For US fund managers, managing cross-border investments comes with its own set of challenges, particularly regarding taxes. One of the most significant issues is withholding tax leakage on dividend and interest income from foreign investments.
Many US regulated investment companies (RICs) do not realize they are entitled to reclaim additional withholding taxes, leading to substantial sums being unnecessarily forfeited.
Did you know?
Overwithholding happens due to varying tax regulations across jurisdictions, where foreign investors like US RICs may not automatically benefit from the preferential rates they are entitled to. This is where WTax’s expertise becomes indispensable, offering solutions to recover these excess amounts efficiently.
Why US RICs May Be Suffering Excess Withholding Tax
WTax has observed that many institutional investors, including US RICs, assume their current withholding tax recovery service providers are pursuing all available relief and recovery opportunities. However, this is frequently not the case.
- Complex payment chains and tight deadlines mean it is not always possible to take advantage of tax relief in advance of income payments, resulting in situations of overwithholding. In addition, some countries do not have mechanisms for obtaining relief from withholding tax in advance of income payments.
- Once excess tax has been suffered, there are opportunities for recovery. However, these are complex and require significant effort from the claimant to ensure success.
- In addition, typical processes often focus on standard claims, overlooking more complex recovery avenues.
This challenge is compounded by the evolving international tax landscape, where rulings by the European Court of Justice (ECJ) and local courts across Europe have increasingly recognized the rights of US RICs to reclaim excess withholding tax.
As a result, substantial refund opportunities exist, but accessing them requires in-depth knowledge and expertise. Without specialized knowledge or resources to navigate these intricate reclaims, US RICs frequently overpay and miss out on rightful refunds.
Maximizing Withholding Tax Recovery for US RICs Through ECJ Claims
US RICs can unlock significant tax recoveries by leveraging precedent set in ECJ rulings. A series of landmark rulings affirm that US RICs are entitled to comparable tax treatment as European investment vehicles, allowing them to reclaim overpaid withholding taxes across several key markets.
Looking back through key ECJ rulings of relevance to US RICs
Finland
2015: The Finnish Supreme Administrative Court (FSAC) ruled that US RICs (Delaware and Massachusetts Trusts) were comparable to Finnish limited liability companies, enabling them to apply for withholding tax reclaims.
2020: The FSAC ruled that a US RIC structured as a Maryland Corporation was comparable to Finnish contractual investment funds, expanding eligible refund opportunities.
2022: The Finnish Supreme Administrative Court issued a yearbook decision, KHO 2022:130 (dated 15 November 2022), concerning the condition of contractual form. The Court held that an open-ended sub-fund of a registered investment management company of the Delaware Statutory Trust type, registered in the US, had to be equated with Finnish investment funds under section 20a, subsection 1 of the Income Tax Act, even though the sub-fund was not contractual.
Italy
2022: The Italian Supreme Court issued multiple rulings confirming that withholding taxes levied on dividends paid by Italian issuers to US RICs were discriminatory. The Court ruled that this tax treatment violated the free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU). These rulings established a significant precedent.
2023: WTax secured its first favorable rulings from the Italian Tax Court of Pescara for US RICs, confirming that the withholding tax imposed on foreign investment funds constituted unjustifiable discrimination compared to Italian funds. This ruling sets an important precedent, although litigation will likely remain necessary for future claims due to challenges with the Italian Revenue Agency’s processes.
France
2012: The ECJ ruling in the Santander case found that the French withholding tax regime was incompatible with EU law. As a result, France amended its tax legislation to extend the withholding tax exemption to foreign investment funds, including US RICs.
2019: Injunctions were filed with the administrative tribunal regarding the timing of proceedings.
2020: The French Tax Authority (FTA) issued its first set of favorable refund decisions on claims filed by certain US RICs.
2021: Final regulations were published, detailing criteria for non-EU/EEA collective investment vehicles (CIVs) to demonstrate comparability with French CIVs. This allows non-EU/EEA CIVs to file claims using these updated guidelines.
