Tax consequences

Tax consequences

The life of a Dividend Growth Investor is great. We look at the stock market long term. Most of the stocks go up in the long term and you get your dividends that keep on increasing. That is why we invest, isn’t it?

As most people know it is important to keep your costs low. High costs can eat into your profits a lot and that is not something we like. This means that most people are aware of costs associated with the purchase or sale of a stock. However, there is another type of costs that can eat a lot of your profits. It’s that evil thing called taxes!

Dividend taxes in the Netherlands

Before I continue let me explain a little bit about the Dutch tax system since I assume not all readers are aware of how it works. Let me start with the positive side of life. In the Netherlands we are not obligated to pay taxes over our dividends! That sounds great, doesn’t it? But well, as always, there is a catch.

Let me explain first what we do pay. We pay a wealth tax. This means that the government assumes we make a certain percentage over our money. And we pay taxes over that imaginary amount of money we make. In reality this results in the following:

  • We don’t pay taxes over the first € 30.000 of wealth we have
  • We pay 0,61% over the wealth we have from € 30.000 to € 100.800
  • We pay 1,30% over the wealth we have from € 100.800 tot € 978.000
  • We pay 1,61% over the wealth above € 978.000

Then onto our dividends. As you know companies withhold taxes. So that means we pay double taxes. First, we pay taxes over our dividends, then we pay the wealth tax also over the dividend money. Since this is not fair we can deduct a maximum of 15% dividend taxes on our yearly tax bill.

Great news, because in the US, Canada and the Netherlands we only pay 15% taxes so we get the complete taxes refunded because our wealth tax decreases with the amount of the dividend tax we paid!

The catch

So far the system is great. But like I said before, there is a catch. In a lot of European countries we pay more than 15% taxes because the government of the country has a different way of calculating taxes. The result is that we can only withhold 15% on our Dutch yearly tax form, so we still pay double taxes on a part of our dividend income. To avoid this the government made tax treaties with a LOT of countries. Those tax treaties say that the country is only allowed to withhold 15% for Dutch citizens. Sounds great, doesn’t it?

Well, the problem is that those countries still withhold the normal tax. They don’t know that the money goes to a Dutch citizen. Then we can ask the money back at the tax offices in the different countries. And there is the problem. It is really difficult to this and it’s a lot of work. If you don’t get hundreds or more back in Euro’s from a single country then it’s really not worth it. You can pay companies to do this for you, but they are expensive so it’s only worthwhile if you have a lot of money you can get back.

My problem

Now back to my portfolio. As I wrote about before I would love to add more European stocks. I found some stocks I like. For example Nestlé. However, those stocks have a problem. To use Nestlé as an example. They are located in Switzerland. Switzerland withholds 35% taxes. Yes, you read that right, 35%!!!

I can get a refund for 20%, but that is to hard, so I’m not going there. Giving away 20% of dividends is not worthwhile and therefore the company is not worthwhile for me. Although it has a great history and it looks like a great future as well.

Conclusion

This limits my possibility for European stocks a lot. And this is strange. It is perfectly arranged with the US and Canada but we can’t arrange it well in Europe itself. One Europe? Far from that. That is something they like to say in Brussel, but Europe is more divided than ever on a lot of fronts.

Do more people have experiences with this? How do you cope with this? Do you buy companies in countries with high dividend withholding taxes? Do you try to refund them if applicable for your country?

8 thoughts on “Tax consequences”

  1. Great post!
    I recognize this. I really dislike leaving money at the government. 😟
    But for US stocks my broker does all the work. They only withhold 15%
    I’m considering buying German stocks in the near future. My broker(BinckBank) told me I have to do it my self (everything above 15%). The same for Switzerland.
    What broker do you have, and do they do anything for you as investor?

    Cheers,

    Pollie

    1. Hej Pollie,

      Thank you for the post!
      I also use BinckBank. Not the cheapest, but good service and information.

      For the US you have filled the BEN form if I’m not mistaken. Then they keep it to 15% only. You can arrange the same for Canadian stocks with them.

      They indeed don’t do that for European countries. That is the big problem. There is no Dutch broker that does that. Only the “vermogensbeheer” banks. But you have to pay for that service so that doesn’t help.

      I own MUV2 in Germany. Withholding tax is 26,5% in Germany. Not nice, but at least almost 10% lower then in Switzerland. Switzerland is really to expensive. And I hate that because they have some great DGI stocks (Nestlé, Novartis, Roche if I”m not mistaken).

      I looked at US ADR’s because I thought they withdraw only 15%. But that is also not the case. For US investors, a lot of US brokers arrange the deducting process on ADR’s and that’s why US citizens only pay 15%. That wouldn’t work for us if we buy those ADR’s.

      Only solution is not to invest in a lot of countries……

      1. AHold is the only one for now. I really want some Unilever as well, since a lot(!) of articles in my home are from them. Ranging from shampoo to peanut butter! So its comforting to know I support my own dividend 😀

    1. I can’t be sure, but I think I have a simple answer to that. A lot of people do not ask their money back. That is extra money that stays in the pockets of the tax agencies of the different countries. They probably love it like this… As always, the average Joe is the one with the problem.

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