An individual domiciled and tax resident in the UK is taxable on their worldwide income and gains. But if you are in receipt of dividends from another country, it’s possible that the other country will levy a withholding rate on you.
If the UK has a double tax treaty with the country from which the dividend is sourced, you will need to consider the maximum rate of withholding tax to be levied, set out by the double tax treaty, to ensure that you have not suffered too much tax, or have claimed too much by way of double tax relief.
The permissible withholding rate varies depending on the double tax treaty in question but typically it varies between 5-15%. An example of a potential issue faced is as follows.
There is typically a flat rate for non-resident US taxpayers, where the US will withhold 30% on the gross dividends paid. However, the treaty between the UK and the US only allows for US taxes of 15% to be levied on the dividends paid in the US. This means that the recipient of the dividends could suffer 15% too much tax on their dividends.
In this situation it is advisable to request a certificate of tax residence from HMRC to then pass on to the overseas tax authority to reclaim the excess overseas tax suffered back. Please note that in some countries the tax levied can be a notional tax credit and therefore not repayable. It is therefore always advisable to seek local advice.
Double tax relief
When it comes to paying tax on your overseas dividends in the UK, they’re taxed in the usual way (UK dividend tax rates are 8.75%, 33.75% and 39.35%) depending on your other sources of income). However, if you are also subject to a withholding tax in the country where the shares are based, a claim for double tax relief can be made to ensure that you only pay tax once on that income.
If your UK liability is higher than the overseas withholding, you will only pay the amount in the UK over and above the withholding. If it’s lower, then you would not pay any further tax in the UK.
The amount of double tax relief available will be determined by whether you are a basic, higher or additional rate taxpayer, along with whether you have already used up your dividend allowance.
In our scenario, if you were a basic rate taxpayer (taxed at 8.75%) the UK tax would be lower than the US tax and no further tax would be due. However, if you were a higher rate taxpayer (taxed at 33.75%), you would get relief for the 15% suffered in the US and you would need to pay the difference over to HM Revenue & Customs.
An issue arises when you’re claiming all the withholding tax suffered abroad irrespective of what the double tax treaty states. This may be higher than the amount you are allowed to claim, leaving HMRC out of pocket – something that is becoming increasingly subject to scrutiny by HMRC.
Take a look at our example here.
If you’re unsure whether you have paid the correct amount of tax on your overseas dividends or if you need help requesting a certificate of residence from HMRC, please get in touch with BHP’s International Private Client team.
