To the point 

Global withholding tax (WHT) compliance is becoming increasingly complex. While many sovereign wealth funds (SWFs) benefit from exemptions and favorable double tax treaties, achieving these benefits is not only reliant on eligibility, but managing operational processes. Scrutiny of WHT relief claims is intensifying globally, and technology is transforming capabilities in house and at tax authorities. As a result, SWFs investing in international public markets must be proactive in determining how they respond.

Introduction 

The global landscape for sovereign wealth funds (SWFs) is undergoing a period of significant transformation driven by a complex interplay of economic pressures, technological advancements, and evolving international regulatory frameworks. Each source country has its own rules and requirements that continue to change, and this lack of harmonization and stability makes it difficult to implement a consistent, proactive, and strategic approach across the SWFs’ holdings.

Thus, to optimize investment returns, SWFs must approach today’s global tax landscape with care. In some jurisdictions, like the United States, claiming withholding taxes (WHT) relief can be as simple as submitting a single form to obtain relief at source. However, in other countries, particularly across Europe, claiming relief may involve lengthy and intricate processes, often only resulting in partial refunds of withheld tax. Naturally, managing these tax processes has become a growing operational challenge.

This article provides a snapshot of the five key forces influencing the current environment for SWFs in the public markets space as well as thoughts for the future.

Governments acting to attract overseas capital

On the one hand, many governments actively court foreign investment. This can happen in many ways, including tax exemptions, reduced WHT rates, and streamlined processes for claiming tax relief. In a public consultation published by the European Commission in 2023, 89% of respondents strongly agreed that WHT refund processes are hindering cross-border investment in the EU¹. As such, streamlining measures could position a country as a favorable investment destination, attracting capital flows that can stimulate economic activity and create jobs.

China provides a relatively recent example of this in the public markets space. In 2024, with the intention of promoting foreign investment, China introduced a new WHT relief-at-source system for qualified foreign institutional investors, which specifically applied to their A Share investments. This streamlined the application of double tax treaty relief, reducing the significant administrative and cost burdens of the previously complex WHT reclaim process.

On the other hand, many governments are looking to increase tax revenues and strengthen anti-avoidance legislation. This leads to increasing scrutiny of WHT relief claims, and enhanced documentation requirements in many markets.

This duality can present a complex challenge for SWFs to manage WHT in global portfolios. It is particularly relevant for SWFs in the public markets space, where listed assets will often form a significant portion of their global portfolio. Further complexity arises for SWFs that also operate securities lending programs. Simply reacting to changes in tax legislation is no longer sufficient; a proactive and strategic approach is essential.

Scrutiny of beneficial ownership

We have recently seen a surge in high-profile financial scandals.  The German Cum/Ex and Cum/Cum scandals led to an estimated tax revenue loss of approximately US$9.8 billion and US$152.3 billion, respectively², and a WHT fraud case in Denmark resulted in losses of approximately US$1.84 billion³. Both events have highlighted potential vulnerabilities in international WHT systems, leading some governments to act swiftly with a decisive range of new measures aimed at improving transparency, strengthening compliance requirements, and increasing the burden of proof on taxpayers claiming tax relief.

These responses could also include a significant tightening of rules related to beneficial ownership. We have seen some tax authorities demanding greater transparency regarding the ultimate beneficial owners of investments. This strengthens the emphasis on demonstrating economic ownership and thus requires robust due diligence processes and meticulous record-keeping.

We have also seen a marked shift in the burden of proof in some countries. Previously, many tax authorities often bore the burden of proving that tax relief was not legitimately due. Now, however, investors are increasingly required to proactively demonstrate their entitlement to tax relief, providing substantial evidence to support their claims. This can also significantly increase the compliance cost and demand more rigorous documentation and record-keeping.

The role of custodians and advisors

SWFs employ the services of custodian banks to hold and operate their global public market investments. As part of their service, custodians typically offer tax relief and reclaim support. This is predominantly provided in markets where there are clear and mature procedures in place for the application of tax relief; otherwise, local tax advisors can be required.

Considering the developments we are seeing from tax authorities—whether relief applications are being made via the custodian, or independently with external tax advice—SWFs should anticipate increasingly onerous documentation requirements from authorities for the service they are receiving.

Coordination across what might be multiple custodians, internal teams, and advisors involved in WHT management is another challenge, involving the management of deadlines for reclaims, responses to tax authority inquiries, and gathering the required information. In some cases, a claim may have been made many years in the past before it is processed, and questions are raised. As a result, as tax authority audits and questions become more common, SWFs should be prepared to defend exemption positions and reclaims made in real time. This requires the right records, governance, and processes in place, and easy access to data and documentation held internally or by their custodians.

Transparency of tax reporting and oversight

Layered on top of the above, the international cooperation between tax authorities has improved noticeably. This collaborative approach can reduce tax avoidance as well as increase the efficiency and accuracy of both compliance and enforcement.

Global information reporting initiatives, like the Foreign Account Tax Compliance Act, Common Reporting Standard, and Mandatory Disclosure Regime, are providing tax authorities with significantly enhanced capabilities, especially when coupled with increased use of data analytics and AI. The sheer volume of data available to tax authorities is increasing exponentially, allowing for more sophisticated analysis and targeted audits. A recent practical example can be seen in Austria, where their Predictive Analytics Competence Centre utilized predictive analytics and AI to analyze 6.5 million cases across a range of taxes and recovered approximately US$214 million in tax revenue for 2023⁴.

Regarding WHT specifically, legacy systems in the EU have been struggling on several fronts. After launching their public consultation, the European Commission found that for over half of the organizations surveyed it could take over two years for WHT to be refunded. Smaller scale investors often suffered disproportionately, leading to 70% of retail investors rejecting the opportunity to claim reduced WHT rates to which they were entitled⁵.

In response to these findings, the European Commission is introducing a multi-national Faster and Safer Relief of Excess Withholding Taxes initiative⁶; this will introduce more digitization, more reporting and diligence obligations for intermediaries, and implementation of fast track WHT reclaim procedures from 2030. The practical impact of this on SWFs, however, will not become fully clear until EU member states begin to implement new rules.

Use of technology

To effectively navigate this complex and rapidly evolving environment, technology is key. Automated systems for data management, reporting, and tax reclaim processes can all make a real difference to the level of manual work required. AI-powered data checks, automated form population and monitoring, and tracking WHT positions in real time can reduce the risk of missed reclaim opportunities. Tax data can also be integrated into broader portfolio management tools to provide greater investment insights.

Emerging technologies are expected to reshape the future WHT landscape as tax authorities advance their digitization efforts, enabling more sophistication in auditing claims and assessing critical areas like substance and beneficial ownership.

Conclusion

It will be a combination of governance, technology, and a forward-looking outlook that can reduce tax leakage and transform operational complexity. For SWFs operating in this sector, significant long-term value can be gained from the following:

• Centralizing WHT governance and introducing processes that ensure they are receiving any relief to which they are entitled.
• Developing robust systems, controls, and audit readiness to respond to increasing scrutiny from tax authorities, particularly where securities lending programs are in use.
• Considering existing compliance bottlenecks, and seeking out opportunities to introduce future-proof, scalable, tech-enabled solutions to combat these.

Regardless of the chosen approach, one thing is clear: Managing WHT in an increasingly complex global WHT landscape for public markets investments is no longer simply a back-office function, but a key part of preserving investment returns. The most effective SWFs in this space will be those that treat WHT as a strategic capability, rather than a simple compliance process.