Securities lending is often used to “optimise” post-tax dividend rates, particularly within Europe. For example, according to the “Introduction to Securities Lending” published by ISLA, “an offshore lender that would normally receive 75% of a German dividend and incur 25% withholding tax could lend the security to a borrower that, in turn, could sell it to a German investor who was able to obtain a tax credit rather than incur withholding tax. If the offshore lender claimed 95% of the dividend, it would be making a significant pick-up (20% of the dividend yield).”
ETF and index providers may make use of such tax arbitrage “earnings” to improve fund performance, but they are under no contractual obligation to credit any such earnings to their funds if they track an index version that assumes a worse tax outcome.