Taxation of US funds

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My mom is holding a US fund the proceeds of whch are subject to withholding tax. According to her bank this withholding tax can´t be offset against her German income tax so that it is taxed twice. This is what the bank wrote when I challenged their tax handlinhg:

Quote

Auf den Ertragsabrechnungen der WKN 889209 sehen Sie den bereits ermäßigten Quellensteuerabzug von 15 %. Da es sich bei Ihrem Papier um einen Fonds handelt, ist eine Anrechnung auf die deutsche Abgeltungssteuer nicht möglich. Diese findet nur bei US-Dividendenzahlungen statt.

I´m struggling to believe that they are correct. Are they? Would it make sense to file Anlage KAP to have the withholding tax offset against her German tax and get a refund?

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AFAIK this info was correct for the time period until Dec. 31st 2017. As per January 2018 this has changed dramatically because now foreign investmend funds are going to be taxed just like German funds.

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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3 hours ago, Starshollow said:

AFAIK this info was correct for the time period until Dec. 31st 2017. As per January 2018 this has changed dramatically because now foreign investmend funds are going to be taxed just like German funds.

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.

But how can they be treated the same if only foreign funds are subject to withholding tax which could be offset while there is no such thing for German ones?

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They are wrong, you claim for the 15% US Quellensteuer on the dividends contained in the Fond in the 2017 Anlage KAP in lines 15 (ausländische Kapitalerträge) and 52 (anrechenbare, noch nicht angerechnete ausländische Steuer).

 

Please read:

 

From 2018, you can no longer claim for the US Quellensteuer, see the section "Quellensteuer auf Fondsebene": https://zendepot.de/etf-fonds-steuern/#Quellensteuern_auf_Fondsebene

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 Yesterday she received another distribution from the same fund and the breakdown looks like this:

 

Gross distribution:                                        USD 280.- (= € 233,82)

- withholding tax (15%):                                USD   42.- (=€ 35,07)

subtotal:                                                            €  198,75

- German gains tax (24,51% of € 93,54):          €    22,93

- Solidarity surcharge (5,5%)                            €      1,26

- Church tax (8%)                                              €      1,83

 

Net to be credited to her account:                     € 172,73

 

allowable withholding tax: € 35,07

 

I find this incomprehensible. Where do the 24,51 % of € 93,54 come from? Not that I´d have complaints as the end result seems like there is no difference to what she´d have had to pay on a German fund. But still a strange way of accounting.

 

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14 hours ago, PandaMunich said:

From 2018, you can no longer claim for the US Quellensteuer,

Seems the bank still credited it. No complaints though.

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24.51% is the Abgeltungsteuer tax rate for people who pay church tax and live in Bavaria or Baden-Württemberg, see the table half-way down this page: https://www.vlh.de/wissen-service/steuer-abc/wie-funktioniert-die-abgeltungssteuer.html

 

The Kirchensteuer (= church tax) is a Sonderausgabe, which means that it recursively reduces the Bemessungsgrundlage (= assessment basis), i.e. because of the church tax, the tax rate of the Abgeltungsteuer on the capital income sinks from 25% to 24.51%, i.e. she pays a bit less Abgeltungsteuer since she's in the church.

 

And since the amount of Abgeltungsteuer is in its turn the basis for calculating both the Solidaritätszuschlag and the church tax, their tax rates are a bit lower:
•    Solidaritätszuschlag: normally 5.5% * 25% = 1.375%, for church members: 5.5% * 24.51% = 1.34805%
•    church tax: normally 8% * 25% = 2%, for church members: 8% * 24.51% = 1.9608%

 

 

On 1/11/2018, 6:57:57, jeba said:

My mom is holding a US fund the proceeds of whch are subject to withholding tax. According to her bank this withholding tax can´t be offset against her German income tax so that it is taxed twice. This is what the bank wrote when I challenged their tax handlinhg:

Quote

Auf den Ertragsabrechnungen der WKN 889209 sehen Sie den bereits ermäßigten Quellensteuerabzug von 15 %. Da es sich bei Ihrem Papier um einen Fonds handelt, ist eine Anrechnung auf die deutsche Abgeltungssteuer nicht möglich. Diese findet nur bei US-Dividendenzahlungen statt.

I´m struggling to believe that they are correct. Are they? Would it make sense to file Anlage KAP to have the withholding tax offset against her German tax and get a refund?

