Interactive Brokers - Withholding tax/fund held under their name?

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Topic Author
compound12
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Joined: Thu Jan 19, 2017 1:22 am

Interactive Brokers - Withholding tax/fund held under their name?

Post by compound12 »

Hello,

I am considering opening an account with IB due to their low fees, however I have two concerns (I would be getting the new Irish post-brexit account).

First concern: I asked them if there would be any withholding tax on Irish domiciled funds, and I was told yes...They mentioned that the funds/stocks are held in the name of IBKR, not the client, therefore the funds would not know that I am non-resident of Ireland (eligible for an exemption on withholding tax).

1. Has anyone using IB experienced this? Do they really hold the funds in their name and screw you on the withholding taxes?
2. If yes, has anyone requested the refund of the withholding taxes with Ireland?

Second concern: The Irish account are only insured for 20 000 euro, should this worry me?

Thanks
Rosales
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by Rosales »

You might be confusing different levels of taxation. Check the wiki.
VWRA & chill | Retired @28 y.o.
Topic Author
compound12
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by compound12 »

I am talking about level 2 withholding tax, dividends distributed by the fund. In this case the fund-->fund-owner relationship would be relevant. Since the fund is domiciled in Ireland, and I am non-resident of Ireland, then no withholding tax should apply.
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BeBH65
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by BeBH65 »

compound12 wrote: Tue Jan 12, 2021 11:40 am I am talking about level 2 withholding tax, dividends distributed by the fund. In this case the fund-->fund-owner relationship would be relevant. Since the fund is domiciled in Ireland, and I am non-resident of Ireland, then no withholding tax should apply.
Ireland does not have any dividend withholding tax for funds domiciled in Ireland. No Level-2 tax.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
Topic Author
compound12
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by compound12 »

BeBH65 wrote: Tue Jan 12, 2021 12:36 pm
compound12 wrote: Tue Jan 12, 2021 11:40 am I am talking about level 2 withholding tax, dividends distributed by the fund. In this case the fund-->fund-owner relationship would be relevant. Since the fund is domiciled in Ireland, and I am non-resident of Ireland, then no withholding tax should apply.
Ireland does not have any dividend withholding tax for funds domiciled in Ireland. No Level-2 tax.
Which is exactly why I was confused when IB told me there would be...
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Maple
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by Maple »

compound12 wrote: Tue Jan 12, 2021 8:00 am ...

First concern: I asked them if there would be any withholding tax on Irish domiciled funds, and I was told yes...They mentioned that the funds/stocks are held in the name of IBKR, not the client, therefore the funds would not know that I am non-resident of Ireland (eligible for an exemption on withholding tax).

1. Has anyone using IB experienced this? Do they really hold the funds in their name and screw you on the withholding taxes?

...
I own Irish Domiciled ETFs in my IB account, for several years now. Never observed level 2 withholding taxes.
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galeno
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by galeno »

Same here.
Maple wrote: Tue Jan 12, 2021 5:49 pm I own Irish Domiciled ETFs in my IB account, for several years now. Never observed level 2 withholding taxes.
KISS & STC.
sublimelaconic
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by sublimelaconic »

Maple wrote: Tue Jan 12, 2021 5:49 pm
compound12 wrote: Tue Jan 12, 2021 8:00 am ...

First concern: I asked them if there would be any withholding tax on Irish domiciled funds, and I was told yes...They mentioned that the funds/stocks are held in the name of IBKR, not the client, therefore the funds would not know that I am non-resident of Ireland (eligible for an exemption on withholding tax).

1. Has anyone using IB experienced this? Do they really hold the funds in their name and screw you on the withholding taxes?

...
I own Irish Domiciled ETFs in my IB account, for several years now. Never observed level 2 withholding taxes.
I also own Irish domiciled ETFs in IB (under TradeStation Global) but never bothered to check. How do I confirm level 2 withholding taxes?
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Maple
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by Maple »

sublimelaconic wrote: Thu Jan 14, 2021 3:33 am I also own Irish domiciled ETFs in IB (under TradeStation Global) but never bothered to check. How do I confirm level 2 withholding taxes?
In my case (and seemingly the typical case), the absence of level 2 withholding taxes can be observed in the cash activity. For example, a dividend credit can be observed, and confirmed as the correct total (= announced div/share * #shares), without a subsequent tax debit.
sublimelaconic
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by sublimelaconic »

Maple wrote: Thu Jan 14, 2021 4:36 am
sublimelaconic wrote: Thu Jan 14, 2021 3:33 am I also own Irish domiciled ETFs in IB (under TradeStation Global) but never bothered to check. How do I confirm level 2 withholding taxes?
In my case (and seemingly the typical case), the absence of level 2 withholding taxes can be observed in the cash activity. For example, a dividend credit can be observed, and confirmed as the correct total (= announced div/share * #shares), without a subsequent tax debit.
If I understood you correctly, you're referring to distributing funds. How about in the case of accumulating funds?
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Maple
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by Maple »

sublimelaconic wrote: Thu Jan 14, 2021 6:36 am If I understood you correctly, you're referring to distributing funds. How about in the case of accumulating funds?
I don't know of any level 2 withholding taxes for accumulating Irish domiciled ETFs. Level 1 and 3 taxes ... possible.
TedSwippet
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by TedSwippet »

Maple wrote: Thu Jan 14, 2021 8:40 am
sublimelaconic wrote: Thu Jan 14, 2021 6:36 am If I understood you correctly, you're referring to distributing funds. How about in the case of accumulating funds?
I don't know of any level 2 withholding taxes for accumulating Irish domiciled ETFs. Level 1 and 3 taxes ... possible.
Logical. Level 2 withholding tax is defined as tax withholding applied, typically by the broker, to ETF or share distributions. And by definition, accumulating ETFs do not make distributions!

