When investing in ETFs, it's important to understand the potential impact of withholding tax:
- Withholding Tax: Some countries deduct tax at source on dividends paid to foreign investors. This means the tax is deducted from the dividend before it’s paid, meaning investors receive less than the full dividend.
- Double Taxation Agreements: The UK has agreements with many countries to reduce or eliminate withholding tax.
Withholding Tax and ETFs
Even when buying a single ETF, that fund may hold many international investments- and withholding tax is still applied at the fund level when those underlying companies pay dividends.
Example:
- You invest in an Irish-domiciled ETF (like iShares S&P 500 UCITS ETF – CSP1) which holds US stocks.
- The US imposes a 15% withholding tax on dividends going to Irish funds (thanks to the US–Ireland tax treaty).
- So, if Apple pays a $1 dividend, only $0.85 reaches the ETF.
You, the investor, don’t see the tax directly- but it reduces the income the ETF receives and therefore what it can pay out or reinvest.
This means the effect of withholding tax is typically reflected in the ETF's performance. For specific details, consult the ETF provider's documentation.
Note: Tax treatment depends on individual circumstances and may change. Seek professional advice if unsure.