 

What your mum has there, WKN 889209 is a Rentenfonds, i.e. a fund that invests in bonds: http://www.morganstanley.com/msamg/msimintl/docs/en_LU/publications/factsheets/sicav/International/en_emergingmarketsdebt_msinvf_fs.pdf

 

So the standard answer regarding the taxation of Aktienfonds from 2018, that foreign source tax (= Quellensteuer) is no longer deductible starting with 2018, does not apply, since these distributions are not dividends, but distributions of interest income from bonds and of profit from trading bonds. 

 

Rentenfonds will be taxed a bit differently starting with 2018 than up till now:

  1. taxation of the distribution: the same it was in 2017, she has to pay US source tax and German Abgeltungsteuer (+ Soli + church tax) on 100% of the distribution, but the US source tax she paid reduces her German Abgeltungsteuer
     
  2. taxation of the yearly "fictive profit" (= Basisertrag): this is something new, the idea behind this is that the state would like some tax from her on the increase in value of her fund right now, i.e. every year, instead of having to wait till she sells that fund in a few years' time.
    If her fund does well, at the end of the year, she will have to pay Abgeltungsteuer (+ Solidaritätszuschlag + church tax) on:
           "fictive profit" = value_of_fund_at_start_of_year * base_interest
           Basisertrag = Kurs_1. Januar * Basiszins
     
  3. taxation of the profit from the sale: when she sells that Rentenfonds, she will have to pay tax on the difference between selling price and purchase price, i.e. on its increase in value. At that time, all Abgeltungsteuer she prepaid every year on the "fictive profit" will reduce the Abgeltungsteuer that is due on the profit that she made on the sale

 

For details, please read this "Overview of taxation of funds from 2018":

 

 

On 1/12/2018, 8:18:35, jeba said:

Yesterday she received another distribution from the same fund and the breakdown looks like this:

 

Gross distribution:                                        USD 280.- (= € 233,82)

- withholding tax (15%):                                USD   42.- (=€ 35,07)

subtotal:                                                            €  198,75

- German gains tax (24,51% of € 93,54):          €    22,93

- Solidarity surcharge (5,5%)                            €      1,26

- Church tax (8%)                                              €      1,83

 

Net to be credited to her account:                     € 172,73

 

allowable withholding tax: € 35,07

 

They deducted a bit too much German tax, but we will come to the explanation where exactly they went wrong later.

 

The correct calculation would be:

 

280 USD (= 233.82€) gross distribution

- 42 USD (= 35.07€) US source tax 15% of gross dividend

 

57.31€ German Abgeltungsteuer 25% = 0.25 * gross_dividend = 0.25 * 233.82€ = 57.31€

- 35.07€ US source tax

_____________________________________

= 22.24€ remaining German Abgeltungsteuer

+ 1.22€ Solidaritätszuschlag 5,5% = 0.055 * "remaining German Abgeltungsteuer" = 0.055 * 22.24€ = 1.22€

+ 1.78€ Bavarian church tax 8% = 0.08 * "remaining German Abgeltungsteuer" = 0.08 * 22.24€ = 1.78€

 

net_dividend 

= gross_dividend - US_source_tax - German_taxes

= 233.82€ - 35.07€ - 22.24€ - 1.22€ - 1.78€ 

= 173.51€

 

--> they deducted 0.78€ (= 173.51€ - 172.73€) too much in tax.

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Let's go back to a real-life example of somebody who doesn't pay church tax, i.e. who pays 25% Abgeltungsteuer and who received a US dividend in 2017 (source):

 

5a5bb0d9dced6_HCN-Div-2017-11(1).jpg.d0d

 

 

The people who work in banks are very traditional.

They could have done a simple and easy to understand calculation like this one instead:

 

30.45 USD (= 25.79€) gross dividend

- 4.57 USD (= 3.87€) US source tax 15% of gross dividend

 

6.45€ German Abgeltungsteuer 25% = 0.25 * gross_dividend = 0.25 * 25.79€ = 6.45€

- 3.87€ US source tax

_____________________________________

= 2.58€ remaining German Abgeltungsteuer

+ 0.14€ Solidaritätszuschlag 5,5% = 0.055 * "remaining German Abgeltungsteuer" = 0.055 * 2.58€ = 0.14€

 

net_dividend 

= gross_dividend - US_source_tax - German_taxes

= 25.79€ - 3.87€ - 2.58€ - 0.14€ 

= 19.20€

 

However, they don't seem to want to do this the straightforward way, but instead want a Bemessungsgrundlage amount (= assessment basis) that they want to multiply directly by the 25% Abgeltungsteuer rate. The result of this multiplication should be the remaining German Abgeltungsteuer 2.58€.

