Withholding Tax

tichtich

Hi. I've just transferred my SIPP from Vanguard to Interactive Investor, so that i can have a greater range of investment options, including individual shares. In doing so I've discovered the wonderful world of Withholding Tax (something I hadn't thought about before). For anyone else who's new to the subject, this is tax on dividends in foreign countries, withheld at source.

I've done some research, and understand the basics, but still have some questions. The first two are rather specialised, so bonus points to anyone who knows the answers. ;-)

1. I don't need to pay any withholding tax on dividends on US shares (in a SIPP), but I do on Canadian shares. It's possible to buy some Canadian shares on the NYSE, such as Agnico Eagle (TSE:AEM, NYSE:AEM). Can I avoid any withholding tax on a Canadian share by buying it on the NYSE?

2. AJ Bell YouInvest (unlike Interactive Investor) provides the option of using a Canadian NR-301 form to prevent deduction of withholding tax at source (similar to the US W8-BEN form). What I'm not sure about is whether this will prevent ALL withholding tax in a SIPP (as in the US case) or will it only prevent the 10% reclaimable tax? If it prevents all the tax, I might open an additional SIPP in YouInvest just for holding Canadian shares.

3. This is more asking for confirmation than a question. As I understand it, withholding tax of 15% is deducted rom dividends on shares in ETFs (on the London Stock Exchange). At least, that's for ETFs domiciled in Ireland; maybe it's different for some other domiciles. I'm not sure whether it's deducted at source or by the ETF, but either way it's irretrievably lost to the ETF holder. If that's correct, this seems like an extra reason to buy U.S. shares directly, rather than holding them via an ETF. (Of course there are still reasons why you might prefer an ETF.)

4. This is nothing to do with withholding tax, but I might as well ask it while I'm here. Some ETFs on the London Stock Exchange are denominated in USD. In some cases there are even 2 ETFs from the same provider tracking the same index (I think), with one denominated in GBP and the other in USD. For example, XLEP and XLES. What difference does this make? As far as I can tell, I pay in GBP (with no explicit currency conversion) even if I buy the USD version.

Thanks in advance for any answers.

masonic

tichtich said:

1. I don't need to pay any withholding tax on dividends on US shares (in a SIPP), but I do on Canadian shares. It's possible to buy some Canadian shares on the NYSE, such as Agnico Eagle (TSE:AEM, NYSE:AEM). Can I avoid any withholding tax on a Canadian share by buying it on the NYSE?

If a share is listed on NYSE, then it is a US share not a Canadian share, even if the company is Canadian. Such companies will have more than one legal identity.

tichtich said:
2. AJ Bell YouInvest (unlike Interactive Investor) provides the option of using a Canadian NR-301 form to prevent deduction of withholding tax at source (similar to the US W8-BEN form). What I'm not sure about is whether this will prevent ALL withholding tax in a SIPP (as in the US case) or will it only prevent the 10% reclaimable tax? If it prevents all the tax, I might open an additional SIPP in YouInvest just for holding Canadian shares.

The page here seems clear: https://www.youinvest.co.uk/faq/do-you-reclaim-withholding-tax-overseas-dividends

These forms are not needed for SIPPs. For US shares, they are exempt from US WHT in a SIPP while for Canada the rate is reduced.

tichtich said:

3. This is more asking for confirmation than a question. As I understand it, withholding tax of 15% is deducted rom dividends on shares in ETFs (on the London Stock Exchange). At least, that's for ETFs domiciled in Ireland; maybe it's different for some other domiciles. I'm not sure whether it's deducted at source or by the ETF, but either way it's irretrievably lost to the ETF holder. If that's correct, this seems like an extra reason to buy U.S. shares directly, rather than holding them via an ETF. (Of course there are still reasons why you might prefer an ETF.)

This is news to me. Why would a (for example) FTSE All share ETF domiciled in Ireland withhold any tax from UK investors? Perhaps you are confusing the specific US withholding tax that applies to ETFs investing there with one applying to non-UK domiciled ETFs in general. There isn't (as far as I'm aware) any Irish withholding taxes on ETFs domiciled there. There may be withholding taxes applied to the dividends of the underlying shares before they are received into the ETF.

Edit: some brokers can recover the withholding tax deducted from US dividends received into an ETF if you are holding the ETF in a SIPP. There is also the option of holding a US listed ETF in a SIPP.

tichtich said:

4. This is nothing to do with withholding tax, but I might as well ask it while I'm here. Some ETFs on the London Stock Exchange are denominated in USD. In some cases there are even 2 ETFs from the same provider tracking the same index (I think), with one denominated in GBP and the other in USD. For example, XLEP and XLES. What difference does this make? As far as I can tell, I pay in GBP (with no explicit currency conversion) even if I buy the USD version.

The difference it makes is that your broker doesn't have to do a fx conversion when you buy and sell, this is handled within the ETF. It is usually cheaper to trade in the GBP share class of an ETF. Distributions may still be in USD.

tichtich

Thanks for the reply, masonic.

If a share is listed on NYSE, then it is a US share not a Canadian share, even if the company is Canadian. Such companies will have more than one legal identity.

Great. That's good news.

The page here seems clear: https://www.youinvest.co.uk/faq/do-you-reclaim-withholding-tax-overseas-dividends

Yes. I didn't find that page myself.

This is news to me. Why would a (for example) FTSE All share ETF domiciled in Ireland withhold any tax from UK investors?

I was thinking about ETFs that hold US shares (and possibly other foreign shares). Sorry I didn't make that clearer.

There may be withholding taxes applied to the dividends of the underlying shares before they are received into the ETF.

That's what I was referring to. Do you know whether that's the case for US shares (and other non-UK or non-Irish shares)?

The difference it makes is that your broker doesn't have to do a fx conversion when you buy and sell, this is handled within the ETF. It is usually cheaper to trade in the GBP share class of an ETF. Distributions may still be in USD.

Thanks. I'll make sure to buy the GBP version if there is one. To be honest, that's already what I do, but I wanted to understand what difference it makes.

Thanks again.

masonic

tichtich said:

There may be withholding taxes applied to the dividends of the underlying shares before they are received into the ETF.

That's what I was referring to. Do you know whether that's the case for US shares (and other non-UK or non-Irish shares)?

Yes, if you are holding an ETF investing in US shares then those shares will be paying dividends net of 15% US WHT. For US shares it can be reclaimed by the broker if held within a SIPP, if the broker supports this. For other countries, it will depend on the double taxation treaties in force between the UK and tthe country in question.