Withholding Tax Efficient Investing: Four Investment Jurisdictions for Optimal Returns

A WTax guide to investment jurisdictions that may minimise your cross-border dividend withholding tax burden

Are you a fund manager striving to optimise fund returns? Understanding the nuances of withholding tax is paramount, as minimising tax leakage and enhancing after-tax returns for investors can significantly improve your fund’s performance. Withholding tax, as imposed on dividend income generated from stock investments, presents a multifaceted landscape to navigate.

In this article, we explore four jurisdictions offering advantageous withholding tax treatment. We will cover additional jurisdictions in future pieces.

Our aim is to equip you with the knowledge needed to consider the withholding tax consequences of foreign investments ahead of the actual outlays, to optimise your tax outcomes and enhance your investment returns.

Let’s explore these jurisdictions to uncover strategies for minimising your fund’s withholding tax exposure.

Please note that this article is not exhaustive and provides only a concise overview of selected opportunities for withholding tax relief and recovery in each jurisdiction. 

1. Ireland

The Republic of Ireland is a frontrunner in withholding tax relief and recovery. With its dynamic economy and business-friendly policies, Ireland has established itself as a global hub for multinational corporations and investment funds. The country’s competitive corporate tax rate, combined with generous tax incentives for research and development activities attracts a steady influx of foreign investment across various sectors. 

Effective since January 1, 2020, Ireland’s dividend withholding tax rate has been raised to 25% from the previous 20%. Despite this, domestic legislation grants an exemption from withholding tax to residents of treaty countries and to residents of EU Member States who meet specific criteria. It is also significant that this exemption can be enacted at the time of dividend payment, affording investors ‘relief at source’. Investors must complete and submit the appropriate application form prior to the dividend payment event for this to occur.  

As the Irish Tax and Customs agency notes, Ireland has tax treaties with more than 70 countries, meaning that many global investors may benefit from this exemption.  

In fact, almost all of the withholding tax relief and recovery we have facilitated from Ireland for our clients have been reclaims using Irish domestic legislation as a basis. These exemptions are pivotal to allowing investors to leverage the jurisdiction’s favourable tax landscape. By choosing Ireland as an investment jurisdiction, funds may help minimise their global withholding tax burden. 

2. Switzerland

Switzerland is renowned for its stability and neutrality, and offers investors a unique blend of financial sophistication and regulatory resilience. The country’s tradition of banking confidentiality, coupled with its modern framework for tax transparency and compliance, makes it an attractive destination for preserving and growing wealth. 

When it comes to withholding tax recovery, Switzerland is a mixed landscape. On the one hand, Switzerland’s domestic withholding tax rate of 35% is one of the highest worldwide, imposing a substantial tax burden at the time of dividend payments. On the other hand, many of the tax treaties that Switzerland has entered into include withholding tax exemptions for pension funds. This favourable treatment allows foreign pension funds to limit their Swiss withholding tax liability effectively, and they are often able to recover the full 35% withheld.

Some foreign pension funds, however, may face unique challenges when trying to benefit from these treaty exemptions, depending on their legal structure – this is currently the situation for US 81-100 Group Trusts, for instance. 

Non-Swiss investment funds also encounter challenges when attempting to claim treaty benefits to recoup withholding tax levied in Switzerland. This difficulty stems from the Swiss Federal Tax Administration (SFTA) view on whether collective investment vehicles should be viewed as the treaty eligible beneficial owner of the dividend concerned. In most cases the SFTA take the view that it is the investors in the fund rather than the fund itself that should be viewed as the beneficial owner eligible to file a reclaim for Swiss withholding taxes.  

However, a handful of investment funds domiciled in select countries are entitled to claim withholding tax from Switzerland based on agreements between the Swiss Federal Tax Administration and the fund’s country of domicile. In those cases, only the income that can be attributed to investors living in the same state as the investment fund will qualify for treaty benefits. 

Despite the challenges presented by Switzerland’s high domestic withholding tax rate and the differing treatment for investment and pension funds, it remains a relevant addition to our list. Switzerland’s unique combination of a notably high tax rate and prolific treaty exemptions for pension funds results in exceptionally high reclaimable value for these funds. This potential for reclaimable value makes Switzerland a compelling jurisdiction for pension funds seeking to optimise withholding tax recovery. 

3. Singapore

As a global financial powerhouse, Singapore boasts a dynamic economy, investor-friendly policies, and a robust legal framework. The South-East Asian city state is a destination for a wide variety of multinational corporations and high-net-worth individuals seeking lucrative opportunities.  

One of Singapore’s most compelling features is its 0% withholding tax rate for dividends – a rare advantage shared by few other jurisdictions. This benefit provides Singaporean investors with a significant edge, allowing them to retain the entirety of their dividend earnings without any deductions.  

While a 0% withholding tax rate is seen in a handful of other prominent investment jurisdictions (such as the United Kingdom, some Middle Eastern countries and Hong Kong), Singapore is increasingly attracting the attention of investors wanting to diversify their funds into other markets. Singapore’s well-established financial sector, characterised by its sophisticated banking system, vibrant capital markets, and stringent regulatory framework, further enhances the appeal of investing in the country. 

Note, however, that withholding tax at the prevailing corporate tax rate is levied on distributions made by Singaporean REITS (S-REITs). Currently, this is set at 17%. Qualifying foreign investors will still be able to reclaim a portion of this tax, as provisioned in Singapore’s Income Tax Act.  

4. France

Rounding out our list is France, which stands as a prominent jurisdiction in Europe renowned for its vibrant economy. As a destination for investors, France offers a diverse range of opportunities across various industries, from technology and finance to manufacturing and luxury goods. 

France introduced an exemption from dividend withholding tax for qualifying foreign investment funds, effective from 17 August 2012. This was prompted by a decision passed in the Court of Justice of the European Union, which deemed prior French withholding tax provisions incompatible with EU law.  

The French tax authority has offered updated guidance in recent years offering clarity on the comparability criteria that foreign funds must meet. Despite this, these claims still require a high level of subjectivity and nuanced understanding, which need to be expertly navigated.  

Showcasing our expertise at doing so, we process five times the value in reclaims based on French domestic exemptions as compared to those based on double taxation treaties. This also shows how the exemptions provide an important avenue for funds to recover withholding tax, earning France a place on this list.

Conclusion

In summary, navigating the intricacies of withholding tax can be challenging, but with the right knowledge and expertise, investment managers can ensure their funds retain a greater portion of its earnings and minimise withholding tax leakage.  

At WTax, we specialise in withholding tax recovery, offering tailored solutions to meet your specific needs. Partner with us today and unlock the full potential of your investments. 

This material has been prepared for informational purposes only. WTax does not provide or offer tax, legal or investment advice. While WTax may provide non-legally binding opinion on industry matters, systems and operational procedures based on its knowledge of regulatory frameworks and other general practices, these are not intended to, and within the context of the delivery of the Services, shall not be construed to be advice of any kind. You should consult your own tax, legal and accounting advisors before engaging in any transaction.