Advisers could be missing out on a way to maximize returns on their clients' foreign investments.
Americans investing in non-U.S. stocks could be earning less of a return than they'd otherwise get due to taxes some foreign governments levy on stock dividends.
Take stock in Nestlé, for example, which is headquartered in Switzerland. Since 1998, Swiss tax authorities have assessed a 35% tax rate on the dividends U.S. residents receive from Swiss-domiciled corporations.
The good news is the U.S. has a tax treaty with Switzerland, as it does with several other countries, allowing individual investors to recoup 20 percentage points of that from the Swiss government, lowering the tax burden on the dividend to 15%. But this sort of cross-border tax reclaim is something many advisers may not know about.
“This subject is one that's been overlooked [by advisers]. It's not top of mind, but it should be,” said Tom DeCesare, manager of trust operations at The Commerce Trust Co.
Investors can get this type of tax refund on their direct foreign asset holdings, such as stock of foreign-domiciled companies as well as American Depositary Receipts. ADRs are dollar-denominated certificates issued by U.S. banks to investors, and represent a specified number of shares in a foreign stock.
Outside the U.S., the practice of paying a dividend to shareholders is more common. Indeed, about 70% of the world's dividends come from non-U.S. companies.
The U.S. has a tax treaty allowing for tax reclaim on dividends with about 20 countries, including Belgium, Canada, France, Germany, Italy and Spain. In France, for example, a U.S. investor who is paid $1,000 in dividend income would only get $700 of it, due to a 30% French withholding rate. But the investor could receive 15% back, or $150.
Tim Steffen, director of financial planning at Baird, said these rebates likely aren't for an average investor, but added that he sees value in them for investors with sizable foreign positions.
“The benefit here is really to the mass affluent and high-net-worth individuals with more than $1 million to $2 million with foreign security exposure,” according to Len Lipton, managing director at GlobeTax Services Inc., a firm specializing in dividend tax reclaim.
Rebates received from foreign entities compensate for what is essentially a double taxation U.S. investors would receive on the dividends, because the U.S. imposes taxes on these as well, Mr. DeCesare said.
Firms such as GlobeTax make money by taking a percentage of the rebate recovered for investors. GlobeTax gets a 20% cut, for example. Acupay System, a competitor, takes between 5% and 10% of the reclaimed amount.
Some advisers have enlisted such firms to do cross-border tax reclaim for clients. The complexity of the process makes it difficult for advisers to do in-house, according to Stef Lambersy, co-president of Acupay.
For example, claims must be filed with the relevant tax authorities, and the process and paperwork differ from country to country. Each country has a different tax treaty with the U.S., so the rebate amount differs. Countries also have a range of statutes of limitations designating a time-frame within which an investor can reclaim the tax. Treaty terms can change, as well.
“The opportunity to do something incorrectly is vast, and very often if you do something wrong you're never going to get your money,” Mr. Lipton said.
Mr. DeCesare's firm used to do reclaims in-house for advisers, but now outsources to GlobeTax.
“When the global [financial] collapse happened, the activity around these treaties really picked up, and we knew we couldn't keep up,” he said.
Some large custodians of RIA assets also make this sort of full-service tax reclaim available for their clients through third parties. For example, Fidelity Institutional Wealth Services has an alliance with GlobeTax whereby advisers get a discounted rate for using the service, a spokeswoman said. TD Ameritrade provides advisers with GlobeTax's service and that of The Depositary Trust and Clearing Corp., called DTC TaxRelief.