 

So what they are looking for is this x:

 

x * 25% = 25% * gross_dividend - US_source_tax

x * 0.25 = 0.25 * 25.79€ - 3.87€    | divide by 0.25, which is the same as multiplying by 4

x = 25.79€ - 4 * 3.87€

x = 25.79€ - 15.48€

x = 10.31€

 

And if you look, that is exactly what the following lines in the above Abrechnung say:

5a5bb0d7babe7_2018-01-1419_47_39-Start.p

 

If you take 25% of that Bemessungsgrundlage (= assessment basis), you get the German Abgeltungssteuer that was charged:

  • Bemessungsgrundlage * 25% = x * 25% = 10.31€ * 25% = 10.31 * 0.25 = 2.58€

 

5a5bc33051975_2018-01-1421_52_24-Start.p

 

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On 1/12/2018, 8:18:35, jeba said:

Gross distribution:                                        USD 280.- (= € 233,82)

- withholding tax (15%):                                USD   42.- (=€ 35,07)

subtotal:                                                            €  198,75

- German gains tax (24,51% of € 93,54):          €    22,93

- Solidarity surcharge (5,5%)                            €      1,26

- Church tax (8%)                                              €      1,83

 

Net to be credited to her account:                     € 172,73

 

allowable withholding tax: € 35,07

 

I find this incomprehensible. Where do the 24,51 % of € 93,54 come from?

 

They are a bit off.

Like the bankers of the 25% Abgeltungsteuer guy above (the one who didn't pay church tax, unlike your mum) at Consorsbank, your mum's bankers are in love with a "Bemessungsgrundlage" (= assessment basis), they are simply not happy unless they see it.

 

Your mum pays church tax, so her Abgeltungsteuer is only 24.51%, not 25%.

 

Unfortunately, in your mum's case they calculated the Bemessungsgrundlage incorrectly, they used the standard 25% Abgeltungsteuer rate, instead of her correct 24.51% Abgeltungsteuer rate, the one for church members:

 

Incorrect (= the way they did it):

x * 25% = 25% * gross_dividend - US_source_tax

x * 0.25 = 0.25 * 233.82€ - 35.07€    | divide by 0.25, which is the same as multiplying by 4

x = 233.82€ - 4 * 35.07€

x = 233.82€ - 140.28€

x = 93.54   <--- this is where they got their incorrect Bemessungsgrundlage of 93.54€

 

They then calculated the Abgeltungsteuer, though in this step they did use the correct tax rate of 24.51%, as:

  • Bemessungsgrundlage * 24.51% = x * 24.51% = 93.54€ * 24.51% = 93.54 * 0.2451 = 22.93€ (which is incorrect, since the underlying Bemessungsgrundlage is wrong)

 

Correct (= the way they should have done it):

x * 24.51% = 24.51% * gross_dividend - US_source_tax

x * 0.2451 = 0.2451 * 233.82€ - 35.07€    | divide by 0.2451 

x = 233.82€ - 35.07€/0.2451

x = 233.82€ - 143.08€

x = 90.74€

 

The correct Abgeltungsteuer is:

  • Bemessungsgrundlage * 24.51% = x * 25% = 90.74€ * 25% = 90.74 * 0.25 = 22.24€

 

And lo and behold, this is exactly what you get if you calculate it the simple way:

 

1 hour ago, PandaMunich said:

280 USD (= 233.82€) gross distribution

- 42 USD (= 35.07€) US source tax 15% of gross dividend

 

57.31€ German Abgeltungsteuer 25% = 0.25 * gross_dividend = 0.25 * 233.82€ = 57.31€

- 35.07€ US source tax

_____________________________________

= 22.24€ remaining German Abgeltungsteuer

+ 1.22€ Solidaritätszuschlag 5,5% = 0.055 * "remaining German Abgeltungsteuer" = 0.055 * 22.24€ = 1.22€

+ 1.78€ Bavarian church tax 8% = 0.08 * "remaining German Abgeltungsteuer" = 0.08 * 22.24€ = 1.78€

 

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Thanks, Panda. Do you know whether US closed end funds will be regarded stocks or funds by the Finanzamt?

