Most investors probably think they only need to fill in paperwork on dividends if they are investing in stocks listed in other parts of the world – but that is not necessarily the case.

Withholding tax is levied by the government of an overseas company on dividends received by people who are not residents of said country.

The UK market is home to several big companies, including in the FTSE 100 and FTSE 250 indices, which are domiciled or incorporated overseas. In the construction sector, both CRH (CRH) and Grafton (GFTU) are Irish-incorporated companies and are therefore subject to a dividend withholding tax of 25%.

Although Ireland has a tax treaty with the UK which means dividends should, in theory, be exempt from withholding taxes, you must fill out a declaration form and cover letter and send it to HMRC to claim the exemption. You should be able to claim a refund with HMRC if the withholding tax has already been deducted from your dividend payment.

However, a lot of investment platforms only allow you to reclaim withholding tax for US or Canadian companies (by filling out the relevant forms) and are not, in any case, considered ‘qualifying intermediaries’ by Irish tax authorities. Therefore, UK investors in CRH or Grafton are very likely to be subject to the 25% levy.

A UK investor buying shares in US stocks faces a 30% withholding tax on dividends but this can be halved by filling out a W-8BEN form. With Canadian dividends, subject to a 25% withholding tax, the form to fill out is a NR301. Doing so also cuts the rate to 15%. You should be able to get hold of these forms through your investment platform provider.

If you hold your stocks in a SIPP (self-invested personal pension) then you are exempt from withholding taxes on US dividends and automatically benefit from the reduced Canadian rate.

Concrete flooring kit supplier Somero Enterprises (SOM:AIM) is an example of a UK-listed firm which is incorporated in the US and therefore its dividends are subject to withholding taxes of 30% unless a W-8BEN form has been filled out or the shares are held in a SIPP.

A slightly more complex case is presented by FTSE 250 US gas producer Diversified Energy Company (DEC). The company is incorporated in the UK but under American tax rules it is considered a US company for tax purposes, essentially because it makes its money by producing oil and gas from wells located in the country. This means its dividends are subject to US withholding taxes.

This situation is a reminder of complexity of tax rules and if an investor is ever unsure about how tax rules apply to them it is worth seeking advice from a qualified professional.

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