Frequently Asked Questions
To promote a more favorable investment climate, governments enter into bilateral Double Taxation Treaties and negotiate favorable “treaty rates” that are lower than the regular “statutory rates.”
These treaties help to resolve issues regarding which country deserves to tax investor earnings and prevent the same income from getting taxed twice.
Non-resident investors do not automatically obtain the preferential treaty rate applied to dividend payments. Rather, they must follow a process to substantiate their eligibility to the foreign tax authority. At a minimum, most markets require submission of a certification of residency to demonstrate that an investor is eligible, though recovery processes can differ substantially by market and investor type.
In a relief at source regime, the shareholder can be taxed at the lower treaty rate when the dividend is distributed if the investor has provided the necessary paperwork to the tax authority or local agent prior to pay date.
For example, a U.S. investor is invested in Nestle, a Swiss company. The statutory withholding rate is 35%. If the investor provides documentation to the Swiss Tax Authority prior to dividend pay date, the investor can be withheld at the 15% treaty rate. On a $10,000 dividend, this means the investor would receive $8,500 on pay date rather than $6,500.
When an investor fails to submit paperwork or a market does not offer relief at source, investors can file an application to secure the treaty rate after the dividend is paid. In these standard (post-payable) reclaim regimes, investors submit claims to recover the difference between the unfavorable statutory rate and the favorable treaty rate. In the above example, the investor would be taxed at the 35% rate when the dividend is paid. If they are eligible for the 15% treaty rate, they can submit a reclaim application to the tax authority and get a refund of 20% of the withheld tax, or $2,000.
The statute of limitations is the time limit within which investors must submit reclaim applications. It averages around 3-4 years in most markets, but extends up to 7 years in some jurisdictions.
It can take between 6 months and 5 years for foreign tax authorities to process standard reclaims. That gap explains why investors often prefer relief at source when it is available.
GlobeTax services a range of transparent and opaque investor types such as asset managers, pensions, hedge funds, proprietary trading desks, ultra-high net worth individuals, and family offices. Those who realize the most benefit from tax recovery typically have over $10 million in invested assets or $1 million in directly-held foreign securities (not counting mutual funds or ETFs). As another rule of thumb, it is typically worthwhile to pursue recovery on foreign dividend payments over $5,000.
No. Although tax-exempt entities like pensions and retirement funds often qualify for a full exemption (a 0% treaty rate), they will be withheld at the high statutory rate unless they submit appropriate documentation to avoid withholding or obtain a refund.
Many brokers don’t offer tax reclamation services or only offer limited services, as they often lack the dedicated operational teams necessary to oversee and manage the changing tax rates, administrative procedures, and documentation requirements needed to file claims and reconcile payments.Custodians face the same issues. Their bundled, flat fee service models do not incentivize proactively gathering the client documentation required to service complex/transparent entities.
Many investors assume they do not need to reclaim their excess foreign taxes and can instead take a foreign tax credit or deduction on their U.S. tax return. However, the IRS only allows investors to claim foreign tax credits or deductions on withholdings that are not eligible for recovery. In other words, investors can only take a tax credit or deduction up to the country’s treaty rate, not the statutory rate. Moreover, non-taxed entities, e.g., pensions and charities, do not have the opportunity to take such a credit.
In delivering the service, GlobeTax strives to achieve a “low touch” model and remove as much work from the client as possible. The firm gathers all information upfront and prepares custom, populated documentation packages so that investors need only sign the forms.
Limited powers of the attorney are included in those packets to empower GlobeTax to procure the necessary certificates of residency required to reclaim taxes, submit and process claim applications on behalf of clients.
The terms of the PoA are, unfortunately, non-negotiable. These terms have been determined and agreed upon by tax authorities and various other counterparties. Although the PoA cannot be changed, the firm is willing to address concerns in a side letter.
It depends. Tax authorities often categorize investors as either opaque or transparent entities. “Opaque” structures are identified as the ultimate beneficiary by the tax authority. Examples include individuals, pensions, and charities.
By contrast, “transparent” entities (LPs, LLCs, most trusts, etc.) have underlying beneficiaries. Tax authorities often wish to ‘look through’ these entities to ensure the underlying holders qualify for treaty benefits. As a result, beneficiary documentation is often required to substantiate eligibility.
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