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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22661
Experience:  Taxes, Immigration, Labor Relations
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Whats the difference between Withholding Tax and Tax bond

Resolved Question:

What's the difference between 'Withholding Tax' and 'Tax bond' ?
What is the amount (%) of these 2 taxes in regards XXXXX XXXXX income ?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
Are you asking about US tax issues or tax issues in Romania?

Customer:

Hello

Customer:

The broker is asking for this taxes as payable in US by me, a romanian citizen.

Customer:

I'm not familiar with tax regulations in US and I want to double check their statement.

LEV :

Let me verify...

Customer:

ok

LEV :

So - you are a nonresident alien - and according to US tax laws - you are only taxed on income from US sources. When you receive an income - the withholding agent is required to withhold taxes. The purposes of withholding is to cover your possible tax liability. If for any reason the amount withheld is more than your actual tax liability - you may file your tax return - calculate your actual tax liability and request the overpayment to be refunded.

LEV :

Now - income might be taxed differently depending if that is an effectively connected income (ECI) or not. NOT effectively connected income - as it seems in your case it generally taxed at flat rate 30% unless the tax treaty with your country of residence overrides that tax law in this case.

Customer:

is there any tax treaty between US and Romania stating that the rate is 15% instead of the mentioned 30% ?

LEV :

Here is the tax treaty agreement between the US and Romania - www.irs.gov/pub/irs-trty/romania.pdf
Here is the IRS publication about withholding requirements - www.irs.gov/pub/irs-pdf/p515.pdf

LEV :

See page 41 - so withholding on dividends is 10%

LEV :

To claim tax treaty benefits - you need to sign this form -


http://www.irs.gov/pub/irs-pdf/iw8ben.pdf - and provide it to your withholding agent - in your situation - the broker.

Customer:

I already signed W8(BEN) form at the beginning of our tradings

Customer:

so, it sounds OK

Customer:

first, the broker asked for a withholding tax of 30%, later on only 15% as tax bond

LEV :

For capital gains (in case you sell shares on your brockerage account) - it is not taxable - see page 15 - http://www.irs.gov/pub/irs-trty/romania.pdf


ARTICLE 13 Capital Gains


(1) A resident of one of the Contracting States shall be exempt from tax by the other Contracting


State on gains from the sale, exchange, or other disposition of capital assets (whether acquired by


inheritance, gift, or any other manner) unless-


(a) The recipient of the gain, being a resident of one of the Contracting States, has a


permanent establishment in the other Contracting State and the property giving rise to the gain is


effectively connected with such permanent establishment, or


(b) The recipient of the gain, being an individual who is a resident of one of the


Contracting States is present in the other Contracting State for a period or periods aggregating


183 days or more during the taxable year.
So - I am not clear wher 15% came from?

Customer:

me neither

LEV :

I suggest talking with your broker again and pointing into the tax treaty - asking not to withhold from capital gains and withhold only 10% from dividends. .
In case the broker will refuse - you will need to file the tax return and request a refund from the IRS.
So far - these are only options.

Customer:

could it be that the document http://www.irs.gov/pub/irs-trty/romania.pdf is very old (from 1974) and there is an update somewhere with 15% ?

LEV :

This is the only document and it is in effect and it is listed on the IRS website.
See here - http://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z
So "very old" is not an issue here.

Customer:

ok, last question to this topic:

LEV :

sure go ahead. You may also came back later if needed.

Customer:

my broker says:

Customer:

The procedure is as follows:


- The tax bond is posted by yourself. Your funds will be held for 10 (ten) days.


- Within 10 (ten) days you will receive the liquid value on the account.


- Within 21 (twenty one) days you will receive the tax bond plus the clearance certificate.


- All business is concluded.

Customer:

sounds familiar / legal (no scam) to you ?

LEV :

I do not think that the tax bond is applicable in your situation..
However - the broker seems as do not want to take a risk related to their decision.
In your situation - you do not have any choice.
Also - I am not clear what do they mean under the clearance certificate.
Your position is clear - no withhold on capital gains and 10% on dividends - according to the tax treaty.
I suggest insisting and try to convince the broker (or his manager if needed).
But if the money will be withheld and remitted to the IRS - they are not lost - you still will be able to claim a refund - but there will be some overhead for filing the tax return.

Customer:

ok, understood.

Customer:

Thank you so much for now

LEV :

The tax bond is kind-of a security deposit but it should be held by taxing authorities - not by third party. So - fro you - that is just another type of security - that the broker will held in escrow account and will release after some internal approval (I guess) - but that is not the tax bond because the money are not going to the IRS. This is how I understand the situation based on your information.

Customer:

hmm ... good to know that, too

Customer:

again, thank you

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22661
Experience: Taxes, Immigration, Labor Relations
Lev and 3 other Tax Specialists are ready to help you
Expert:  Lev replied 1 year ago.

Some additional information about tax bonds or so-called "tax surety bonds"

Those are used by taxing authorities to insure future tax revenue - that is not a tax paid or withheld - but the amount held on the escrow account which serves as a security deposit.

Some examples for illustration.

1. The US taxpayer claims foreign tax credit for taxes paid in a foreign country. In some situations because of limited ability to verify foreign payments - the IRS requires that another reputable US entity provides financial guarantee for the taxpayer. Here is the form to use http://www.irs.gov/pub/irs-access/f1117_accessible.pdf

2. The US retailer applies fro the liquor license - but local taxing authorities usually require a special "Alcohol Tax Bonds" as a condition - which is a financial guarantee of compliance with laws governing the sale alcohol.
See example - http://dort.mo.gov/tax/calculators/bond/

These are for illustration only just to get understanding of situations required tax bonds.

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