Are Asset Owners Leaving Tax Dollars on the Table?


By WTax, a division of the VAT IT Group


Winter, 2020






2020 has certainly been a challenging year and very few institutional investors around the world will be unaffected by the COVID-19 pandemic.  It’s no surprise that dividend payments have decreased drastically and in this uncertain time, it’s difficult to predict how long this environment will last.  Media sources such as Forbes1 and CNBC2 have commented on the significant decreases in dividend payouts over the past few months.  More recently, Janus Henderson’s Global Dividend Index3 warned that the impact of the pandemic for the rest of the year “will be significant” with dividend cuts already announced or likely impending and set to wipe at least 15%, or $213 billion, off this year’s total payouts.


As a result, more than ever before, asset owners should ensure they recoup all of the foreign withholding taxes (assessed on their dividend payments) that they are legally entitled to.  Indeed, when done correctly, withholding tax recovery can equate to as much as 20% of all foreign dividend and interest income earned.


Most asset owners rely on their custodial banks to assist in filing the necessary paperwork to recoup any taxes their funds are eligible to reclaim.  Unfortunately, although pension funds and many other asset owners are entitled to reclaim 100% of their foreign withholding taxes, most are not actually getting the full refunds owed to them.  In this article we discuss the challenges of withholding tax refunds, why most asset owners are not maximizing these refund opportunities and how to turn what most consider sunken tax leakage into significant improvements in fund performance.




The most prevalent challenge in the withholding tax space is a lack of knowledge of the available claiming mechanisms.  An eye-watering 65% of investors currently recover absolutely no withholding tax and of the 35% of investors that are claiming, they are often coming up short by 40% or more of their potential savings.


Further, despite the European Commission issuing a Code of Conduct on Withholding Tax that was aimed at providing a set of pragmatic approaches to improve the efficiency of current withholding tax reclaim procedures4 , the process is still extremely onerous and outdated.   For asset owners, the primary barriers to reclaiming all of their eligible withholding taxes are:


A Cumbersome Reclaim Process

Many investors don’t have the correct resources in place to address withholding tax leakage, and even if they do, the process is so cumbersome that those resources can fail at maximizing the refund opportunities.  This is in no way due to a lack of hard work or skills, but there are hundreds of Double Taxation Agreements (“DTT”), domestic legislation provisions and European Court of Justice Court case precedents that need to be understood intimately.  Ultimately, this results in many investors simply foregoing their right to reclaim 100% of their withholding tax (often unknowingly).


Language Barriers and Lack of Fiscal Representation

As noted above, there is an enormous amount of global legislation, policy, and laws to understand in order to affect successful refunds.  Now add the fact that you have to deal with each tax authority in their local language and most require local fiscal representation in order to claim successfully.  With ongoing compliance changes and legislative amendments, this becomes a logistical and administrative nightmare.


Tax Refund Expiration Dates

Every jurisdiction has its own statute of limitations.  Some of these statutes match the dividend payment date throughout the year, while others exist solely at the end of the calendar year.  If you are not on top of these deadlines, it’s easy for withholding tax value to simply expire.



Local Tax Reclaim Rules and Laws


Unfortunately, simply submitting a claim does not ensure a successful refund.  Tax authorities apply stringent rules and laws that make the process even more complex while providing very little guidance.  The onus is on the taxpayer to get their money back.  Most tax authorities require manual claim submissions for which the paperwork must be immaculate and all possible queries pre-answered.  Furthermore, many tax authorities have recently tightened their belts, querying claimants’ status and eligibility for refunds before paying out.


Consequently, a strong team of lawyers and CPAs is needed to provide the necessary analysis, explanations and breakdowns required to ensure queries are answered successfully and refunds are ultimately received. In addition, your existing process will require a strong debtors team to follow up on your refunds. Otherwise, chances are you will be waiting a very long time for your refund.


How Much Money Are You Leaving On The Table?


Asset owners are often entitled to reclaim 100% of their withholding tax on foreign investment income.  But do all asset owners know this is the case?  Are you claiming the full amount that is owed to you?  With over $200 billion in taxes withheld from pension funds alone, your fund needs to ask itself, how much of this belongs to you?


Keep in mind, the fact that many asset owners are tax exempt entities means there is no tax credit available.  Therefore, every withholding tax dollar unrecovered goes straight to that asset owner’s bottom line.  Unfortunately, due to the complex tax reclaim process described above, asset owners are at risk of losing a significant portion of their withholding tax refund opportunity.


Further, the administrative hurdles noted above are exacerbated by two additional constraints faced by the asset owners’ existing processes.  These are: “blanket tax reclaims,” and custodians not being able to offer tax refunds through the European Court of Justice (“ECJ”).


