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Posted by Alan on October 26, 2009, 1:05 pm
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removeps-groups@yahoo.com wrote:
>> W wrote:
>
>>> I was told that a brokerage account holder is NOT a US resident, that he
>>> does NOT pay any withholding tax on any kind of "foreign sourced income".
>>> Assuming that is true, I am looking to get details on some specific cases:
>>> 1) If the account holder asks the US broker to buy a stock on a foreign
>>> exchange and hold it in the US brokerage account, then all dividends in that
>>> stock are *not* subject to US withholding tax? Of course there will be a
>>> withholding tax in the foreign country where the stock was bought, but I am
>>> referring just to additional withholding taxes in the US. What are the
>>> chances that a US broker would incorrectly withhold 30% of the dividend on
>>> such stocks as they would for US based stocks? If such withholding is
>>> incorrectly charged to the holder, can it be refunded by filing a US tax
>>> return?
>>> 2) If the account holder buys a foreign stock as an ADR on a US exchange,
>>> would dividends in such a company also avoid the 30% withholding tax?
>>> Since the income is "foreign sourced" even though the stock trades on a US
>>> exchange, it's an interesting case. I'll bet many US brokers would
>>> withhold 30% of the dividend for such stocks, not taking the time to
>>> understand that the underlying business income of the entity is not US
>>> based. Is there any way to get the 30% withholding refunded by filing a US
>>> tax return?
>
> As your US broker if they will withhold 30% on the specific stocks you
> had in mind. Mention both cases: foreign stocks purchased on foreign
> exchange, and foreign stocks purchased on US exchange. In your email
> mention that according to IRC 871(i)(1)(D) these stocks should not be
> subject to withholding.
>
> Be aware that there may be a treaty between your country of residence
> and the US that will allow withholding at a lower rate. The treaties
> are at http://www.irs.gov/businesses/international/article/0,,id=96739,00.html
>
> BTW, the law if confusing sounding, in particular 861(a)(2)(B).
>
> Section 871 says
>
> (i) Tax not to apply to certain interest and dividends
> (1) In general
> No tax shall be imposed under paragraph (1)(A) or (1)(C) of
> subsection (a) on any amount described in paragraph (2).
>
> (D) Dividends paid by a foreign corporation which
> are treated under section 861(a)(2)(B) as income from
> sources within the United States.
>
> The above suggests that stocks in (i) and (ii) are not subject to
> withholding. Section 861 says
>
> (a) Gross income from sources within United States
> The following items of gross income shall be treated as income from
> sources within the United States:
>
> (2) Dividends
> The amount received as dividends—
>
> (B) from a foreign corporation unless less than 25 percent of the
> gross income from all sources of such foreign corporation for the 3-
> year period ending with the close of its taxable year preceding the
> declaration of such dividends (or for such part of such period as the
> corporation has been in existence) was effectively connected (or
> treated as effectively connected other than income described in
> section 884 (d)(2)) with the conduct of a trade or business within the
> United States; but only in an amount which bears the same ratio to
> such dividends as the gross income of the corporation for such period
> which was effectively connected (or treated as effectively connected
> other than income described in section 884 (d)(2)) with the conduct of
> a trade or business within the United States bears to its gross income
> from all sources; but dividends (other than dividends for which a
> deduction is allowable under section 245 (b)) from a foreign
> corporation shall, for purposes of subpart A of part III (relating to
> foreign tax credit), be treated as income from sources without the
> United States to the extent (and only to the extent) exceeding the
> amount which is 100/70th of the amount of the deduction allowable
> under section 245 in respect of such dividends, or
>
>
>> From IRS Form W-8BEN:
>> =============================================================
>>
>> Broker transactions or barter exchanges.
>>
>> Income from transactions with a broker or a barter exchange is
>> subject to reporting rules and backup withholding unless
>> Form W-8BEN or a substitute form is filed to notify the
>> broker or barter exchange that you are an exempt foreign
>> person.
>> You are an exempt foreign person for a calendar year
>> in which:
>> • You are a nonresident alien individual or a foreign
>> corporation, partnership, estate, or trust;
>> • You are an individual who has not been, and does not
>> plan to be, present in the United States for a total of 183
>> days or more during the calendar year; and
>> • You are neither engaged, nor plan to be engaged
>> during the year, in a U.S. trade or business that has
>> effectively connected gains from transactions with a
>> broker or barter exchange.
>
> Doesn't the above apply only to withholding of profits on capital
> gains? Dividends should always be withheld at source.
>
You are correct. He said dividends.. I thought gains....
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