Dividends are declared by companies, tax is deducted at source and paid to the government, and shareholders get what is left. Simple. Or is it? In fact, the taxation of dividends for non-resident investors is far from straightforward.

Double Taxation Treaties are bilateral agreements between two countries that can reduce the tax burden on shareholders’ final income, often through a reclaim procedure. The effect of applying these treaty rates on the true benefit of any return could be considerable, often reducing the withholding tax rate significantly -- even to zero in some cases.

A simple illustration is to compare the true income returns from an identical portfolio held by shareholders in 4 different countries. The chart below compares a portfolio in a benchmark location (in this case Luxembourg, as no benefits from treaties are applicable, unless special conditions apply), to portfolios held by investors based in Hong Kong, the USA and a UK based pension fund.

It is assumed that each theoretical investor receives dividends the equivalent of USD 100 from companies based in each of the countries included in FTSE Global Equity Index Series.

The performance of the Hong Kong investor closely matches the Luxembourg based investor; although several treaties are being negotiated, Hong Kong currently has few treaties in place.

The American investor benefits from the many Double Taxation Treaties the USA has in force, many of which are currently being renegotiated.

The UK has one of the world’s most extensive global treaty networks. In this example, assuming the net income is reinvested, the net benefit to the UK investor over a 5 year period approaches 30% more income than a Luxembourg based investor, simply by reclaiming the withholding tax under treaty rates to which the investor is entitled.

Clearly this greatly simplifies the complexities of where to base a fund, however it does illustrate the variety of net incomes available from proper use of DTT networks.

Benefiting from the reduced withholding tax rates is not always automatic and can involve significant paperwork to reclaim the tax. Yet there are a number of independent reclaim specialists that can easily and reliably do the legwork in claiming back some of the billions of dollars lost to the investment industry every year.

Standard withholding tax rates and treaty rates are dynamic, with many new changes becoming effective each year. Datavenue specialises in collating and monitoring these global withholding tax rates in order to help companies worldwide comply with new regulations to maximise portfolio returns.

Please contact us as at info@datavenue.net for further information, or to discuss how Datavenue can help your organisation to monitor and apply this data.