Living in a small country like Belgium definitely has its perks, mostly because you’re well-known for things that don’t matter in the grand scheme of things, such as beer, chocolate and waffles. The open economy of the European Union, of which Belgium is a founding member, furthermore succeeded in removing many of the downsides of small countries by allowing unprecented movement of people, goods and capital. As a result, investors of small European member states now get to enjoy the economic benefits of the big players like France, Germany and the UK.
Of course, that’s the theory. And while the theory holds true for many aspects of European life, dividend growth investing isn’t one of them. It’s a fact that it’s never been easier to become a shareholder of a French company like oil-giant Total (EPA:FP) or to invest in dual-listed British-Dutch Royal Dutch Shell (LON:RDS.A and RDS.B). However, the lack of a pan-European tax system for capital appreciation or income from capital creates many barriers for investors seeking to reap dividends from a profitable business abroad.
And it’s not just European investors that suffer from this problem. While EU countries at least share a certain level of harmonised regulation and legislation on taxation, hardly any legislative action has been taken at the international level. As a result, investors from the United States wishing to own a part of Unilever (LON:ULVR) have to jump through many tax hoops and hurdles to pick the right stock for them on either the London or Amsterdam Stock Exchanges.
Maybe you thought yourself smart by buying Unilever on the New York Stock Exchange? Well, there’s a 50% chance you bought the wrong ADR. The UL shares don’t withhold any taxes because they originate from the London-based shares, whereas the UN listed stock applies a 15% Dutch withholding tax.
Dividend growth investing can become complicated pretty quickly when you decide to look beyond your country’s borders for great investment opportunities. Citizens of small nation states like myself obviously have much less opportunities to invest at home, so it’s important that their knowledge of foreign withholding tax regimes is up to snuff when they pop over to a neighbouring country.
That’s why I decided to share the foreign withholding taxes that apply to the most popular countries to invest in. Ever since I became interested in following the dividend growth strategy I’ve been researching and looking for ways to reduce the tax pressure on my dividend income, sadly without much success. Belgium doesn’t offer tax credits for foreign taxes withheld on dividend income like the Netherlands or even the United States do.
Belgium – 15% or 25%
While Belgian citizens are always subject to a 25% tax rate on income from capital, international investors can apply for a reduced rate of 15%. From what I’ve heard many brokers automatically apply the reduced rate if you reside in a country that has a bilateral tax agreement with Belgium, such as the US.
Canada – 15% or 25%
Oh, Canada. I’m not even going to explain this one. It’s even more cumbersome than the German system described below for investors outside of North-America. Basically, you have to apply to the Canadian administration for a reduced rate of 15% that’s only valid for up to three years for every single purchase. In my personal experience, many brokers charge an outlandish fee for this service, so beware.
France – 15% or 30%
France is a tough one – no surprise there. As usual, the French thought it wise to introduce one of the highest tax rate on dividends of any developed country. At about 30% the taxes withheld on dividends would be a serious roadblock to creating a sizeable passive income stream, especially if you also have to pay taxes on dividends received in your home country.
Thankfully, investors who know their French and feel like dealing with the French administration – for many people the second hurdle will be much larger than the first – can apply for a reduced foreign withholding tax of 15%, which is in line with most other European countries. Some brokers offer this service for free, but remember that it can take several months before your application is succesfully dealt with by the French.
Germany – 15% or 26.375%
The Germans actually apply a 25% flat rate on income from capital, but introduced an extra solidarity rate of 5.5% not too long ago. As such, the foreign withholding tax on German stocks is 26.375%, which is rather high. Like in the case of Belgium and France, it’s possible to reduce that rate to 15%.
Weirdly enough the 15% rate cannot be applied automatically like in the case of Belgian stocks – very inefficient, Germany! Everytime you receive a dividend from a German company you’ll have to apply for a reduced tax rate, which is not only time consuming but rather expensive because most brokers charge a surplus for the labour intensive service.
Italy – 15% or 27%
With the current state of the Italian economy it may not look like it, but there used to be a time that the Italian stock exchange offered many great investing opportunities. At the moment very few investors hold Italian stocks, partly because of the high foreign withholding tax.
Not too long ago Italy did introduce the same withholding tax recovery as France has in place, which remedies some of the reservations against investing in oil company Eni (BIT:ENI), for example. As a result it’s possible for international investors to reduce their withheld taxes from 27% to 15%.
Japan – 7%
Personally I haven’t invested in a Japan-based company yet even though the Japanese authorities offer dividend growth investors relatively straight-forward guidelines. If you received Japanese dividends you’ll be 7% out of pocket.
Luxembourg – 15%
Many European banks are based in Luxembourg because of its favourable tax laws. Luxembourg also hosts many international corporations or shell companies because of tax optimization schemes. If you buy into a Luxembourg-based company you’ll have to take into account a 15% foreign withholding tax.
Switzerland – 15% or 35%
Switzerland, the country of personal tax evasion and massively profitable banks, withholds 35% on any dividends from Swiss companies by default. If you thought investing in Novartis (VTX:NOVN) or Nestlé (VTX:NESN) was a smart decision, you might want to reconsider.
Thankfully, the Swiss also introduced a way to recover 20% of your dividend payment through very much the same system as the French. Many brokers offer this service for free because it’s not as cumbersome as the German one, but make sure to check when you decide to invest in Swiss companies. US-based ADR holders of Nestlé, for example, immediately receive a reduced withholding tax rate.
The Netherlands – 15%
The Dutch certainly own their fair share of succesful international companies with many offering a great dividend policy. Again Unilever and Royal Dutch come to mind, but also the now British-Dutch Reckitt Benckiser (LON:RB). Sadly, though, the Dutch government introduced a 15% foreign withholding tax on almost all dividends in 2012.
The United Kingdom – 0%
If you’re looking to invest in a British company, don’t worry. The Brits don’t apply a foreign withholding tax on dividends, so you’re not losing any income at the source. That’s why it’s important to purchase most dual-listed stocks on the London Stock Exchange rather than on any other exchange.
The previously mentioned Royal Dutch Shell and Unilever are two great examples of companies that are best bought in the UK rather than in the Netherlands. As a matter of fact, for Shell the situation is even more complicated because both the A and B shares are listed in London and Amsterdam, but only the A shares withhold any foreign taxes. Another popular dividend growth stock that’s a safer buy in London than South Africa is BHP Billiton (LON:BLT).
The United States of America – 15% or 30%
The most capitalistic country of all time withholds 30% on dividends – what? That is if your government hasn’t put a bilateral tax agreement in place, which is the case for almost all Western and Northern European countries. My purchases on the New York Stock Exchange, for example, are immediately subject to a 15% tax rate.
As you can see, there are a ton of different tax rates and systems out there. Please bear in mind that the withholding taxes described above are general rules of thumb, which may differ from one country of residence to another. Like I already mentioned, Belgium is the only country in Europe that taxes dividends twice, both in the country of origin and again in Belgium. As such, my effective tax rate on most dividends is 37.5%.
When you compare that to the example of a Dutch resident who is able to reclaim foreign withheld taxes in his personal income tax, he’ll be ahead about 22.5% every single dividend payment. That’s a lot of money in the long run.
If you’re looking to add foreign companies to your portfolio, be sure to read up on the applicable laws and rules before dumping your money in a stock that yields next-to-nothing because of crippling tax arrangements. I’m really glad that I’ve never had the misfortune of running into a situation like that. Have you?