are there any negative dividend tax implications of investing in Eurozone shares of which I’m unaware?
We use US ETFS for our clients. Automatic 15% credit for DWT on ROSSuppose that a retiree with money to invest outside a tax-sheltered pension account, and who does not want to purchase either a UK investment trust (because of active management and high fees) or an ETF (because of the eight-year deemed disposal rule and possible estate-planning tax implications), were to implement a direct indexing strategy by seeking to track, say, the EURO STOXX Select Dividend 30 or the MSCI EMU High Dividend Yield index via individual stock purchases from a discount online broker. How much work, apart from possible periodic rebalancing, would such a strategy involve, given the complications entailed by dividend withholding taxes?
As far as I know, Ireland has a double taxation agreement in place with every country in the Eurozone. Given this—and the fact that (if I’m not mistaken) Ireland has the highest marginal dividend tax rate in Europe—am I right in thinking that none of the dividends received would be subject to double taxation, and thus that the total amount of tax paid on any dividends received would be the same as that paid on Irish dividends for an investor in the 40% tax bracket?
By way of a worked example, suppose the retiree received €100 in dividends on their holdings of a German stock. This is subject to German dividend withholding tax of 26.38% (25% plus a 5.5% “solidarity surcharge”). So their net dividend (before Irish tax) would be €73.62. When completing their Irish tax return, they would simply “gross-up” the after-tax dividends received back to €100, enter this amount in line 31 of Form 12, “Amount of gross Other Foreign Dividends,” and enter €26.38 in the “Foreign tax deducted (if any, and not refundable)” box below. Revenue would then deduct €40 income tax + (say) €4.50 USC + €0.00 PRSI (if they’re over 65) = €44.50 - a €26.38 credit for German tax = €18.12, so the total tax burden of €44.50 would be identical to that paid by an investor in the same 40% marginal tax bracket who receives Irish dividends?
In short, are there any negative dividend tax implications of investing in Eurozone shares of which I’m unaware? (I do realize that the marginal rate of tax on dividends is higher than the CGT rate of 33%.)
Thanks, AAAContributer! I'd forgotten about these refund procedure complications that you highlight, which certainly make investing in individual foreign shares from multiple countries a much less attractive option. On the plus side, it seems like there are moves afoot to streamline the process. Hopefully, the proposed new rules will come into effect on schedule:The difficulty is that it introduces more admin into the mix which I wouldn't discount as unlikely to be burdensome to your portfolio management and cashflow maximization.
In your example above, the German withholding tax will be 26.375%. As 11.375% is refundable from the Bundeszentralamt fur Steuern (German Federal Tax Office) by an Irish investor, only 15% (and not 26.375%) will be allowed by the Irish Revenue as a credit against the Irish income tax liability. It is up to the investor to chase up the refundable credit of 11.375% from the German tax authorities as otherwise there will be an element of double tax.
There has been historically long delays in the processing of German reclaims due to the dividend tax reclaim scandal that has been in the news there.
Similarly, Denmark applies 27% dividend withholding tax but Ireland will only offer a credit for 15% of this and it is up to the investor to chase up the 12%. I'm still waiting on a reclaim from several years ago. Similarly, the Danish system was subject to aggressive tax arbitrage trades (like Germany) that has caused it to completely overhaul their system and as a result it can be difficult getting timely reclaims processed.
Thanks, Marc! But what about the issue of the low $60,000 estate tax threshold on US-situated assets for nonresident non-US citizens, above which taxes of from 18% to 40% apply?We use US ETFS for our clients. Automatic 15% credit for DWT on ROS
Simples
Several ways to deal with US estate taxThanks, Marc! But what about the issue of the low $60,000 estate tax threshold on US-situated assets for nonresident non-US citizens, above which taxes of from 18% to 40% apply?
My understanding is that under the terms of the tax treaty between the US and Ireland, Revenue grants a tax credit for US estate taxes paid against any Irish CAT liability, but if there was no such liability, because the value of the bequest was between the US estate tax threshold of $60,000 and the Irish group A CAT threshold of €335,000—or if a large bequest fell into one of the higher US estate tax brackets, and thus the US estate tax due exceeded the Irish CAT due—that could result in significant additional taxes being owed.
I guess that some kind of plan could be put in place to avoid having to pay those taxes by disposing of the ETFs before death, but since "you know neither the day nor the hour," holding over $60,000 worth of US ETFs would seem to be highly risky in some cases, especially for older persons hoping to leave either a relatively modest or a sizeable legacy...
6 months either side?As a last resort within 6 months of death survivor can transfer US assets to a US trust
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