With many online stockbrokers offering these days easy access to shares listed on foreign stock exchanges many investors may be paying unnecessary amounts of dividend withholding tax by not claiming back excess deductions or not having filled out the correct paperwork prior to investment.
Once you start receiving dividends, as a UK tax payer, you will usually need to declare this on your self-assessment tax return. You may find that you will be charged tax twice: in the country of origin and in the UK.
Often you may be able to claim foreign tax credit relief or reclaim part of the tax already paid.
What is withholding tax all about?
Income from dividends are taxable at source in most countries. If not being reclaimed, dividend withholding tax will have a considerable impact on an investor’s dividend income and total returns.
Many UK investors are completely unaware that they are not protected from dividend withholding tax even if their investments are shielded from UK tax via an ISA or SIPP.
Foreign tax revenue agencies automatically deduct withholding tax even if the stocks or shares are ‘wrapped’ within an ISA or SIPP.
While a minority of countries do not deduct withholding tax on dividends paid, most countries require dividends to have a proportion withheld for tax - the taxable component is withheld by the foreign revenue agency.
The amount taken varies per country, for instance:
- France deducts 25%
- The United States takes 30% (this may even increase to 39.6 per cent if President Obama’ s fiscal 2013 budget plan for higher taxes on dividends is accepted)
- Switzerland deduts a massive 35%
Most investors are unaware that foreign withholding tax can be reclaimed in full or at least in part.
The United Kingdom has signed over 100 double taxation agreements (DTA) with other countries, which usually set out a maximum rate of withholding tax that a given country can charge on payments to UK residents. These rates vary per country. Typically, only up to 15 percentage points of these overseas deductions can therefore be reclaimed.
Where the UK has a DTA with the country in question, investors are entitled to reclaim the difference between the foreign tax rate and that deducted here in the UK. The allowable amounts that can be claimed back from the foreign tax revenue agencies are restricted to…
