The Ministry of Finance and Economy(MOFE) in Korea has proposed waiving withholding tax on manufactured dividends used in securities lending transactions between foreign counterparties, irrespective of whether the borrower holds the borrowed securities on the dividend record date or not.
At present, borrowers do not have to pay 100% of manufactured dividends via the Korea Securities Depository(KSD) if they can prove that they were not actually holding the stock on the record date. Instead, they can pay dividends net of tax to the KSD, which passes the net amount back to the lender without any further tax being withheld. But if the borrower does hold assets on the record date, he has to pay withholding tax on behalf of the lender, while the beneficial owner continues to receive the net dividend from the KSD.
“If this measure is implemented, the borrower will not need to pay any withholding tax on manufactured dividends regardless of its holding status as of the record date in cases of securities lending transactions between foreign investors,” says a spokesman for Citigroup in Seoul. “Which could save borrowers costs.”