Discover how South African investors can reclaim a portion of the dividends tax on their offshore investments through tax treaties and double taxation agreements. File photo.
Did you know that you may be able to recover a portion of the dividends tax on your offshore investments? This is because of tax-rate differences in taxation treaties between South Africa and other countries.
Mark Berger, chief executive officer of Global Tax Recovery, which specialises in recovering dividends tax for institutional and retail investors, says most people don’t realise that, in many cases, they can claim back a portion of the tax that has been withheld on dividend distributions by offshore companies – more than half in some instances – and would not know how to go about claiming such a refund.
Tax on dividends
Many countries, including South Africa, tax company dividends. A common method is not to tax the shareholders directly, but for the company involved to deduct the tax before making the distribution; thus the shareholder receives a dividend from which tax has already been withheld – hence its name “dividend withholding tax” (WHT).
In South Africa, the current WHT rate on dividends from local companies is 20% – it went up from 15% in 2017. For investors in local equities, the process is straightforward: unless you’re in a tax-free investment or retirement fund, in which case the tax does not apply, the dividend is paid with the 20% WHT already deducted.
However, things get complicated when it comes to offshore investments. Not only do WHT rates vary significantly among countries, ranging between 15% and 35%, but so does legislation around who is liable for what.
Double taxation agreements
In order to prevent taxpayers receiving foreign income from being taxed twice on the same income, countries negotiate double taxation agreements (DTAs) whereby each country subject to the agreement knows what taxing rights they hold against taxpayers. South Africa holds such agreements with dozens of countries.
When it comes to WHT, 15% is typically the rate that countries agree on, Berger says. This will often differ from the WHT rate for taxpayers in the country in which the dividend-paying company is based which, as stated above, could be as high as 35%. It also differs from the South African rate, 20%. As a South African taxpayer you are entitled to claim the difference between the country’s WHT rate and the negotiated DTA rate of 15%.
For example, if you hold shares on the Swiss luxury goods company Richemont (this would also apply if you held Richemont shares on the JSE, its secondary listing), Swiss WHT of 35% will be deducted from its dividends. But South Africa’s DTA rate with Switzerland is 15%, so you are entitled to a refund of 20% of the dividend. On an investment of R1 million and a dividend yield of 2.8%, R9 800 (35%) will be deducted from the dividend of R28 000. But the DTA rate is 15%, so you can reclaim R5 600 (20%).
“Investors reclaiming WHT for the first time often receive a windfall payment, as they may be entitled to multiple prior years of recovery,” Berger says. “The period of historical claims that may be recovered is determined by each jurisdiction’s particular statute of limitations - generally speaking, between two and six years.”
Collective investments
Collective investment vehicles such as unit trust funds are treated differently, depending on the country, Berger says. “For instance, in Belgium, the fund is regarded as the beneficial owner, and the fund should apply for the refund. But some countries do not accept that, and you need to apply in your personal capacity in your proportion of WTH suffered, and they will allow you to recover the tax from your share of the fund,” he says.
But where it is the fund’s responsibility to claim, Berger says his company found that many South African asset managers were not even aware that they could be claiming. “It’s a big thing for the funds to make sure they are doing the recoveries for their unitholders. Equally, a trust could be regarded as the beneficial owner, so if the trust doesn't do it, the beneficiaries are losing out,” he says.
Benefits for smaller investors
Berger says it is not only large investors who can benefit from the recovery process; smaller investors can too.
“Even for relatively small amounts, a client simply has to print out and sign a letter of authority, authorising us to fill in all the claim documents and submit them to the foreign tax refund office, and the money is paid into their account at their institution. We have a basic fee of R95 plus a percentage of what we recover.
“Generally, if the refund is R200 or so, we don't make money on that, but what we've noticed is that as young investors grow their wealth, we just grow with the client – if someone looks after the cents, the rands, pounds and dollars look after themselves because the process is set up and then it is automated going forward.”
PERSONAL FINANCE