Withholding tax on dividends from foreign shares

In this Flash, we address the final important cost and tax topic in securities management: withholding tax. Anyone wishing to study the cost topic again in more detail is referred to our whitepaper.

Anyone investing in foreign shares loses part of the achieved return because the company's country of domicile levies withholding tax on dividend distributions. In the United States – which accounts for over 70% of an equity portfolio invested according to global market capitalization – the withholding tax amounts to 30% of the dividend. The capital-weighted average taxation of dividend income (reference MSCI World) amounts to 24% of dividends.

Over the ten-year period from 1 January 2015 to 31 December 2024, the gross dividend yield amounted to 2.20% per year. A 24% withholding tax deduction results in a return reduction of 0.52% per year, which is almost as high as the recurring asset management costs of a competitive provider.

Fortunately, cross-border double taxation agreements are negotiated between countries, allowing certain investor groups to partially reclaim withholding taxes or even obtain full exemption. Swiss pension institutions (BVG; FZG; 3a), for example, can benefit from full exemption from withholding tax on American, Canadian and Japanese equities.

This exemption does not apply to Swiss private investors, which means that a significant withholding tax burden remains in discretionary asset management even after reclaim procedures. The best alternative for Swiss private investors wishing to invest in global equities is to purchase Ireland-domiciled funds or ETFs, as these can reclaim half of the US withholding tax.

Important: these reclaim and exemption possibilities only apply if the most suitable – i.e. withholding-tax-efficient – investment instruments are used in portfolio construction. Unfortunately, inefficient instruments are still used far too often in practice. As a result, withholding tax burdens of 0.52% per year may arise instead of around 0.30% in asset management or 0.06% for pension solutions (3a/FZG). It is therefore worthwhile to choose an asset manager who understands this topic or to study withholding tax carefully when managing investments independently.