Meaning
Statutory requirement for a corporation to subtract tax from a profit distribution before it reaches the shareholder. Dividend withholding acts as a collection mechanism for the tax authority and applies most often to foreign investors. This deduction reduces the net cash received by the owner of the stock.
Treaty Relief
Agreements between countries often lower the standard rate of the tax for residents of the partner nation. The dividend withholding amount is reduced if the shareholder provides a certificate of residence to the paying agent.
Remittance Duty
Responsibility for paying the tax to the government sits with the company rather than the person receiving the dividend. Failure to perform the dividend withholding correctly can result in penalties for the corporate treasurer.
Cash Drag
Reduction in the immediate return on investment affects the overall yield for the shareholder. While the investor might claim a tax credit in their home country the dividend withholding still creates a timing issue for their cash flow. Fund managers must calculate these net returns when deciding where to allocate capital globally.
The process requires a deep understanding of local tax codes and international treaties. Changes in tax laws can suddenly alter the attractiveness of a specific market.
