Witholding tax on dividends of foreign shares (US vs DE)

hoc

I am interested in buying some shares listed on multiple exchanges- for example a German company listed traded on ETR as well as listed as an ADR on NYSE.

I can purchase both through my broker (AJ Bell) and cost will be similar. Other than the longer term impact of underlying currency (USD or EUR) versus GBP, it seems the other thing to consider is the witholding tax on the dividend, because although my account is tax free (ISA S&S) I will lose a cut of the dividend before it reaches me.

Searching online on this topic, which hasn't been the easiest, it seems US listed is 30% and German listed is 30.5%, so forex aside the US listed is more advantageous to buying a German company's share? Is that correct?

Reckless_Saving

I don't know which one's better but I wouldn't be concerned about 0.5% difference, it's the currency exchange rate that swings widely that needs to be watched.

bowlhead99

hoc wrote: »

Other than the longer term impact of underlying currency (USD or EUR) versus GBP, it seems the other thing to consider is...

Reckless_Saving wrote: »

I wouldn't be concerned about 0.5% difference, it's the currency exchange rate that swings widely that needs to be watched.

The currency exchange rate between the two options is a complete red herring.

The US ADRs are simply a receipt that says that an american depositary is holding some shares in the german company for you. The price in dollars of those ADRs is implicitly the price in euros for the underlying shares that they represent, multiplied by the exchange rate of dollars to Euros.

So if the share price in Germany is EUR is €10, and the USD/EUR rate is 1.14, then the share price in USD is $11.40 (assuming each ADR represents one share, although sometimes they may represent five shares or ten shares or fifty shares or half a share each).

As a UK investor with exchange rates today of 1.265 EUR to the pound or 1.443 USD to the pound, you can choose to buy the €10 share for £7.90 or the $11.40 ADR for £7.90. The price is the same. The differences would just be if each US ADR did not represent exactly one German share, in which case one price would be some multiple of the other.

Let's say that Sterling strengthens against the Euro (so you get 1.5 Euros for a pound instead of 1.265 Euros) and the USD weakens against the Euro so that you get 2 USD for a Euro. Implicitly, you get $3 for a pound. And the German share has become more valuable so that it's valued on the German stockmarket at €15 a share instead of €10.

When you then look at the market prices:
The market price of the share on the German exchange is €15.
The market price of the ADR is $30 (fx rate $2 to the Eur).

If you try to sell your share in Germany you will get £10. (€1.5 to the pound)
If you try to sell your ADR in USA, you will get £10 ($3 to the pound)

So whichever you choose, it costs you £7.90 and whichever you choose, you sell it for £10. Your profit is driven by the return that the German company makes in Germany and the relative exchange rate between EUR and GBP.

The relative exchange rates between EUR and USD or between USD and GBP can be ignored; the dollar price of the US-listed receipt that represents an underlying German share is just a way of keeping score at a point in time. The underlying currency which is most important to your returns is EUR.

hoc wrote: »

Searching online on this topic, which hasn't been the easiest, it seems US listed is 30% and German listed is 30.5%, so forex aside the US listed is more advantageous to buying a German company's share? Is that correct?

Shares in US companies have a withholding rate for foreign investors of 30%. This can be reduced to 15% under the tax treaty between US and UK; your ISA provider would generally have you fill out a form to access that lower treaty rate if you were going to be investing ion the US stock market to access a US company like a Microsoft.

However, if you buy an ADR you are not buying shares in a US company like Microsoft which withholds 30% of its dividends to foreign investors and pays them over to the IRS. You are simply buying a receipt that says someone is holding a German share for you.

As such, there is no US source income to be withheld from you at 30% or 15% for the IRS. There is only German income to be withheld at German withholding rates for the German tax authority.

So, it shouldn't really matter whether you buy the ADR or the German share - it's a German company with the tax implications that go with owning a share in a German company, whichever exchange you buy it on.

As an aside, your estimate of 30.5% WHT on German shares is high. It will be less than that.

hoc

What a reply, thank you bowlhead.

