etoro share trading, withholding tax and agreements

RyanONeill1970

I'm looking to purchase some US shares traded on NASDAQ for a long term investment and I'd like to understand how etoro manages withholding tax and other legalities.

Separately, I've researched a stocks and shares ISA from Halifax and I see I would need to sign an 'NYSE Share Subscriber Agreement' and fill out a 'W-8BEN' form for withholding tax.

I can't find anything on the etoro site regarding 'withholding', 'subscriber agreement' or even 'W-8BEN' though.

I believe etoro will sign the 'NYSE Share Subscriber Agreement' on my behalf as they'll be holding the shares and know I am in the UK.

But what about the W-8BEN? Who declares the income to the UK government from the sale of these shares, me or etoro? They have my National Insurance number so I suppose they could. But again, it is vague.

Any insight would be much appreciated.

Regards

Ryan

bowlhead99

I would assume they don't try to minimise your withholding taxes through a proper W8BEN tax treaty claim process (which could reduce your US tax on the income to 15%), because it is a hassle for them, and instead they just expose you to the standard 30% withholding on US shares. As they offer fractional shares to investors, a single share of (e.g.) Microsoft could be beneficially owned by multiple individuals and they are not going to faff about calculating a blended weighted average withholding rate in real time. They are offering a simple execution-only service to give you exposure to the assets at rock-bottom prices.

For US tax compliance they are aware that they should obtain a W8BEN form from you and put it on their files in order to be able to act as a broker/nominee for investments onto the US stock market. So they allow you to electronically sign one, the first time you try to buy stocks. However, when they autofill the form based on the personal information they gave you, they only fill out the 'beneficial owner identification' section and don't actually complete the tax treaty claim section "I certify that the beneficial owner is a resident of ______ within the meaning of the income tax treaty between the United States and that country.", and there is no way to do it manually.

Unhelpfully, as part of the exercise to electronically sign the form, they flash up a popup with a footnote saying "*eToro does not provide a service of claiming treaty benefits and reduced rate of withholding tax for clients. If you require such service, contact the IRS directly".

But the IRS can not provide you with a service of reducing your withholding rate because the withholding is done by the payer of the income (the US withholding agent), and will be based only on the records that the agent receives from eToro UK. What you could do is contact the IRS at the end of the tax year and fill out a US tax return as a nonresident alien who has received US dividend income of $x and suffered US withholding tax of $0.3x, and you wish to claim your benefits under the UK-US tax treaty for the dividends to be taxed by the US at $0.15x instead, so the IRS owes you the excess back. If the IRS believe you, you would be able to get a US dollar cheque in the post for the $0.15x, which (assuming you don't have a dollar bank account which accepts cheques), you would then have to pay a fee at a UK bank to cash and convert to pounds.

That is much more of a faff than if you had just used Halifax to buy the stocks and make the treaty claim on your behalf using the properly-completed W8BEN form they have on file, and only expose you to the correct 15% withholding rate in the first place. Also, Halifax and other brokers can offer UK ISA or pension wrappers which will shield you from UK taxes on income and gains, which eToro won't.

You may misunderstand taxes generally if you are asking in this context "Who declares the income to the UK government from the sale of these shares, me or etoro?".

Firstly a US withholding form (W8BEN) in the context of a brokerage account is to do with US withholding taxes on US source investment income, and is nothing to do with your UK tax bill.

Secondly unless your business is sharetrading you are unlikely to have an income to declare 'from the sale of these shares'. Selling a share for more than you paid for it (or less than you paid for it) gives rise to capital gain (or capital loss), rather than income or income losses. In the context of investing, 'income' to declare to HMRC means dividends and interest received (or property income distributions from REITs), during (or shortly after) your ownership of the shares. Not at a point of sale.

It is always the responsibility of the taxpayer to inform HMRC about income and gains received. If you tell them about foreign taxes suffered on the income, you can generally claim relief from that amount of UK income taxes on the same income, although foreign income taxes will not reduce UK gains taxes.

If you were a non-UK resident who held an account with eToro UK, they would share your income and capital proceeds information with HMRC to allow HMRC to share it with your home country tax authority as required by international law. If you are solely a UK resident they will only provide information to HMRC to the extent HMRC requests it. Whether or not they provide information to HMRC does not absolve you of the requirement to report your taxable income and gains to HMRC. It simply changes the risk of your getting caught for not doing so.

eToro say that taxes are the customers' own responsibility and they do not provide tax reports. They do provide an account statement which could be used to figure out what you paid for what and when, what disposals you made of what and when, and what income was credited to your account from time to time.