From time to time we get the question; what is dividend leakage. So here once and for all, this is it and how to deal with this.
Let’s start at the beginning: what is dividend and what is dividend tax?
When you own stock, you own a piece of a company, so to speak. These companies sometimes share a piece of the profits with their shareholders and then you get a dividend per share. So if you have many shares, you will receive more dividends as a total amount, than if you only own 1 share of this company.
Dividend is very nice because you don’t have to do anything for it and you can reinvest that amount again. So dividends are a little different from share price gains.
Dividend tax
In the Netherlands you pay tax on income, in box 3 you also pay tax on income from savings and investments, which includes dividends. If your assets in Box 3 exceed the exemption, you pay wealth tax. Dividends also fall into Box 3, and to make sure you pay taxes on that income, it is withheld in advance. So immediately upon payment of the dividend.
The dividend tax rate in the Netherlands is 15% and this is a tax already withheld by the company paying the dividend.
Example; Suppose a company pays €20 in dividends, you get €17 because the company retains 15% of €20 (is €3).
If your capital exceeds the exemption in box 3, you will pay wealth tax, but you will have already paid tax when you receive the dividend, as it is withheld immediately. Therefore, you can then reclaim the double-paid tax.
Then when you fill out your tax return, the tax department will check how much dividend you paid and see if you will get a refund or have to pay extra.
Read all the “to knows” about paying taxes on your shares here.
Investments outside the Netherlands
Well, dividend leakage actually occurs mainly when the company paying dividends is not based in the Netherlands. Most countries also have a dividend tax, but it is not always 15%, it can be more or less.
Investments in countries with which the Netherlands has a treaty
The Netherlands has a treaty with most of the countries, so 15% is levied for residents of the Netherlands. This works the same as for companies in the Netherlands. Suppose a company in a country with which the Netherlands has a treaty pays dividends, you get the amount minus that 15%. This is withheld again at the “source” and then you can enter it back into your box 3.
Investments in countries with which the Netherlands has no treaty
But what if the Netherlands has no treaty with a company’s country of establishment? Then the applicable rate (usually it does exceed 15%) is withheld again at source. Again, you can offset that 15% in Box 3, but anything above that 15% you have to reclaim yourself. Well, you can imagine that sometimes that takes some time and it doesn’t always work out.
It’s called dividend leakage if you don’t manage to get so that “other” tax rate (i.e., more than 15%) back from the domiciliary country.
Should you do something if the Netherlands does have a treaty?
Yes, often this is indicated at the broker what you should do then. With U.S. stocks, you have to fill out a form. America has a 30% tax rate on dividends, so if you fill out that form you will pay the agreed 15% at source. If you don’t fill out the form, you may report 15% to the Dutch tax authorities and must claim 15% back from the U.S. tax authorities. If you don’t get it back, so you have dividend leakage again.
Are you adjusting your investment strategy?
Only you can determine that for yourself. If you believe in the stock or ETF and the return to be achieved, even if the company is not based in the Netherlands and there is no treaty, you will probably go for that return anyway. This is because it’s really about a percentage of the dividend, so not price gain.