Running through the details more carefully, I see what are saying about the USD forex not mattering in the equation. The ADR shares outstanding are 1 to 1 with the main share listed in Germany and therefore the price on NYSE in USD just reflects the USDEUR and follows the main share in Germany, so it becomes purely a matter of GBP-EUR long term. I understand.

Searching specifically on "ADR witholding tax", I did manage to find some articles which confirm these are not eligible for witholding tax reduction which is a shame as I'm with Youinvest who offers W8_BEN which would have reduced the rate from 30% to 15% (https://www.youinvest.co.uk/faq/do-you-reclaim-withholding-tax-overseas-dividends)

The 30.5% I mentioned for German WHT was from 25% base/flat + 5.5% but some sources site this 5.5% applied to the 25% instead, so 25% + (25%*5.5%) = 26.375% (e.g. http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-germanyhighlights-2016.pdf)

Most guides suggest there is no way for individuals to reduce this, only corporations which can reduce it to 15% (https://www.foreign-investments-in-germany.com/taxation).

However, one site I found (https://the-international-investor.com/investment-faq/reclaiming-withholding-tax-foreign-dividends) points to http://www.bzst.de/EN/Steuern_International/Kapitalertragsteuerentlastung/Kapitalertragsteuerentlastung_node.html and various forms here mentioning UK agreements: http://www.bzst.de/EN/Steuern_International/Kapitalertragsteuerentlastung/Auslaendische_Antragsteller/Formulare/KapSt_Ausl_Formulare_node.html

I haven't read through these documents, if you already know the answer please guide me in the correct direction.

Thank you

bowlhead99

hoc wrote: »

The 30.5% I mentioned for German WHT was from 25% base/flat + 5.5% but some sources site this 5.5% applied to the 25% instead, so 25% + (25%*5.5%) = 26.375%

Correct, the 'solidarity' additional rate is 5.5% applied to the 25% charge to give total 26.375.

As I understand it, with german divs you can't get the amount reduced to the treaty rate simply by signing a form as a one-off, you have to apply to the tax authority every time you're getting a dividend, to say you met the terms of the double tax treaty for that piece of income.

I'm not sure that individuals qualify and in your case it is further complicated by the fact that you are going through a broker's ISA nominee rather than owning the shares directly yourself and being within the scope of UK tax. It would be your broker that would need to complete any forms and get a stamp from HMRC to say that the income being received was subject to UK tax so shouldn't be taxed by the Germans at a high rate;; which might not wash when in fact it's not being taxed in the UK because of being in an ISA wrapper.

Either way it seems like it would be a lot of hassle for little gain. Say you have €1000 of German shares and they pay a dividend yield of 2% (€20). The withholding tax at 26.375% is €5.27. The withholding tax at 15% would only be €3. So the exposure to excess German tax is €2.27 or about £1.80 per year. Maybe split across an interim and final dividend in two separate chunks. For that amount I wouldn't want to bother to be stuck on hold with my broker to find someone who could help me and then fill out forms and post them off etc.

Obviously if you are investing €50,000 instead of €1000, and picked something that pays a 4% yield instead of 2%, then the total dividends is €2000 not €20 and the excess withholding above the 15% treaty rate is €227 not €2.27. At that point it would be worth investing some time talking to your broker or a tax advisor to find out if individuals holding German stocks via ISAs can claim back the excess withholding above 15%, because you would potentially be getting paid €227 to do so. Of course if it turns out you can't make a claim then you would be getting paid €0 for your time spent on research. So it's something that's worth pursuing if you have more meaningful amounts invested, IMHO.

Most of my European holdings are via investments trusts or other collective investment schemes and I'm only invested in one individual German company, Deutsche Bank. But I invested this year, after they had already announced they weren't paying any dividends for 2015 or 2016, so I haven't bothered looking into the small print of how German WHT works in respect of my SIPP or unwrapped holdings. As an aside, pensions are usually better than ISAs for avoiding tax because they're more internationally recognised as having a tax free status when it comes to tax treaties.