Tax Me Three Times?

One’s foreign stock investing may cross three different tax jurisdictions. For example, a U.S. resident buys a French stock through a London stock broker. The stock broker provides custody services in London. When the French company declares a dividend:

  • The French company pays the dividend to the London custodian.
  • The London custodian pays the dividend to the U.S. investor.

Will the United Kingdom want to tax that flow of income as it passes through London?

We do not know what the United Kingdom wants or will want to do.  But we can see what the income tax treaty between the United Kingdom and the United States permits. In this case, the treaty does not seem to allow the United Kingdom to tax the French income.

 

The treaty

Article 1, section 1 states, “Except as specifically provided herein, this Convention is applicable only to persons who are residents of one or both of the Contracting States.” Because the investor is a resident of the United States, the treaty applies.

Article 2, section 1 states, “This Convention shall apply to taxes on income and on capital gains imposed on behalf of a Contracting State irrespective of the manner in which they are levied.” Thus, the treaty covers both dividend income and capital gains.

Article 10, section 1 states, “Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.” Thus, the United States (i.e., “the other Contracting State”) can tax its citizen’s dividend income from a company residing in the United Kingdom (i.e., “a Contracting State”).

Article 10, section 2 states, “However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State …” Thus, the United Kingdom (i.e., “the Contracting State”) can tax dividends from a company resident in the United Kingdom (i.e., “that State”). The treaty does not permit the United Kingdom to tax dividends from a company resident in a third country (e.g., France).

The residence of the custodian does not appear to permit the U.K. to impose tax. In the OECD commentary on Article 10, section 12.1 (p. 187) states, “… a conduit company cannot normally be regarded as the beneficial owner [of the dividend] if, though the formal owner, it has, as a practical matter, very narrow powers which render it, in relation to the income concerned, a mere fiduciary or administrator acting on account of the interested parties.” See also section 12.2 of the OECD commentary on Article 10.

Article 13, section 1 states, “Gains derived by a resident of a Contracting State that are attributable to the alienation of real property situated in the other Contracting State may be taxed in that other State.” Thus, a United States resident (i.e., “a Contracting State”) can suffer capital gains tax only on real property in the United Kingdom (i.e., “the other Contracting State”). The treaty does not say that the United Kingdom can tax a capital gain on the sale of French property.

Probably no triple tax …

Thus, for the above fact pattern, it appears that the income tax treaty between the U.S. and the U.K. prohibits British tax on French income and capital gains.  Of course, HM Revenue & Customs may take a different view.  It ought not to be too difficult to give them a call for confirmation.

And now for the disclaimer … None of the above is intended to be legal or tax advice.  One should consult with a qualified professional before investing across borders!

None of this legal advice.  See the Terms of Service.

ADR = foreign stock subject to foreign tax!

ADR stands for “American Depositary Receipt.”  With an ADR, an American can gain exposure to a foreign stock without having to worry about converting currencies or opening foreign stock brokerage accounts.  Trading costs may be lower, as well.  The “American Depositary Share” (ADS) is a similar structure.

For tax purposes, however, the foreign government may take the position that the owner of the ADS is actually an owner of the underlying shares.  This means the investor becomes subject to all the tax laws and filing requirements of the foreign country.

For example, the prospectus for Nabriva Therapeutics AG (an Austrian company) states,

For Austrian tax purposes, a holder of ADSs who is entitled to claim the full number of shares represented by the ADSs held at any time and who may freely dispose of and exercise the shareholder rights, in particular voting rights, inherent to our common shares (or instruct the depositary acting as an agent for the holder in light of the ADSs to do so) is in general considered to be the economic owner of common shares represented by such ADSs. As a result, dividend income resulting from our common shares should be attributable to the holder of the ADSs for Austrian tax purposes. As a consequence, any distribution received by an Austrian resident or nonresident ADS holder with respect to our common shares will therefore be taxable in Austria as a dividend under the principles set out for common shares below. Capital gains realized upon the disposal of the ADSs will equally be subject to tax in Austria as outlined below with respect to capital gains realized through the sale of common shares.

Then the prospectus lays out in great detail what one might expect from the Austrian tax authorities.

Many ADRs trade in the United States, but do not have to make such disclosures.  If you were to invest in such securities, how would you find out if you have to:

(a) pay taxes to a foreign government, and

(b) file income tax returns with that foreign government?

My book, Investing in Foreign Stocks is one way to find out!

None of this legal advice.  See the Terms of Service.