Friday 10 December 2010

Withholding tax on German shares?

Question
Do you know the tax rates for holding German shares?

What would happen to shares bought in Euros (German), if the Germans were to dump the Euro?

What could happen with the international share account if Britain goes bust?

Is it wise to open a Swiss or German bank account?Answer
Dividends paid by German companies are subject to a withholding tax of 26.375%, regardless of whether you're as German or overseas resident.

Under the UK -Germany double taxation agreement a UK resident can offset up to 15% of the tax withheld against their UK tax liability. For a basic rate taxpayer this means that although there's no further UK tax to pay (as the 15% that can be offset more than covers the UK liability) you'll be 11.375% out of pocket unless you can reclaim that part of the withholding tax from the German tax authorities.

Your stockbroker should be able to do this for you and, if not, you can do so yourself from the German Federal Central Tax Office, although I've no idea of the success rate and how long refunds take.

If you're a higher rate taxpayer you can also try and reclaim the overpaid11.375%, but you'll have to pay some extra UK tax regardless.

Let's suppose the German dividend is £900 including the German withholding tax, i.e. you receive £662 (£900 - 26.375%). HMRC will divide this by 0.9 to get £1,000 then calculate your higher rate liability at 32.5%, equal to £325. You can then deduct 15% of the withholding tax, i.e. £900 x 15% = £135 and a 10% UK tax credit of £100 to leave you with a UK tax bill of £90.

In the unlikely event Germany ditches the Euro I imagine the shares would instead be traded in the new currency that Germany would adopt. The exchange rate with British sterling would obviously affect the value of your investment.

Although I think the UK economy is in a potentially perilous state, I really can't see Britain going bust. And, in any case, your German shares are as safe as the company you've bought them in. Your stockbroker share account should be fine provided you either own the certificates or the stockbroker nominee account in which they're held is ring-fenced from their business (it should be!) - as even if the stockbroker goes bust you should still be entitled to the shares.

I think the only reason for holding an overseas bank account is if you think the pound will crash against other currencies. If things really were that bad I guess you argue the Financial Services Compensation Scheme would not have enough money to pay in full if a series of banks went bust, but even I'm not that pessimistic.

Read this Q and A at http://www.candidmoney.com/questions/question335.aspx

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