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6Mo
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@lawinvest @gloinvest What do you think? For me it seems understandable.... for US stocks! But there are others....
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@lawinvest I have added this calculation to the amount. It's now complete for US equities. good that we are talking about this topic!
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6Mo
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@lawinvest I took EURO . could have taken stones :) But since it only applies to US stocks. I'll change it, thanks :)
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6Mo
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@lawinvest You are very welcome, because your calculation does not take into account the cap and the imputation surplus. Here is the explanation of the partial exemption for a dividend ETF taking into account US withholding tax. The interaction of these two rules is crucial for investors' net returns.
First things first: two tax advantages at a glance
If you invest in an ETF that distributes dividends from US companies, two key tax rules come into play:
1. US withholding tax: the US levies a tax on dividends paid to foreign investors. Thanks to the double taxation agreement (DTA) between Germany and the USA, this is generally reduced from 30% to 15% for German investors. This 15% is withheld directly at source in the USA.
2nd German partial exemption: In Germany, 30% of income (dividends and capital gains) from equity ETFs (equity ratio > 50%) is tax-free. This means that you only have to pay tax on 70% of the dividend in Germany.
The crucial point is how these two regulations interact. The US withholding tax already paid can be credited against the German withholding tax, but only up to the amount of the German tax actually due on this income. And this is precisely where the partial exemption comes into play.
The interaction: explained step by step
1. dividend payment & US withholding tax: A US company in the ETF distributes a dividend. Before the money reaches your broker, 15% US withholding tax is automatically deducted.
2. arrival at the investor (gross): The gross dividend (before deduction of German tax, but after US withholding tax) is credited to your settlement account.
3. application of the partial exemption: Your German broker now applies the partial exemption of 30%. This means that only 70% of the gross dividend is taxable in Germany.
4. calculation of the German tax: The German withholding tax (25% plus solidarity surcharge and church tax, if applicable) is calculated on this taxable portion (70%).
5. crediting the US withholding tax: The US withholding tax paid (15% of the original dividend) is now credited against the German tax liability just calculated. Important: The credit is capped. You cannot offset more withholding tax than you would have to pay in Germany. Due to the partial exemption, the German tax liability is lower, which may mean that the US withholding tax cannot be fully credited. This is often referred to as "excess withholding tax".
Conclusion of the calculation
Although the 15% US withholding tax can be fully credited against the German tax liability in this case, the combination of withholding tax and partial exemption is more favorable for the investor than German taxation alone (which would be €26.38 on the full €100). The total tax burden is effectively only 18.46%.
The role of the fund domicile is decisive
The above explanation applies to ETFs domiciled in Germany or Luxembourg that invest directly in US equities. ETFs domiciled in Ireland often offer an even more advantageous tax structure:
- Due to a special tax treaty between the USA and Ireland, only 15% withholding tax is also withheld on dividend payments from US companies to Irish funds.
- Between Ireland and Germany, there is no further withholding tax on the ETF's distributions to you.
- As a German investor, you still benefit from the 30% partial exemption on the income of the Irish ETF.
Effectively, with an Irish ETF that invests in US equities, you have the same reduced US withholding tax at fund level, but there is no complicated imputation overhang at your personal level. This often makes Irish domiciled ETFs the most tax efficient choice for investing in US equities.
First things first: two tax advantages at a glance
If you invest in an ETF that distributes dividends from US companies, two key tax rules come into play:
1. US withholding tax: the US levies a tax on dividends paid to foreign investors. Thanks to the double taxation agreement (DTA) between Germany and the USA, this is generally reduced from 30% to 15% for German investors. This 15% is withheld directly at source in the USA.
2nd German partial exemption: In Germany, 30% of income (dividends and capital gains) from equity ETFs (equity ratio > 50%) is tax-free. This means that you only have to pay tax on 70% of the dividend in Germany.
The crucial point is how these two regulations interact. The US withholding tax already paid can be credited against the German withholding tax, but only up to the amount of the German tax actually due on this income. And this is precisely where the partial exemption comes into play.
The interaction: explained step by step
1. dividend payment & US withholding tax: A US company in the ETF distributes a dividend. Before the money reaches your broker, 15% US withholding tax is automatically deducted.
2. arrival at the investor (gross): The gross dividend (before deduction of German tax, but after US withholding tax) is credited to your settlement account.
3. application of the partial exemption: Your German broker now applies the partial exemption of 30%. This means that only 70% of the gross dividend is taxable in Germany.
4. calculation of the German tax: The German withholding tax (25% plus solidarity surcharge and church tax, if applicable) is calculated on this taxable portion (70%).
5. crediting the US withholding tax: The US withholding tax paid (15% of the original dividend) is now credited against the German tax liability just calculated. Important: The credit is capped. You cannot offset more withholding tax than you would have to pay in Germany. Due to the partial exemption, the German tax liability is lower, which may mean that the US withholding tax cannot be fully credited. This is often referred to as "excess withholding tax".
Conclusion of the calculation
Although the 15% US withholding tax can be fully credited against the German tax liability in this case, the combination of withholding tax and partial exemption is more favorable for the investor than German taxation alone (which would be €26.38 on the full €100). The total tax burden is effectively only 18.46%.
The role of the fund domicile is decisive
The above explanation applies to ETFs domiciled in Germany or Luxembourg that invest directly in US equities. ETFs domiciled in Ireland often offer an even more advantageous tax structure:
- Due to a special tax treaty between the USA and Ireland, only 15% withholding tax is also withheld on dividend payments from US companies to Irish funds.
- Between Ireland and Germany, there is no further withholding tax on the ETF's distributions to you.
- As a German investor, you still benefit from the 30% partial exemption on the income of the Irish ETF.
Effectively, with an Irish ETF that invests in US equities, you have the same reduced US withholding tax at fund level, but there is no complicated imputation overhang at your personal level. This often makes Irish domiciled ETFs the most tax efficient choice for investing in US equities.
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•@gloinvest Yes, that's exactly how I understood it, but with numbers there is an advantage for direct investment. ( See calculation in article )
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6Mo
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@lawinvest everyone's head is in the same place :)
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6Mo
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