According to a recent study conducted by Brussels-based NGO Better Finance and Germany’s DSW, reclaiming withholding tax in Europe remains an arduous and costly endeavor. The study, which surveyed 3,000 European investors, unveiled the considerable challenges faced by non-professional investors in reclaiming taxes paid twice on cross-border dividend income, making it financially impractical. The European Commission is poised to present proposals in June to alleviate obstacles and prevent double taxation.
The survey findings underscored the prevailing sentiment that the reclaim procedures designed to safeguard against double taxation are perceived as cumbersome. An overwhelming 70 percent of claims incurred additional costs, further exacerbating the financial burden on investors. Moreover, the study highlighted the indispensable requirement for an in-depth understanding of refund procedures, as navigating through the intricacies demands “substantial knowledge.”
Better Finance and DSW assert that the complexity and delays entailed in these procedures undermine investors’ trust in cross-border investments within the European Union. In light of this pressing issue, the survey’s results were published on May 15th and promptly submitted to the European Commission, entrusted with presenting a proposal to rectify the challenges surrounding double taxation.
“If we truly want to achieve a capital markets union, there is an urgent need for EU action,” said Guillaume Prache, managing director at Better Finance. “Only simplified and harmonised processes at the EU level will help to stimulate and stop hampering cross-border retail investments. Beyond mere tax cooperation between EU member states, barriers to WHT refund procedures need to be removed, including deficient cross-border procedures and administrative barriers.”
‘Very difficult’
Better Finance and DSW specifically reviewed the difficulties that private investors encountered when attempting to reclaim taxes paid twice. The majority of respondents - 78% - were tax residents in Germany, followed by Belgium (19%), Austria, France, Denmark and Italy. Their experience was mainly with reclaiming dividend taxes withheld in France, Denmark, Italy and Germany.
Some 30.5% percent of the respondents said they had attempted to reclaim withholding tax paid in another country. Of these, three quarters said they found it either ’difficult‘ (27%) or ’very difficult‘ (47%) to do. A mere 2 percent said it was ‘easy’.
Withholding tax “refund procedures are far too cumbersome, and often too costly (especially if a bank/third party is mandated) to enable the average, non-professional investor to reclaim – and thus retrieve – the excess withholding tax rate on cross-border dividend income,” Better Finance said. “Moreover, substantial knowledge is required and high compliance and procedural burdens exist, and the delays may also be significant.”
Professional investors face similar challenges although they have better resources available to do so and often can rely on their custodians for retrieving taxes paid twice. A 2016 European Commission study found that some 8.4 billion euro goes down the draw in every year due to the complexity, not only in withholding tax, but also in missed “opportunity costs”, as it sometimes takes years before you get your money back and can invest it again.
‘Obstacle course’
Luxembourg only exempts professional investors if they are ‘corporate’ shareholders resident in one of 86 countries that have a tax treaty with the grand duchy and which hold a stake of at least 10% in their Luxembourg company for at least 12 months. This applies mostly to Sicav and FCP investment funds. Luxembourg has such tax treaties with only 11 of the 27 EU member states, including France, Germany and Belgium.
Insurance industry group ACA has said encouraging cross-border investment and simplification of taxes should be a priority for the EU. “Nowadays, too often, the process to claim a refund looks more like an obstacle course than a legitimate right,” ACA said in response to an EU consultation.
ACA said these practices are discriminatory. ”As such they should not be even possible in the EU, and a court decision should not be needed to apply this fundamental principle,” it said.
Accepting double tax is ‘nonsense’
Even if the claim is possible, refund procedures are often too complex and are too expensive for the taxpayer. “The refund procedures should be eased and the delays to examine a claim should be reduced to avoid this discrimination by facts,” ACA said.
The European Commission in June is due to present a proposal that will force EU Member States to coordinate their actions on preventing double taxations. Currently these actions are not coordinated, and largely depend on bilateral tax treaties between EU member states, which also leads to ‘treaty shopping’, with investors opting for specific jurisdictions for this particular reason.
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