That aside ...
compound12 wrote: Tue Jan 12, 2021 8:00 am First concern: I asked them if there would be any withholding tax on Irish domiciled funds, and I was told yes...They mentioned that the funds/stocks are held in the name of IBKR, not the client, therefore the funds would not know that I am non-resident of Ireland (eligible for an exemption on withholding tax).
This looks to me like either the IB agent gave the wrong answer here, or perhaps did not fully understand the question.

As a general rule -- and unlike the US -- Ireland does not apply any withholding tax, or in fact a tax of any kind, so estate, inheritance, income, transfer, and so on, to ETFs domiciled in Ireland and which pay (or accumulate) dividends to (or on behalf of) investors who are non-residents of Ireland.
ndr
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by ndr »

TedSwippet wrote: Thu Jan 14, 2021 8:56 am As a general rule -- and unlike the US -- Ireland does not apply any withholding tax, or in fact a tax of any kind, so estate, inheritance, income, transfer, and so on, to ETFs domiciled in Ireland and which pay (or accumulate) dividends to (or on behalf of) investors who are non-residents of Ireland.
The topic author mentioned this bit in the initial post: the funds would not know that I am non-resident of Ireland (eligible for an exemption on withholding tax) - so the fact that non-residents of Irelands don't pay the withholding tax hasn't escaped them.

What I'm now wondering about is how does the fund actually know that it's not the Ireland resident owning a given position?

In the case of US-domiciled funds, there is a W-8 form in play. Does anyone know how this process looks like for an Ireland-domiciled ETF?
TedSwippet
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by TedSwippet »

ndr wrote: Thu Jan 14, 2021 6:43 pm
TedSwippet wrote: Thu Jan 14, 2021 8:56 am As a general rule -- and unlike the US -- Ireland does not apply any withholding tax, or in fact a tax of any kind, so estate, inheritance, income, transfer, and so on, to ETFs domiciled in Ireland and which pay (or accumulate) dividends to (or on behalf of) investors who are non-residents of Ireland.
The topic author mentioned this bit in the initial post: the funds would not know that I am non-resident of Ireland (eligible for an exemption on withholding tax) - so the fact that non-residents of Irelands don't pay the withholding tax hasn't escaped them.

What I'm now wondering about is how does the fund actually know that it's not the Ireland resident owning a given position?
It is not the ETF that needs to know about residence, it is the broker where the ETF is held, because the broker is the entity responsible for handling any Level 2 tax withholding.
ndr wrote: Thu Jan 14, 2021 6:43 pm In the case of US-domiciled funds, there is a W-8 form in play. Does anyone know how this process looks like for an Ireland-domiciled ETF?
In the case of a W-8BEN, this form goes to the broker, and rarely (if ever) to the IRS, but never to a US domiciled fund or ETF. For Ireland ETFs, at minimum the broker's Know Your Client (KYC) rules should establish that a client is a resident of a country that is not Ireland. As far as I know, nobody has ever had to complete any Irish equivalent to a W-8BEN for holding Ireland domiciled ETFs. I certainly have not.

Note that the withholding situation with Ireland domiciled ETFs is the complete reverse of the US one. For US domiciled ETFs, the broker must withhold tax on US nonresident aliens but not on US residents (and citizens). For Ireland domiciled ETFs, a broker might have to withhold tax on Ireland residents, but never on non-Ireland ones.

Also, a W-8BEN for is for claiming treaty treatment on a US domiciled ETF, because the US taxes dividends paid by US domiciled ETFs to nonresident aliens. By contrast, a non-Irish resident holding Ireland domiciled ETFs does not need to claim any treaty treatment, because Ireland simply exempts all Ireland domiciled ETFs from Irish dividend tax withholding.

Confusing though, isn't it?!
ndr
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by ndr »

That clears up a lot, thanks for the explanation, Ted! :sharebeer
TedSwippet
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by TedSwippet »

ndr wrote: Fri Jan 15, 2021 8:00 am That clears up a lot, thanks for the explanation, Ted!
I suppose. However, it still does not explain why someone from IB thinks that Ireland will withhold tax on dividends paid by an Ireland domiciled ETF to a non-Irish resident. Assuming no wires were crossed in communication, my guess would be that the IB rep was simply wrong. It would not be the first time that a broker has given out incorrect tax withholding information.
domybit
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Re: Interactive Brokers - Withholding tax/fund held under their name?

Post by domybit »

Assuming no wires were crossed in communication, my guess would be that the IB rep was simply wrong.
Maybe wires were crossed, and the IB rep was referring to the 15% US withholding tax on dividends on US securities in Irish-domiciled funds.
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