Dominic Coyleanswers your questions.
Share taxes
You recently answered a query on the tax treatment of dividends. from a Swiss company, where a 35 per cent withholding tax is imposed and 20 per cent can be reclaimed under the Irish-Swiss double-taxation agreement,
I would appreciate if you could deal with the treatment for Dutch dividends (where 25 per cent Dutch withholding tax is deducted) and US dividends (15 per cent withholding tax). Why does the Income Tax Form 11 have a separate line for US (and also Canadian) dividends and another line for all other foreign dividends? Is there a different treatment of US withholding tax?
Ms P.G., Dublin
When it comes to dividends on shares in foreign companies, you are always likely to face issues with local taxation rules. Quite often, you may find yourself liable to tax in the country where the dividend is paid and again in your country of residence. The Irish Government has signed agreements with over 45 states to address such double-taxation issues. The agreements do not cover identical areas and the measures agreed are not the same in each case.
As far as Dutch dividends are concerned, the current level of dividend withholding tax is 15 per cent. As you point out, the domestic dividend withholding tax used to be 25 per cent until the start of this year. However, under most double-taxation agreements between the Netherlands and its European union peers, this rate was reduced to 15 per cent.
There are separate rules if the Irish shareholder is itself a company and owns more than a quarter of the capital of the Dutch company, in which case the Dutch dividends are exempt from Dutch withholding tax, but this hardly applies to you.
It is worth noting that there is some talk that the Dutch regime may be liable to legal challenge as Dutch residents can generally substantially reduce or erase their dividend income tax liability. This could mean that foreign shareholders are treated more arduously that domestic investors, which could run into trouble with EU law. However, any such challenge is likely to be through the European courts.
Turning to US dividends. As best I can tell, the domestic dividend withholding tax rate in the US is 30 per cent. However, under the Ireland/US tax treaty, Irish tax residents are liable to US dividend withholding tax of 15 per cent on dividends from Irish companies. Again, there are more beneficial rates where the Irish shareholder is a company with a significant stake in the US business.
Revenue points out that if the tax withheld exceeds the levels agreed under the double taxation accords, Irish taxpayers should claim refunds from the tax authorities in the relevant foreign country.
Looking now to Form 11, the basic premise is that a tax credit is allowed where income is taxable in both jurisdictions. This is the case with foreign dividends, which are liable both to foreign dividend withholding tax under the terms of Ireland's double-taxation agreements and also to Irish income tax - as Irish tax residents are liable to Irish income tax on worldwide income.
Effectively, then, if you are paying 15 per cent abroad on your share dividend, this will deducted from your liability in Ireland - which can be as high as 41 per cent depending on the tax band into which you fall.
Why does Tax Form 11 have a separate line for the US (and Canada)? Revenue says this is because the double taxation treaties with these states involve a more complex process in calculating the effective rate to determine the tax credit allowable on foreign dividends. The separate entries for US and Canadian dividends ensure any tax credit is given at the lower of the Irish effective rate of tax or the US/Canadian effective rate.
The Revenue also notes that a large number of Irish residents receives dividends from either or both of these countries.