Blanket Tax Reclaims

In some cases, the custodian applies a blanket reclaim process for all of their foreign investors.  In these situations, the custodian files a tax reclaim using a single reclaim rate for all of the investors in an investment vehicle.  The rate used by the custodian is based on the lowest tax reclaim rate for which any of their client accounts are eligible; notwithstanding the fact that many asset owners participating in that vehicle may be eligible for a higher refund rate.


This is not an error or oversight.  It’s just that it is an incredibly time consuming and complicated process for the custodian to break down the structures into this level of detail.  Administratively, it’s simply easier to apply a blanket rule.  As a result, asset owners often miss out on the difference between the custodian’s low blanket rate verses the higher rate the asset owner actually qualified for.


Since many asset owners are entitled to 100% tax refunds, the difference can be substantial.  To address this global problem, pension funds and other asset owners need to make sure they are claiming all of the withholding tax they are owed.


European Court of Justice Claims

One particularly lucrative source of withholding tax refunds is the European Court of Justice (“ECJ”).  ECJ claims are based on Article 63 of the Treaty of the Functioning of the European Union.5  In particular, a number of milestone judgments rendered since 2004 have established the precedent that there should be no discrimination between a domestic fund and a comparable foreign fund when withholding tax on investment income.  Consequently, investors both within the EU and outside the EU can reclaim the entire amount of tax withheld on dividends and interest.


The problem is that most investors do not take advantage of this mechanism. ECJ claims are highly complex and require deep knowledge of the legislation, past court cases and legal precedent to be able to achieve refunds.   Specifically, ECJ claims must present a strong case supporting the argument that the investor seeking a refund is comparable to funds within the jurisdiction from which it is requesting a refund.


Achieving this standpoint for individual cases across many different jurisdictions requires technical knowledge and expertise.  This in turn requires accountants and legal experts who continuously review the local legislation of over 40 countries to understand the comparability implications across all of these and perform a detailed analysis of each client’s individual fund structure relative to other structures in the investment jurisdiction.  Moreover, in most cases, custodians are generally unable to help with ECJ claims (as such claims may be viewed as rendering tax advice).


Having said that, refunds achieved via the ECJ claim mechanism can increase tax savings on dividend income by up to 30%.  Indeed, the ECJ recently ruled in favor of a Canadian pension fund in its bid to reclaim the 15% withholding taxes owed to them from Germany.  Since the tax treaty between Canada and Germany did not provide for a full refund, the Canadian pension fund filed its refund request in the ECJ. Subsequently, the EU Council ruled that Germany’s treatment of the Canadian pension fund was discriminatory relative to local schemes.



For all of the above reasons, it’s not a question of whether asset owners should be looking into this tax reclaim mechanism, but when.   In this regard, a number of global specialist tax-reclaim providers have developed proprietary software that track and auto-flag tax deadlines/timelines. These firms have teams of dedicated tax lawyers, accountants, debtors and managers who harness the relationships they’ve built over years with various tax authorities to maximize tax refunds on a client-specific basis.


Many of these firms work on a contingency basis, whereby clients pay no upfront fees.  Instead, these service providers only receive a percentage of the refunds they successfully reclaim.   Consequently, if the service provider fails to reclaim any taxes for its clients, those clients pay nothing.


In essence, the clients of these service providers thereby enjoy a risk-free opportunity to recoup previously foregone withholding taxes.  Further, because asset owners are permitted to reclaim withholding tax retrospectively (in some jurisdictions, up to five years), withholding tax recovery can be particularly beneficial in the initial years.




Historically, withholding tax recovery has sometimes been viewed as an immaterial gain.  But in these challenging times, it makes sense to recover as much foreign withholding tax as possible. When doing so, it’s critical that asset owners are aware of the many pitfalls associated with their current withholding tax reclaim process and explore all practical means for maximizing their refunds.


To this end, prudent fund fiduciaries should ask themselves if they’ve looked into all possible avenues of reclaim.  These include Double Taxation Agreement claims, Domestic Exemption claims, and ECJ claims.  Asset owners should also get a sense of:


  • How successful their withholding tax claims have been in the past,
  • What reclaim practices their current processes include (such as blanket claims), and
  • What avenues their current processes don’t include (such as ECJ claims).


Bottom-line, given the current climate, a risk-free effort to maximize withholding tax refunds is a sound and prudent practice that all asset owners should be actively considering.



About WTax

WTax is a foreign withholding tax recovery specialist that provides wholly-outsourced withholding tax refund solutions to all and any parties seeking to optimize their withholding tax benefits processes and capabilities.  WTax attends to all of the administrative, technical and practical tasks in the foreign withholding tax recovery process, providing leading solutions to unlock recovery opportunities in over 40 jurisdictions.



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If you are interested in our partner WTax's withholding tax recovery service, please contact your Abel Noser Solutions or Zeno AN Solutions rep or email us at:




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