H&L Are saying I am subject to Withholding tax on US Shares but I am an overseas US Citizen?

[charlesagrit]

I'm really confused and was wondering if someone could clarify this. Perhaps they have been in a similar situation. I have just opened an S&S ISA with H&L. I am a dual UK/US Citizen who has lived in the UK my whole life, I pay and file tax but have never owed US Tax due to double taxation treaties and my salary not meeting the US threshold. I am looking to invest some of my savings but have been told that I am not eligible for reduced tax on US Income.

They have told that "The IRS defines anyone with a tax liability in the US as a US person. This will include residents of the US and anyone that has worked in the US in the last tax year. If you’re not sure of your status, please check with the US authorities.

Clients classed as US persons aren’t eligible for reduced tax on US income and will be subject to the full 30% withholding tax on US income and 25% for Canadian income."

However, I checked the IRS website and they state "A payee is subject to withholding only if it is a foreign person. A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U.S. person. It also includes a foreign branch of a U.S. financial institution if the foreign branch is a qualified intermediary. In most cases, the U.S. branch of a foreign corporation or partnership is treated as a foreign person."

They then state that a "U.S. person is A citizen or resident of the United States."

From my understanding, that means that according to the IRS I am not liable to pay withholding tax. Why is H&L saying that I am? Are they allowed to?

Thanks so much in advance.

 

[adamadam]

@charlesagrit Do you work for a US company in the UK? When I was working for an American company while living overseas, they were responsible for paying their part of Social Security/ Medicare and I also had to pay my portion so they would deduct that from my paycheck quarterly (All while being able to claim the foreign tax credit). If the company is not a US entity then best to get help from a UK lawyer, if the company is from the US, contact the International Compensation & Benefits department back in America. YMMV

 

[charlesagrit]

@adamadam Unfortunately I work for UK company.

 

[quasar92]

@charlesagrit My guess is that what they're saying is that a US citizen doesn't benefit from the reduced 15% dividend withholding that is in the US/UK tax treaty, so they're going to withhold the full 30%. However, when you file your US taxes, you'll be able to include the correct amount of dividend tax and get any excess withholding refunded - although that means you're making an interest-free loan to the US government until you file your taxes, so if you get a dividend on 01Jan2022, you might not get the excess refunded until late 2023 (if you get an extension and don't file your 2022 US taxes until October 2023).

So that isn't ideal, but I can't imagine a situation where you, as a US taxpayer, would actually have to pay the 30% dividend withholding tax, just have it withheld and then pay the actual amount (which will vary based on your overall tax situation, and whether the dividends are qualified or ordinary).

Another in the long list of reasons why being a US citizen abroad is the worst of both worlds...

(I'm also a HL S&S ISA customer, but have chosen to restrict the investments in there to UK companies, in part to avoid any US dividend withholding questions and also to avoid HL's 1% foreign currency fee, so I haven't seen how they treat US dividends first hand)

 

[charlesagrit]

@quasar92 This makes so much sense! I think your guess has hit the nail on the head thank you so much. I'm curious if you investing in UK stocks how do you make sure they aren't classified as pfic?

 

[quasar92]

@charlesagrit While there's grey area in the PFIC definition, for the most part it's fairly clear:

• >75% of income is passive OR
• >50% of assets are passive

Investment trusts and REITs clearly fall afoul of this, so they're out. But beyond those, most companies that actually make something or provide some kind of service for sale are pretty clearly not PFICs, but are making their money from active activities and assets. This gives a hugely broad spectrum of companies to invest in - technology, utilities, pharma, health care consumer, industrials, materials, communication, housebuilders (but not REITs - have to be a little careful there), and so on.

The main area where it can get kind of grey are some of the financial companies, where some of their income is from assets they hold and others from providing loans, financial services, etc. If there's any doubt, I skip that one, not worth the risk. I do own some financial companies - Experian, LSEG, Aviva, and Close Brothers, for example (not a recommendation for those stocks specifically, just examples of financial stocks where it's clear that they don't fail the PFIC tests).

The IRS doesn't provide any sort of a list of non-PFICs, so it is just up to judgment - I recommend erring on the side of caution if it's not clear.

 

[richking58]

@charlesagrit Have you completed a form W-9? You should not be subject to any withholding as a US person, but it doesn’t necessarily surprise me that HL don’t know that.

Are they providing you with a 1042-S or a 1099 to back up the withholding? If not I would be concerned whether you will be able to prove you have suffered it to the IRS.

If the amounts are material you might want to look at another broker for your US investments.

 

[charlesagrit]

@richking58 Thanks so much I will ask them this specifically. When I asked for clarification they basically said they aren't tax experts and to seek advice elsewhere.

 

[maria890]

@charlesagrit Hey, I’m with HL and am in the same situation. Just Google “Hargreaves Lansdown W9” and you can submit a form that shows you don’t need it. They have a bunch of sites explaining the W8-BEN (which reduces from 30% to 15% for non-citizens), but in its place you do the W9.
Without the form they have to withhold 30% due to US rules, doesn’t matter if they think you’re American or not. Good luck!

 

[charlesagrit]

@maria890 Oh interesting so the person at HL I spoke with said if I fill in the W9 they will withhold 30%. Guessing they were misinformed. So you sent them the form and they didn't withhold 30% of dividends?

 

[maria890]

@charlesagrit I’m no expert, only invested in a non dividend stock and haven’t sold any yet - so I’m not actually sure what the withholding details are yet - I just know I had to submit the form in order to buy the US stock so did that

 

[charlesagrit]

@maria890 Ok fair enough thank you!

 

[maria890]

@charlesagrit Although it’s worth noting that the W9 form contains wording certifying that you aren’t subject to withholding tax. Ask them to confirm HL’s practices?

 

[charlesagrit]

@maria890 The specific wording for that is backup withholding which I believe is a different withholding tax for those that have previously owed the IRS money.

 

[stephendisraeli]

@charlesagrit

Why is H&L saying that I am?

Could it be possible that H&L is considered a "nonparticipating foreign financial institution" as far as FATCA is concerned?

That would mean they and anything held in their accounts are subject to the blanket 30% withholding tax on any income from the US.