Withholding Tax Leakage

Investing in Income Producing Assets, means we as investors are exposed to withholding tax leakage.

As ETP focused Investors, potentially even more so. Let me explain!

Investor into an Exchange Traded Product like a Dividend focused ETP, are struck by withholding tax twice, first from withholding tax from the Country of domicile for the dividend paying Companies in the Index, then secondly from withholding tax between the Fund domicile and the Investor, before the proceeds finally arrive at our account, subject to yet a third level of taxation.

Proceeds are therefore a function of where the Fund is domiciled and the double taxation treaties between that domicile and investors. And the same between the Companies the fund invest into and the Fund domicile.

The most tax-optimal Fund is therefore different for a US based investor, than say someone tax liable in UK. Below I have listed the withholding tax rates ascending from the perspective of a Luxembourg investor. (A popular fund domicile.

 
As you can see some countries will withhold more than a third of the proceeds, the combined effect on implicit fund expenses can be more than the TER on a passive ETP.
 
So it pays to analyze where the fund invest, if the investment mandate is locked into specific countries, so as not to suffer from tax-leakage drift. 
 
Perhaps it is wiser to simply construct a sub-portfolio of Country specific Income funds, with a low implied Tax-leakage, at least one knows where one stands. Notice the Countries with substantial withholding headwind, tend to be developed countries.