediary (QI) status of the broker or money manager via whom they deal.

Basically, UK investors will receive dividends on their US shareholdings net of withholding tax if they have lodged an up-to-date W-8BEN with the broker who has handled the transaction and if that firm is a QI approved by the US Inland Revenue Service. Under those circumstances, primary responsibility for paying the correct amount of tax rests with the QI, who tells the agent paying a company’s dividend how much tax to withhold. That means UK shareholders in US companies will receive their dividends net of 15 per cent tax if they hold their stock within an Isa or outside a tax wrapper. If their holding is within a Sipp, then they are treated like a conventional pension fund and receive their dividends gross.

Of the money management firms we spoke to, Hargreaves Lansdown, Killik & Company and Redmayne Bentley all have QI status. Hargreaves and Killik can apply the lowest tax rates to holdings in both Isas (15 per cent) and Sipps (zero); Redmayne Bentley only offers that for Isa holdings.

A W-8BEN form is easy to complete, has a shelf life of three years and is widely available to download, including from a link on the web version of this feature. The link also contains the claim forms for seven other countries shown in the table; the exceptions are the Netherlands and Denmark, whose claims procedure is wholly online.

In theory, procedures similar to the W-8BEN apply to some other countries. Investors can fill in the appropriate forms and get their dividends paid at the lowest allowable rate. Denmark, which seems to have the best hold on this issue of all EU countries, announced such a system in September. It already exists in Belgium and France, which introduced a ‘simplified’ procedure in 2005 to expedite payment of dividends at the correct tax rate. This revolves around two forms issued by the French tax authorities – Form 5000 and Form 5001 (don’t worry, there are English language versions of both). Form 5000 confirms where a claimant lives. If it gets to the paying agent – probably a bank – that distributes dividends on behalf of a company within the correct time frame then the agent can pay the dividend at the lower tax rate. But it’s a big 'if'. One reader we spoke to gave up in despair. The problem is not the forms – they are fairly simple – but with paying agents that are not geared to cope with small numbers of foreign shareholders making unusual claims. In short, the simplified procedure doesn’t seem to work.

The Danish claim procedure is a model of clarity

Which is a pity because grappling with withholding tax is clearly badly in need of simplification. The specifics of how to make a claim vary from country to country, but there is a generic procedure, which we describe as follows (with help from Denmark’s government website, a model of clarity on this subject that other countries might want to copy).

First, let’s run through the five requirements that a shareholder needs to prove before claiming a tax refund (apologies if this entails a bit of reiteration and stating the obvious).

●  One, you will need to submit a claim form issued by the tax office of the country in question. Depending on how many holdings you have, in how many countries and how those holdings are lodged (in your own name or in a nominee account) you may have to submit more than one form. Certainly, there will be one form per country per tax year. It would be more if, say, you held shares in L’Oréal (FR:OR) and Sanofi (FR:SAN) – both of them French blue-chips – in two different accounts.

●  Two, you should be subject to only a limited tax liability (or none at all) in the country from where the dividends came.

●  Three, the country’s withholding tax must actually have been withheld from the dividend in question (ie, paid).

●  Four, that withheld tax must be more than the tax that would have been due on the dividend according to the terms of the double taxation treaty between the UK and wherever.

●  Five, you must have been the beneficial owner of the shares in question when the dividend was distributed.

Almost all UK shareholders in overseas companies will meet these requirements. The tougher act – more bureaucratic, more time consuming – is to provide the documents that tax authorities will demand before they pay the refund. Here’s another list:

●  First – and fairly straightforward, albeit time-consuming – is proving that you lived in the UK, and were subject to its tax laws, at the time you received the dividends in question. For this, you will need your claim form to be certified (ie, stamped) by the UK’s HMRC. A UK tax return or a photocopy of your passport won’t do. You will have to go to the bother of sending a completed country claim form to your tax office and waiting for its return before pushing your claim onto the tax office of the country concerned. Miserable, but true. Granted, for some countries – Switzerland, Denmark, Norway – the final push can be completed online; for others, which includes Germany, France and Belgium, you will be relying on snail mail.

●  Second, you will need documentary proof that the local withholding tax has been paid on the dividend in question. This requires some sort of dividend voucher from the paying agent, which might be a bank or a registrar. If you are lucky and hold overseas shares in a nominee account with a UK manager then that firm may be able to help. Hargreaves Lansdown says it can provide a voucher showing the relevant tax and dividend details. To the extent that a recognised UK financial intermediary can be recognised as trustworthy then that should pass muster with an overseas tax office. Hargreaves says this process works well with Ireland and Switzerland. Indeed, anecdotally – and happily because it is home to some world-leading companies – Switzerland comes across as a good country from which to reclaim withheld tax.

However, if your broker responds as badly as some big private client firms responded to our questions on this subject then you might as well whistle in the dark. Reclaiming withholding tax is a minority sport in which they don’t participate. They can’t or won’t help.

●  Third – and linked to the second – you may need to show that the number of shares you held when the dividend was distributed coincides with the number for which the refund is being claimed

●  Fourth, you will need to show that the dividend in question has been deposited into a bank account belonging to you. Denmark is relaxed enough to allow a screenprint from the bank but, as with other countries, if the payment has passed through more than one bank, there will need to be evidence at each stage of the transaction.

●  Fifth, a small point but vital, you will need to show that there is a double taxation treaty between the UK and the country in question. Don’t worry, there will be. Apparently, the UK has more such treaties than any other country. And, most likely, there will be a relevant box to complete on the claim form.

●  Sixth, the tax authorities don’t actually need to know this, but they will almost certainly make the repayment only in their country’s currency. No problem if that’s US dollars or euros, but remember to check that your payee bank can process a payment in a minority currency such as Norway’s or Denmark’s.

After all that, you send your completed form – either online or by post – and wait. And wait. Denmark aims to process claims within six months of receiving them and pays interest on claims that take longer. However, its tax office also acknowledges that, with claims running at the rate of over 10,000 a year, the six-month interval is regularly exceeded. The assumption is that other countries will take longer.

On top of this delay, most likely you will have spent several months waiting for HMRC to send back the stamped claim forms. Add in delays with banks and brokers and it can easily be more than a year before you get a tax refund. Then, come the happy day when the payment actually arrives, even if it is in respect of shares held in an Isa or Sipp, you won’t be able to credit it to your tax-free account, or at least not unless it counts as new money.

All of which seriously calls into question whether the game is worth the candle; whether claiming back withholding tax is generally worth the effort. For countries such as the US and Canada, where it is relatively straightforward to avoid paying the excess tax upfront, then “yes, it is”. For countries that seem relatively easy to deal with – in particular, Switzerland and Denmark – then “quite possibly”. For the others, it’s a “definite maybe” bordering on “don’t bother”.

If you are determined to proceed, then HMRC’s Double Taxation Relief Manual – available online – has much useful information, as does the website for Clearstream, which provides settlement services for the securities industry. For much of the time, however, you’ll be on your own. Best of luck.

A W-8BEN form is easy to complete, has a shelf life of three years and is widely available to download