Withholding Tax correct, net, Investment, investing

bleach

Scenario:

USA & UK has tax treaty having a dividend withholding tax rate of 15%.

(I am a USA-citizen investing in the UK - bought 5000 shares).

Investment in the UK pays dividend of ￡0.40 per share.

Exchange rate = $1.61 / ￡

My pre-tax net US dollar dividends is equal to:

A) (5000 x ￡0.40 x $1.61 ) = $3220

B) (5000 x ￡0.40 x $1.61 ) x (0.85) = $2737

Schweser seem to go with answer B.

Are they correct or wrong?

THANKS!

wizofoz

due to the treaty...

In UK - it is taxed to the rate of 15%.
when you come to US -> the remaining 85% is all that is taxed. Otherwise - it would be double taxed. The treaty is doing just that.

overall - the dividend is taxed to the 100% extent only 1 time.

CP

giorgio10

USA tax would be at 28%.

so the 15% would be a tax credit....

based on your reply above, are you saying that it should be ans A?

Analyze_This

if we are only interested in a pre-tax dividend...

shuoldnt we forget about the 15% tax anyway?

smuggycfa

15% tax is charged on UK on the full amount of dividend.

when the dividend arrives on the US side of the fence - you are allowed to remove the 15% of the dividend and then charge the 28% US tax on the remaining 85% of the dividend.

if you charged the US tax rate on the full dividend - the benefeciary is being dinged twice with the tax. Tax treaty allows him to be taxed only once on the entire 100% of dividend amount.

No - I meant Schweser's answer was right.

CP

economicz

O hyeahhh thats right...

we have to be taxed by 15% in the UK anyways....
THanks

ayodayo

Tks idreesz.
My concern is: what happens if investment nation div tax is lower than your nation dividend tax (the first case)?. Surely, there is a tax treaty.

I agree with you on the second case wherein investment nation div tax is higher than your nation div tax

FinancialAnaly

NTP Wrote:
-------------------------------------------------------
> Tks idreesz.
> My concern is: what happens if investment nation
> div tax is lower than your nation dividend tax
> (the first case)?. Surely, there is a tax treaty.
>
>
> I agree with you on the second case wherein
> investment nation div tax is higher than your
> nation div tax

You answered it correctly. You will pay only 4% to your nation.

Pegasus2008

look at this question
US investor invest in UK - 100 shares, receives dividend of 2 per share, witholding tax rate in UK is 15%, exchange rate is $1.175/pound, USA tax rate 30%

how much does the US investor declare at home?

19831985

This is my understanding.

100 x 2 = Pound 200

Tax rate in UK = 0.15 x 200 = 30 pound

When converted to US = 1.175 x 30 = 35.25$

Income transferred to US = 200 x 1.175 = $235

Taxes on $235 = 0.30 x 235 = $70.5

But $35.25 was already paid in UK

So $35.25 will be needed to pay in US and the rest of $35.25 will be given back as tax credit.