Sapec SA offering attractive tax arbitrage opportunity

Sapec SA is a Belgian holding company that sold their main asset last year, and is going to pay out the majority of the proceeds using a dividend of €150/share. After the dividend is paid some additional cash and some small stakes in various businesses will remain in the holding company with a total book value of €41.60/share. Assuming a 30% holding company discount the stub should be worth roughly €30/share. So if there wouldn’t be dividend taxes you would expect that Sapec would currently be trading at roughly €180/share.

Unfortunately for many investors there are dividend taxes, and in case of Belgium these are a hefty 30 percent. Because of that the stock is trading at just €152.50/share which offers an opportunity for investors who can reclaim some of these taxes and/or use paid dividend taxes as a tax deductible. The author of the “value and opportunity” blog who has been following this situation for some time, discusses here how German investors can get around the tax issue.

Dutch investors have a similar opportunity. There is a double taxation treaty with Belgium that makes it possible to reclaim 15% of the dividend taxes from Belgium (I think most countries have this, but reclaiming the tax might not be equally easy for all countries). From what I have read the procedure isn’t that complicated, although it requires some paperwork and patience. Apparently it can take more than a year before Belgium repays the 15% of the dividend taxes. The other 15% of the dividend taxes can be used as a tax credit against the annual Dutch wealth tax. So you have to be careful not to buy a too big position because then can’t fully deduct it from your Dutch taxes (it’s possible to carry the remaining tax forward to the next year, but this add some complications that makes it not attractive for me). So the trade would look like this:

DateCash flowDescription
5/23/2017-152.50Buy Sapec SA
8/20/2017+105.00Payment dividend (estimated date)
8/20/2017+30.00Sell Sapec SA sub (estimated value, estimated date)
6/30/2018+22.50Use tax credit to offset Dutch wealth tax (estimated date)
12/31/2018+22.50Receive Belgium tax reclaim (estimated date)
 IRR 40.78%

As you can see the internal rate of return of this trade is more than excellent! It’s a bit sad though for Belgium investors. Sapec is a Belgium company, and they are the ones who have no way to avoid paying the tax. The company promised to research options to return capital in a tax efficient manner for small shareholders (the big holders don’t have to pay dividend taxes), but in they end they choose the worst option possible for retail investors.

Disclosure

Author is long Sapec SA

22 thoughts on “Sapec SA offering attractive tax arbitrage opportunity

  1. woyzeck

    Great post. Thanks for sharing. Are you aware of any minimum amounts required for the tax reclaim? Have you bought through Binck or Interactive Brokers and do you believe that will have any impact on the reclaim process?

    Reply
    1. Alpha Vulture Post author

      As far as I understand reclaiming Belgian withholding taxes doesn’t necessarily require cooperation from your broker (just a statement showing the dividend payment should be sufficient), but it could have an impact if they request a more formal prove. I know that Binck can provide that if necessary while I’m not sure about IB. I have my position with IB, but might transfer it… not yet sure what will be best.

      Reply
      1. 60North Investments

        Many thanks for this idea too AV! Anyone have for example a link to the Belgian tax authorities page where one could find the form that needs to be filled to reclaim the excess tax? Would be nice to know the process beforehand. Thanks!

        Reply
    1. Rupert

      I am not a lawyer but my interpretation of https://www.gov.uk/government/publications/belgium-tax-treaties 2012:

      “1. Dividends paid by a company which is a resident of a Contracting State to a resident of
      the other Contracting State may be taxed in that other State.

      2. However, such dividends may also be taxed in the Contracting State of which the
      company paying the dividends is a resident and according to the laws of that State, but if the
      beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed 10 per cent of the gross amount of the dividends.”

      is that a maximum of 10% tax will be charged to UK residents earnings dividends on Belgian shares. Let me know what your interpretation is!

      Reply
      1. Alex

        Hi Rupert,
        I read the double tax treaty too and my interpretation is 10% too.
        Also in my experience, this adjustment is processed automatically by the broker and no application to reclaim taxes is necessary in the UK. This is how it has worked with Swiss and US stocks, I have not had dividend receipts from Belgium stocks yet.
        Have you had dividend receipts from mainland Europe stocks Rupert? What was the with holding? Most tax treaties with European countries allow for 15% WHT.
        Alex

        Reply
        1. Alex

          I think I found the answer. Countries with which the UK (or other countries) automatically exchanges tax information do not with hold the full amount if there is a tax treaty in place. This applies to most EU countries. BUT

          “Three Member States – Austria, Belgium and Luxembourg – will, as an alternative to exchanging information from the outset, apply a withholding tax during a transitional period”

          https://www.gov.uk/government/publications/european-union-savings-directive-eusd/european-union-savings-directive-eusd-exchange-of-information-and-witholding-tax

          Reply
          1. Alex

            Apologies for the running commentary: IB have confirmed to me that the depositary handles the WHT and they do not recognise the DTT. Hence, if you live in the UK, it will be 30% and you have to reclaim it which will take 11 months.

  2. Cardano

    I am afraid the IRR is heavily overestimated. 180/152 is more of a 19 % irr, without time/risk effects are priced in

    Reply
      1. woyzeck

        Exactly, you have to factor in the timing. I get to 48,7% based on the current price 😉

        Thanks for sharing the link to the tax authorities. When will you submit the tax forms?

        Reply
      2. Cardano

        True. I underestimated the big portion of CFs (>0) arriving very soon, which changes the whole story. :-s

        Errare humanum est.

        Reply
      1. John Legend

        Or double it. I don’t think anyone here can predict FX. Not hard or expensive to hedge EURUSD anyway, so FX not really an issue is my view.

        Reply
  3. Asa

    Very interesting.
    What about trying to buy the stock at the market after the distribution day of the dividend at 2.5-10 euro per share? (shouldn’t the price go directly to 2.5 euro after the distribution?). Eccording to your theaory, the price of the stock should climbe very quickly to 30 euro. And if that wan’t happen, the all move wouldn’t be profitable.

    Reply
  4. Friuli

    Trading price ex divi isn’t likely to be pre-divi price minus dividend. All depends on what the next match is between what a buyer is willing to pay and a seller is willing to accept

    Reply
    1. Alpha Vulture Post author

      Yes, great news! A bit unfortunate that I wanted to increase my position this week and then the trading halt made that impossible. Could have been so much better…

      Reply

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