Did you know that billions of dollars of dividend withholding tax (DWT) is deducted from investment profits every year? In fact, it is estimated by S&P that globally $200bn of DWT is withheld each year, with a large percentage of that unclaimed.
The good news? You may be able to claim a DWT refund!
However, from our own research, most people are unaware that this tax is even being withheld from their investments.
Sprintax Dividends is making the reclaim process more accessible, to reduce that percentage of annually unclaimed DWT – we want to put people’s own money back in their own pockets.
This guide will explain what Employee Share Schemes are, the impact of Dividend withholding tax (DWT) in cross-border scenarios, and how to reclaim your DWT back.
What is an Employee Share Scheme?
An Employee Share Scheme (ESS), also known as an Employee Stock Option Plan (ESOP) or Employee Share Option Scheme, is a program that allows employees to acquire shares or options in the company they work for, often at a discount or on favorable terms.
The main goal is to align the interests of employees with those of the company and its shareholders. By giving employees a stake in the company’s success, it can:
- Improve motivation and performance
- Enhance employee retention
- Encourage long-term commitment
- Provide a financial reward if the company performs well
Types of Employee Share Schemes
Common types of Employee Share Schemes include:
Share Options
Employees are given the option to buy shares at a fixed price (the “exercise price”) after a certain period or once certain conditions are met.
Restricted Shares
Shares are granted outright, but may be subject to vesting conditions or restrictions on sale.
Performance Shares
Shares, awarded only if specific company or individual performance targets are met.
Share Purchase Plans
Employees can buy shares (often via salary sacrifice or at a discount).
What is dividend withholding tax?
Many governments worldwide impose taxes on dividends paid to nonresident shareholders by organizations in their country. This includes tax on employee share schemes (ESS).
These shareholders, who have been subject to a cross-border withholding tax on a dividend received (DWT), are not tax residents in the country where the company is headquartered and therefore are subject to DWT.
How are dividends from employee share schemes taxed?
Tax treatment is a critical aspect, especially for cross-border employees or participants in multinational companies.
Rates of withholding tax vary significantly between countries, typically ranging from 15% to 30%, though they can be higher or lower depending on bilateral tax treaties.
For instance, the United States generally imposes a 30% withholding tax on dividends paid to nonresident aliens, unless reduced by an income tax treaty.
Similarly, European Union countries have varying rates, with France imposing a 25% rate and Germany 26.375%.
Many investors can reclaim a portion of the withholding tax paid on their investments such as employee share scheme tax, by filing for a tax credit in their home country or through complex tax treaties aimed at avoiding double taxation.
So, if you own shares in a company headquartered outside of the country in which you reside, you will likely have tax withheld from dividends you receive.
This can impact the net return on your investment, making it crucial for international investors to understand the tax implications and explore potential relief options through tax treaties or local tax authorities.
Each investment country has a different rate of DWT withheld from investments.
See below some key countries and their statutory dividend withholding tax rates:
| Investment Country | Statutory Dividend Withholding Tax Rate |
|---|---|
| Australia | 30% |
| Austria | 27.50% |
| Belgium | 30% |
| Canada | 25% |
| Denmark | 27% |
| Finland | 35% |
| France | 25% |
| Germany | 26.375% |
| Ireland | 25% |
| Japan | 20.42% |
| Norway | 25% |
| Sweden | 30% |
| Switzerland | 35% |
| US | 30% |
How do double taxation treaties affect my investment?
Double tax treaties (DTTs), also known as double taxation agreements (DTAs), are agreements between two or more countries designed to prevent double taxation on the same income.
These treaties can significantly impact the DWT applied to cross-border dividend payments. Just like how each investment country has a different rate of DWT withheld from investments, they also have different DTT rates with other countries.
Key points of double tax treaties for DWT
The purpose of a double tax treaty (DTT) is to avoid double taxation and promote cross-border trade and investment.
They establish rules on how certain types of income, including dividends, should be taxed by the countries involved.
Under a DTT, the withholding tax rate on dividends paid to nonresident shareholders is often reduced.
For instance, if a country normally imposes a 30% withholding tax on dividends, a treaty might reduce this rate to 15% or lower for residents of the treaty partner country.
To benefit from reduced withholding tax rates, you’ll usually need to prove residency in the treaty country. This is typically done through a certificate of residency provided by the tax authorities in your home country.
Investors need to apply for treaty benefits. This can involve filing specific forms with the tax authorities of the country where the dividends are paid, often before the dividends are distributed.
In many cases, investors can claim refunds for excess withholding tax paid.
Examples of DTT’s
United States and Canada: Under the US-Canada tax treaty, the withholding tax on dividends is reduced to 15% for Canadian residents receiving dividends from US companies.
Germany and the United Kingdom: The Germany-UK tax treaty reduces the withholding tax rate to 5% for UK residents holding at least 10% of the voting stock in a German company, and to 15% for other dividends.
Case Study
Imagine an investor residing in the United Kingdom owns shares in a German company.
Normally, Germany imposes a 26.375% withholding tax on dividends. However, under the Germany-UK double tax treaty, the rate can be reduced to 15%.
The UK investor needs to provide proof of residency to German tax authorities to benefit from this reduced rate.
If the investor fails to do so before the dividend payment, they may still be able to claim a refund for the excess tax withheld by submitting the appropriate documentation afterward.
Who can help me to reclaim my overpaid DWT?
Let’s face it – understanding the nuances of cross-border share schemes and DWT can be complex, especially with all of the different tax laws and regulations.
Sprintax Dividends has been developed specifically to support DWT refund applications!
Sprintax Dividends will manage all of the paperwork associated with reclaiming your DWT, before transferring any refund you are due straight to your bank account, no matter where you are.
Get started with your dividend withholding tax reclaim here.
