Do all countries impose withholding tax on dividends and interest paid to non-residents?
No. The rules applicable to non-resident investors vary country to country. However, dividends are far more likely to be subject to withholding tax than interest from bank deposits or bonds. The information below is specific to dividends, but if a non-resident investor has been subject to withholding tax on interest received from a foreign country, taxback.com can assist in determining if any of the tax withheld is reclaimable.
Why does a country impose withholding tax on dividends paid to non-residents?
Countries that impose withholding tax on dividends paid to non-residents do so because it would be extremely difficult – if not impossible – to collect the tax from a non-resident once the dividend has been paid. To ensure collection of such tax, it is deducted from the dividend payment before it is credited to the non-resident investor.
At what rate is withholding tax deducted from dividends paid to non-residents?
As might be expected, the answer is “it depends.” Non-resident dividend withholding tax rates range from 0% (e.g., United Kingdom) to 35% (e.g., Switzerland). Some countries have varying withholding tax rates that apply to different types of dividend payments (e.g., dividends from privatized companies versus non-privatised companies), while many income tax treaties impose a different withholding tax rate with respect to “significant shareholders” who hold at least 5% (if not more) of the dividend-paying company. In certain countries, the length of time that the non-resident investor has held the shares of the dividend paying company can affect the withholding tax rate. In short, the rate at which withholding tax is deducted from dividends paid to non-residents can vary widely, for a variety of reasons.
In basic terms, how does withholding tax on dividends affect a non-resident investor?
Let’s assume a non-resident investor holds 200 shares of a Swiss company called “SwissCo AG”, which pays a gross (i.e., before withholding tax) dividend of CHF 1,000. Before the “gross dividend” is credited to the non-resident investor, 35% withholding tax will be deducted from the dividend. This means that only CHF 650 will be credited to the non-resident investor. This after-tax amount is known as the “net dividend.”
Is it possible for a non-resident to receive a refund of the tax withheld from dividends?
The amount of tax that can be reclaimed depends on several factors, including: 1) where the non-resident investor resides for tax purposes; 2) the tax status of the non-resident investor such as an individual, a company, a pension fund, a partnership, etc.; and 3) the percentage of shares of the dividend-paying company that are held by the non-resident investor.
In the case of the “SwissCO AG” dividend, if the non-resident investor is resident for tax purposes in a country that has an income tax treaty with Switzerland that provides for a withholding tax rate lower than 35%, all or part of the tax withheld would be reclaimable, generally, if certain conditions are met.
What are tax treaties?
Countries regularly enter into bilateral agreements called income tax treaties. The aim of a tax treaty is avoid the full taxation of certain specified income in both countries, i.e., the country where the income was earned (and taxed) and the country where the investor resides for tax purposes. A treaty assigns taxation rights between the two countries, in other words. As a rule of thumb, a common tax rate found in treaties, with respect to dividend income, is 15%. However, this is only a general rule. Many treaties provide for an exemption from withholding tax on dividends paid to pension funds that are exempt from tax domestically and that meet certain conditions, for example.
Why don't countries apply the treaty rate of withholding tax when dividends are paid, so non-residents don’t have to suffer over-withholding and file tax reclaims?
This process whereby the lowest applicable withholding tax rate is imposed on the dividend payment is referred to, typically, as “relief at-source.” Some countries such as Ireland and the United States utilise relief-at-source mechanisms; however, many countries do not. In such instances, non-residents must suffer withholding tax on dividends at the full tax rate determined under domestic law (the “statutory withholding rate”) and are required to file tax reclaim applications to claim back any over-withheld tax.
Even for those countries offering relief-at-source, it is often necessary to have certain required documentation in place to allow the dividend payer to verify the non-resident investor’s country of residence and otherwise confirm entitlement to a reduced withholding tax rate. If such documentation is not properly provided prior to the dividend payment, the statutory withholding tax rate will be applied to the dividend payment and a tax reclaim application will be required to avail of a reduced tax rate. The United States, for example, requires an Internal Revenue Service Form called a W8-BEN to be duly completed by the “beneficial owner” of the dividend and submitted to the dividend payer. If such documentation is not in place by the time the dividend is paid, the 30% U.S. statutory non-resident withholding rate for dividends will be applied.
What is a “beneficial owner” of a dividend?
A beneficial owner is the person (e.g., an individual or a company) who would include the dividends in question on their income tax return. In other words, the beneficial owner would claim the dividends received as their income, and pay taxes on such income in their country of tax residence, generally. When governments process tax reclaims, they want to ensure that they are dealing with the “beneficial owner” of the dividends, and not another party who was simply collecting the dividends for the benefit of someone else, etc.
How long would a non-resident investor typically wait to receive payment on a tax reclaim?
The length of time is entirely dependent on the tax offices involved as each country has a different timeline. Taxback.com’s withholding tax recovery specialists can advise of the tax reclaim repayment timeline relevant to the investment country in question.
Can a non-resident investor reclaim tax withheld for more than one year’s worth of dividends?
Each country has a defined “statute of limitations” that provides the deadline within which a non-resident tax reclaim must be filed. Generally, statutes of limitations are between two years and six years from the calendar year in which the dividends were paid, and – as expected - vary from country to country. Thus, if a non-resident investor has been receiving dividends from companies organised in one or more foreign countries for a few years, the potential amount to be reclaimed could be substantial.
How does taxback.com assist with the tax reclaim process?
Taxback specialises in tax recovery. Our multi-lingual tax specialists have the technical knowledge and practical know-how to navigate the complicated and confusing processes required to avail of withholding tax relief across the globe. Our sophisticated software provides assurance that every tax reclaim request will be handled efficiently, securely and in the most cost-effective manner. Taxback.com will collect required documentation from the necessary parties, prepare and print the tax reclaim forms, sign the tax reclaim forms if Power of Attorney has been provided, file the tax reclaim forms with the foreign government, receive the tax reclaim payment from the foreign government and remit the net tax reclaim – after taxback.com’s contingency fee and any other intermediary or other such related fees are deducted – to the non-resident investor.
How can a cross-border investor get started with taxback.com?
Taxback.com has a minimum tax reclaim threshold of US$50 per dividend payment, which means that the amount of the tax reclaim to be paid to a non-resident investor for one dividend payment has to value at least US$50. We operate on a contingency basis, which means that we get paid only when the tax reclaim is paid by the foreign government. The contingency percentage is 20% of the face value of the tax reclaim. (Note that some countries require that an intermediary institution such as a bank or broker provide certain documentation or perform certain duties with respect to a tax reclaim request. Depending on the country in question and on the financial institution acting as an intermediary, fees may be charged. With this fact in mind, taxback.com will charge a contingency fee equal to 20% of the face value of the tax reclaim before any financial intermediary fees, etc. are deducted from the face value of the tax reclaim).
Taxback.com will never commence the tax reclaim process without disclosing all known intermediary fees on an upfront basis to the customer, and will obtain each customer’s permission before commencing the tax reclaim process.
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