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dividend withholding tax for USA shares held by UK resident

I have just bought £50,000...
I have just bought £50,000 of USA dividend-paying shares with HSBC who processed W-8BEN & A & B forms for NYSE and Nasdaq so as to avoid me having to pay US tax on my dividend income as I am UK resident. I have also put £50,000 into a Hargreaves Lansdown SIPP and £30,000 into a non-tax-wrapped sharetrading account with them. HL refuse to process these US tax forms so I will have to pay US tax on dividend income. Is this just a management oversight on behalf of HL or is there a reason UK taxpayers would pay this US tax and not lose out in the UK on their balance of tax? My current thinking is simply to transfer out of HL and into a company that will allow the process of these USA tax forms but I am so confused now about what to do. Please help, it will be much appreciated!
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Answered in 3 hours by:
6/7/2009
Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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HelloCustomer

If you are a nonresident alien holding stock in the US, you are not subject to US tax on any capital gains realized from the sale of those stocks. However, dividends received from those stocks are taxable.

The dividends are taxable at a flat rate of 15% in accordance with the US/UK tax treaty. Refer to Article 10 which discusses taxation on dividends.

http://www.ustreas.gov/offices/tax-policy/library/uktreaty.pdf

If you have filled out the W-8BEN form and claimed your tax treaty benefits, then the investment firm should not be withholding more than 15% on the dividends you receive. If they are withholding more than that amount, you can file a tax return with the US at the end of the year on Form 1040NR used by nonresidents, and claim a refund for any excess amount which was withheld.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank youCustomer and let me know if you have more questions.

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Customer reply replied 8 years ago
Thanks Merlo, that clears it up a bit. As it stands I have submitted the W8-BEN form with one broker (HSBC) so that should be fine, as that will mean I have claimed my tax treaty benefits with them. I assumed the new broker I have chosen for my pension (Hargreaves Lansdown) would do the same but they refuse to handle these forms, so presumably, as you point out, investors must claim on a US tax return to claim a refund on excess tax held. This seems the least preferred option as it would make sense to set up stock purchasing with the treaty benefits handled at source (broker) so as not to have to sumbit a return to US tax authorities each year, not to mention the administrative hassle. A little further information would help to resolve my remaining issues and close this answer.

Can you explain how my dividends received with the new broker Hargreaves Lansdown, that will not handle these forms for me, will be taxed? Should I assume that the full 30% will be taken from these dividends and lost to me if I do not submit a US tax return annually to recover this? Further I also have a share trading account with this company, just like the HSBC one I hold, but I also have a SIPP (self invested personal pension) with them in which I can directly buy shares. Would the holdings within this pension wrapper be subject to any different tax consideration from the US perspective in comparison to my standard share trading holdings? I ask because I read the tax treaty that you referred to and it states:

3. Notwithstanding the provisions of paragraph 2 of this Article, dividends shall not be
taxed in the Contracting State of which the company paying the dividends is a resident if the beneficial owner of the dividends is a resident of the other Contracting State and either:
a) a company ....
b) a pension scheme, provided that such dividends are not derived from the
carrying on of a business, directly or indirectly, by such pension scheme.

This would seem to suggest that my pension holdings should be subject to zero tax. Or am I misunderstanding the text?

Many thanks for your attention in this matter.
Hello againCustomer

The dividends that you receive on stocks you hold through your personal pension would still be subject to tax. In paragraph #3 that you sited, when they refer to "pension scheme", they are referring to a company that offers a pension to its employees where contributions from the employee are not required. The zero percent tax does not apply to stocks you purchase through your own personal pension funds, so the 15% tax would still apply.


If Hargreaves Lansdown will not handle the W-8BEN forms, then they under US law they would withhold a full 30% tax on the dividends. They should still not withhold any tax on the sale of the shares, but only on dividends paid. If they do withhold at this higher rate of 30%, the only recourse you have to recoup the difference of 15% is by filing a tax return each year with the US. If you prefer not to deal with this paperwork, then you would just end up forfeiting the extra taxes which were withheld.

I think the best case scenario for you would be to find another broker who will handle the W-8BEN for you, as then they should withhold the appropriate tax of 15% and you would not have to be burdened with filing a US tax return to obtain a refund.

If this was helpful please press the Accept button. Positive feedback is also greatly appreciated.

Thank youCustomer and let me know if you need more help here.




Merlo
Merlo, Accountant
Category: Tax
Satisfied Customers: 9,783
Experience: 25+ years tax consulting. Specializing in returns for US citizens living abroad
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Customer reply replied 8 years ago
Merlo, ,many thanks, XXXXX XXXXX a gem! I've been searching for this info to get my head around it for weeks, so you've been a big help. Best regards XXXXX XXXXX newbie Brit who is most impressed with Justanswer.com, I'll be back!

Cheers,

Z
Thank youCustomerfor the kind words.

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