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What you have is a fund, and not even an Aktienfonds at that, but a Rentenfonds that invests in bonds (= Anleihen, i.e. somebody, often a country, borrows money and promises to give the money back with interest on top).

The distributions from a Rentenfonds are composed of that interest from the bonds and profits the fund made buying and selling bonds.

It doesn't matter whether it is an open-end (= offener Fonds) or closed-end (= geschlossener Fonds) fund, your Rentenfonds income category is always capital income (= Einkünfte aus Kapitalvermögen), and that income category is taxed with Abgeltungsteuer + Soli + Kirchensteuer (if the owner is a private person like you mum).

There is no difference in taxation between open-end and closed-end Rentenfonds.

 

Stock or a shares (= Aktie. Stock and share are synonyms and the words are used interchangeably) on the other hand give you ownership of a part of a company, and that company gives you, since you are a shareholder (= part owner of that company) a part of its profit, this is the dividend. 

So if you would only own stock/shares if you owned Aktien directly (= not via a fund), e.g. if you had 10 Siemens-Aktien and 10 Allianz-Aktien in your Depot.

 

 

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7 hours ago, PandaMunich said:

What you have is a fund, and not even an Aktienfonds at that, but a Rentenfonds that invests in bonds

I wasn´t talking about that Rentenfonds I had mentioned before but of US closed end funds which I have often seen referred to as stocks on American websites. That´s what made me wonder (and that their distributions are called "dividends" in my account statement) whether they may be regarded as stocks in the US and if so whether the German Finanzamt might also regard them as such if I bought some for my mom´s portfolio.

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No, that would be an Aktienfonds.

There is no difference in the taxation of open-end and closed-end Aktienfonds.

 

From 2018, the US source tax on dividends is no longer claimable, i.e. it will not reduce your Abgeltungsteuer, but to compensate for that a bit, you will no longer have to tax 100% of the gross_dividend (= dividend before US source tax), but only 70%.

This will mean that in the end, you will end up paying over 30% tax on those dividends (for people who do not pay church tax, 33.4625%, see in here for the calculation).

On the other hand, you will also only have to tax 70% of the "real profit" (= selling _price - purchase_price) that you make when selling the fund, with the Finanzamt also making you prepay tax (Abgeltungsteuer + Soli + Kirchensteuer) on a (small) "fictive profit" every year, for as long as you still own the fund. The tax you prepaid throughout all the years on the "fictive profit" will be credited once you sell the fund, i.e. it will lower the tax you will have to pay on the "real profit".

 

Details in here:

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It get´s more and more ridiculous. This is the statement my mother received from a liquidation (note that it was a liquidation, not some sort of distribution or dividend payment) of a US fund:

 

thumbnail?appId=YMailNorrin&downloadWhen


 

Quote

 

thumbnail?appId=YMailNorrin&downloadWhen

 

When I questioned that they withheld more than € 9000 from liquidation proceeds of € 14033,93 this is what they replied:

 

Quote

vielen Dank für Ihre Anfrage.

Auf der zweiten Seite der können Sie die steuerliche Berechnung entnehmen. Bei dem Thai Funds handelt es sich um einen intransparenten Fonds.

Als "intransparent" wird ein ausländischer Fonds eingestuft, wenn dieser die für Deutschland steuerlich relevanten Daten bisher nicht vollständig offenlegt.

Bei "intransparenten" Fonds wird jährlich gegenwärtig entweder 6 % des Anlagebetrages oder 70 % der jährlichen Kurssteigerung fiktiv besteuert. Dies unabhängig davon, ob Sie im Veranlagungszeitraum tatsächlich Kursgewinne realisiert haben oder nicht. Die Besteuerungsgrundlagen können sich ändern.

Aus diesem Grund wurden über die Haltedauer des Fonds theoretische Erträge i. H. v. insgesamt 33.334,13 Euro festgestellt. Diese wurden im Rahmen der Ausschüttung der Versteuerung unterworfen. Da die Berechnung der fiktiven Erträge von der Steuergesetzgebung so vorgegeben ist, haben wir keine Möglichkeit, hiervon abzuweichen.

