Monitoring Foreign Capital Gains Tax Exposure for RICs

Contact: Gordy Jones

The obligation for registered investment companies (RICs) to pay foreign capital gains tax is not new by any means, but it is gaining more attention lately, making it imperative for fund management to take note.

Foreign tax withholding on interest and dividends has been and continues to be the responsibility of the fund custodian, monitoring and remitting taxes based on a specific country’s legislation. Foreign capital gains tax, on the other hand, traditionally has been the responsibility of fund management. The custodian is not responsible for tracking tax basis of investments; therefore, it does not have the information to appropriately pay the foreign capital gains tax.

However, fund management may find it challenging to determine the amount of tax due and actually remit it to the appropriate taxing authority, as many foreign countries previously did not enforce foreign capital gains tax obligations. As a result, many do not have a means by which these taxes can be remitted — meaning having an office in charge of collection or forms to submit — making the administrative aspect of paying the tax a challenge. Consequently, paying the foreign capital gains tax often falls pretty low on the priority list for many funds. But lately, many foreign countries with the tax in place are viewing it in a different light, seeing it as an untapped and much-needed source of income. As such, the risk of being penalized is increasing for funds not paying their fair share.