Portugal
2024: The Portuguese Supreme Administrative Court ruled that imposing a withholding tax on dividends paid to a US investment fund, while exempting dividends paid to resident investment funds, constitutes a restriction on the free movement of capital, as prohibited under EU law. This landmark ruling paves the way for non-EU investment funds, including US RICs, to challenge similar discriminatory tax practices in Portugal. It sets an important precedent that could entitle non-EU funds to the same tax exemptions as their EU-based counterparts.
Spain
2019: The Spanish Supreme Court ruled that US RICs were entitled to the same 1% withholding tax rate as Spanish funds.
2020: The Spanish National Court ruled that US RICs were comparable to UCITS funds and therefore entitled to a withholding tax refund, though challenges to securing these reclaims remain.
2023: On 7 March 2023, the Spanish National Court (SAN 773/2023) reaffirmed that US RICs qualify for the reduced Spanish withholding tax rate of 1%, which is applicable to Spanish and EU/EEA UCITS investment funds.
Sweden
2015: The Administrative Court of Appeal in Sundsvall ruled in favor of US RICs, entitling them to withholding tax refunds.
2020: After a series of related and appealed cases, the Swedish Supreme Administrative Court confirmed that US RICs, despite their corporate structure, were comparable to Swedish investment funds.
Reminder
These rulings are critical as they not only provide US RICs with the legal precedent to reclaim substantial tax amounts but have also prompted changes in local legislation, granting US RICs access to preferential tax treatment.
However, the process involves both complex technical analyses to justify the comparability between foreign funds and local entities, and determining eligibility for these reclaims, making expert assistance essential for success.
WTax: The Specialist in Withholding Tax Recovery for US RICs
WTax is the global leader in withholding tax recovery, specializing in managing complex claims for all of our clients, US RICs included. We streamline the recovery process, leveraging our legal expertise, advanced proprietary technology, and detailed knowledge of ECJ rulings to maximize recovery opportunities.
Expertise with ECJ Claims:
WTax is at the forefront of utilizing ECJ rulings to secure withholding tax refunds for US RICs. Our tax technical team, comprising mostly lawyers and CPAs, not only manages complex ECJ claims across multiple jurisdictions but also continuously monitors court cases and evolving legislation. This ensures that US RICs can take advantage of every new recovery opportunity as laws and legal precedents change.
End-to-End Process Management:
WTax handles every stage of the recovery process:
- Document sourcing and claim submission.
- Proactive query management, critical for high-scrutiny jurisdictions like Switzerland.
- Use of advanced technology to automate tasks and provide real-time updates through our client portal, reducing the administrative burden on clients.
Partnerships with Custodians:
We work closely with over 150 global custodian banks to minimize withholding tax leakage, facilitating faster and more accurate claim processing.
Proven Results:
With over 10,000 US RIC funds on our platform, WTax files significant withholding tax refunds in over 20 jurisdictions. Our success-fee model ensures we are fully motivated to recover the maximum possible amount for our clients as quickly as possible.
The countries where WTax has filed withholding tax reclaims for US RICs
Why Acting Now Is Critical for US RICs
In today’s investment environment, reclaiming overpaid withholding tax is not just about boosting financial returns—it’s a key reflection of responsible management that enhances stakeholder trust.
Additionally, tax authorities are tightening their scrutiny of cross-border tax claims, making the reclaim process more complex. Working with a specialized provider like WTax ensures that US RICs can navigate these challenges efficiently.
Partner with WTax to Maximize Your Withholding Tax Recovery
US RICs have a substantial opportunity to reclaim excess withholding tax, but doing so requires expertise and a proactive approach. By partnering with WTax, you can ensure that no money is left on the table.
At WTax, we go beyond traditional recovery methods. Our proprietary technology, global partnerships, and deep understanding of cross-border tax laws enable us to recover funds faster and more effectively than other providers, helping US RICs maximize their financial returns.