 

 

 

I had heard of that fictive profit. However, I wasn´t aware it would be applied retroactively. My mother had been holding this stock for about years and doesn´t know anymore at what price she bought it nor even at what bank or broker she bought it. How can she prove that her actual profit was much less? Shouldn´t the fact that the liquidation proceeds are only € 14033,13 be proof enough that there was no profit of € 33334,13 (even if you assume she bought for a stock price of zero)?

 

I even doubt this fund was actually a fund since it´s an incorporation. Couldn´t it therefore be viewed as a "Beteiligungsgesellschaft" like for instance DBAG ?

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Regarding the polite "should" I asked my neighbour from Liverpool and she couldn´t confirm that should actually means "must". But be that as it may: How does the DTA with Thailand come into this? The Thai Fund is, or better: was a US corporation. Would the fact that it invested in Thailand mean the DTA with Thailand becomes relevant? Even if it was, how could that article 25 help my mom given we´re talking about a US company? And why can´t it be regarded a corporation rather than a fund, given that it was one (even if had the title "fund" in it´s name)?

What I don´t understand is that this new law seems to be applied retroactively (how else could a fictive increase of 6% cause a fictive profit more than double the liquidation proceeds?) and that the mere fact that thosee fictive profits exceed the liquidation proceeds isn´t proof enough that this cannot actually be the case?

Thanks god my mom has legal cost insurance. This will be the first time in more than 30 years she´ll have to use it.

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I was a bit disappointed that (--> kindly consult the coloured table in the next post) you do not seem to understand what I wrote and what that article written by a Steuerberater, that I linked to before says that you should do, so as not to have to pay that Pauschalsteuer.

So you will just have to hire a professional to do it for you.

 

I would suggest (--> kindly consult the coloured table in the next post) that you choose a Steuerberater with experience in international cases, a slew of them advertise on Toytown, you can find their threads and reviews written by their clients pinned at the top of the Finance forum: https://www.toytowngermany.com/forum/forum/181-finance/

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2 hours ago, jeba said:

Regarding the polite "should" I asked my neighbour from Liverpool and she couldn´t confirm that should actually means "must".

 

With the greatest respect, Liverpudlians are not representative of the English...

Source: http://www.independent.co.uk/news/uk/home-news/chart-shows-what-british-people-say-what-they-really-mean-and-what-others-understand-a6730046.html

"I’m from Liverpool and we just say what we mean," he said.

 

language-web.jpg.740b81d58a6b5362b51a2fb

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7 hours ago, PandaMunich said:

I was a bit disappointed that (--> kindly consult the coloured table in the next post) you do not seem to understand what I wrote and what that article written by a Steuerberater, that I linked to before says that you should do, so as not to have to pay that Pauschalsteuer.

So you will just have to hire a professional to do it for you.

 

I would suggest (--> kindly consult the coloured table in the next post) that you choose a Steuerberater with experience in international cases, a slew of them advertise on Toytown, you can find their threads and reviews written by their clients pinned at the top of the Finance forum: https://www.toytowngermany.com/forum/forum/181-finance/

Now I´m confused. I thought you might have assumed that the "Thai Fund" was indeed a company subject to Thailand´s law and that was why you brought up the DTA with that country when in fact it was a US corporation.

From the link you posted (and I´m very grateful for that) I understood that my mother must be given a chance to prove that the actual profit was lower than what the "penalty tax law" assumes. The problem is though that she doen´t have records from like 20 years back (that´s for how long she had held that stock) so she cannot prove her actual profit. It also doesn´t answer the question whether this stock (again, it´s a US corporation) is actually a fund and not the equivalent of a German "Beteiligungs(aktien)gesellschaft.

Since mom does have legal cost insurance I thought the easiest way to solve the problem was to task a Fachanwalt für Steuerrecht with fighting the tax administration´s refusal to apply recent jurisdiction.

My point was also that I was surprised (and outraged) that this penalty taxation is being applied retroeffectively. I had assumed it would only apply as of 2018 i. e. the fictive minimum profit would be based on the fictive cost of purchase on 31.12.2017 and not on whenever you bought the respective fund. Or am I wrong in that regard? To me it seems to be the only explanation for how the bank arrived at such a ridiculously high fictive profit.

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