3Settimana
I'm missing a key component... assuming Colgate is the only stock in the ETF.
100 USD distribution of the share in the ETF (simplified USD price = Euro price)
The ETF pays 15% withholding tax like everyone else
=> 85€ remain
It distributes this. You then pay your partially exempt taxes on this
Simplified approx. 17€ tax burden
Your account will therefore receive: 68€
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Colgate pays 100 USD directly to me (as above = Euro)
15% withholding tax => 85
Then: withholding tax and solidarity surcharge on the full income.
Approx. 28€... of which 15€ US withholding tax creditable => further payment of 13€
Therefore my account receives 72€
...
Where am I better off now?
100 USD distribution of the share in the ETF (simplified USD price = Euro price)
The ETF pays 15% withholding tax like everyone else
=> 85€ remain
It distributes this. You then pay your partially exempt taxes on this
Simplified approx. 17€ tax burden
Your account will therefore receive: 68€
___
Colgate pays 100 USD directly to me (as above = Euro)
15% withholding tax => 85
Then: withholding tax and solidarity surcharge on the full income.
Approx. 28€... of which 15€ US withholding tax creditable => further payment of 13€
Therefore my account receives 72€
...
Where am I better off now?
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3Settimana
@lawinvest @gloinvest What do you think? For me it seems understandable.... for US stocks! But there are others....
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3Settimana
@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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•3Settimana
@MainTyp thank you :)
As for the table from @gloinvest. Frankly, it's too long for me to read it all completely... But I'm missing the withholding tax component. Please correct me if I am wrong and it is there
As for the table from @gloinvest. Frankly, it's too long for me to read it all completely... But I'm missing the withholding tax component. Please correct me if I am wrong and it is there
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3Settimana
@MainTyp if you allow me to make a correction: of course 15% is withheld on 100 USD. I had only set USD = Euro for the sake of simplicity. I would perhaps clarify this in the post above for you
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3Settimana
@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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3Settimana
@MainTyp yes, I just mean that someone might get the idea to correct it
;)
;)
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3Settimana
@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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•3Settimana
@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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3Settimana
@gloinvest
1. there is no room for a cap because my withholding tax deduction does not exceed the German tax burden.
2. the above calculation is incorrect in my opinion. It suggests that in the case of a German ETF, the US withholding tax paid by the fund is credited against the distribution. This is not correct. According to the explanatory memorandum to the Investment Tax Act BT-Drucksache 18/8045, this non-credit is precisely the reason for the creation of the partial exemption.
With regard to Ireland, it is true that the partial exemption applies. Nevertheless, as stated, the Irish fund paid 15% withholding tax. I have calculated nothing else. The difference is that I cannot offset it against my tax burden. This compensates for the partial exemption (but not completely).
1. there is no room for a cap because my withholding tax deduction does not exceed the German tax burden.
2. the above calculation is incorrect in my opinion. It suggests that in the case of a German ETF, the US withholding tax paid by the fund is credited against the distribution. This is not correct. According to the explanatory memorandum to the Investment Tax Act BT-Drucksache 18/8045, this non-credit is precisely the reason for the creation of the partial exemption.
With regard to Ireland, it is true that the partial exemption applies. Nevertheless, as stated, the Irish fund paid 15% withholding tax. I have calculated nothing else. The difference is that I cannot offset it against my tax burden. This compensates for the partial exemption (but not completely).
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3Settimana
@lawinvest everyone's head is in the same place :)
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