Foreign Tax Withholding

[A Shot in the Dark]

Owner Only or Solo 401(k) Plan. Large amount of assets. Uses individually directed Brokerage Account.

Purchases a Canadian mining stock via the Toronto stock exchange.

The stock issues a dividend. There is a 20% withholding on the dividend.

Is there a procedure or method to have the withholding returned to the trust? Or Quote - Unquote Is it a cost of owning the stock?

[rcline46]

It would appear the indicia of ownership is outside the US. If so this is a prohibited transaction at least, and quite likely even worse. Hie thee to an attorney pronto.

[A Shot in the Dark]

Thank you for your response. Thankfully for me, not for the plan sponsor, this question is not for a client of mine.

However, the investment advisor who asked me the question is a good referral source and I would like to assist him with finding a correct answer.

Let me state your response into a question if I may.

Is it prohibited for a qualifed retierement plan (trust) to purchase/acquire a publicly traded foreign stock on a foreign stock exchange?

Clearly this question is of far greater importance than the foreign tax withholding issue.

This advisor works for a very large brokerage house. It would amaze me if the institution would allow for this transaction to take place if it is prohibitive.

But it seems I am amazed on a daily basis.

Thanks for the help.

[rcline46]

It is prohibited. The indicia of ownership must be subject to the US courts. The brokers compliance department needs to be made aware that of this purchase in an account listed to a qualified plan. Of course the the account is misregistered........

The findings would be under IRC 501 in the rules for the trust.

[A Shot in the Dark]

Thank you very much for the information. I will pass this along.

[Guest mjb]

It would appear the indicia of ownership is outside the US. If so this is a prohibited transaction at least, and quite likely even worse. Hie thee to an attorney pronto.

How is the indicia of ownership of the stock outside the US just because the stock is purchased on a foreign exchange? I thought the rule was under ERISA 404b?

[Guest Brian E. Foont]

While I appreciate that A Shot in the Dark's inquiry ended up with a discussion of whether such plans may hold a foreign security, the discussion does not appear to have returned to his/her original question, "Is there a procedure or method to have the withholding returned to the trust?" From a generic perspective, the answer to that question is often yes. Much depends on the specific countries and the entities/types of accounts involved. The United States is, for example, party to 58 bi-lateral tax treaties (including with Canada) under which U.S. entities, particularly pensions, are often able to recover all or a portion of withheld taxes. With regard to Canada, U.S. pensions are not exempt from Canadian Unit trust income tax, but they are entitled to the 15% treaty rate on that sort of income.

With regard to whether such securities may be held, please note, for example, that there are over 1,500 American Depositary Receipts that trade on U.S. exchanges and that are accessible by retirement accounts. There are also other methods by which retirement funds may be invested abroad.

Please note that the company for which I work, Globe Tax Services, Inc. will be hosting a free webinar on this subject at 1:00 PM EDT on August 13, 2012. More information on that may be found here: http://benefitslink.com/events/detail.php?id=48797. I hope that you will join us.

Have a good day.

Sincerely,

Brian

[mbozek]

While I appreciate that A Shot in the Dark's inquiry ended up with a discussion of whether such plans may hold a foreign security, the discussion does not appear to have returned to his/her original question, "Is there a procedure or method to have the withholding returned to the trust?" From a generic perspective, the answer to that question is often yes. Much depends on the specific countries and the entities/types of accounts involved. The United States is, for example, party to 58 bi-lateral tax treaties (including with Canada) under which U.S. entities, particularly pensions, are often able to recover all or a portion of withheld taxes. With regard to Canada, U.S. pensions are not exempt from Canadian Unit trust income tax, but they are entitled to the 15% treaty rate on that sort of income.

With regard to whether such securities may be held, please note, for example, that there are over 1,500 American Depositary Receipts that trade on U.S. exchanges and that are accessible by retirement accounts. There are also other methods by which retirement funds may be invested abroad.

Please note that the company for which I work, Globe Tax Services, Inc. will be hosting a free webinar on this subject at 1:00 PM EDT on August 13, 2012. More information on that may be found here: http://benefitslink.com/events/detail.php?id=48797. I hope that you will join us.

Have a good day.

Sincerely,

Brian

While the trust may be able to recover the taxes withheld from the foreign nation's taxing authority, the accountant's fees for preparing the foreign tax return will usually exceed the amount of taxes withheld. This is why it is better to hold foreign securities in a taxable account where the amount of taxes withheld can either be taken as an itemized deduction or a tax credit against US tax.

[Guest hk73]

Are foreign ordinary shares held in a U.S. account now permitted or not? Wouldn't 29 CFR 2550.404b-1 indicate "yes"?

[Guest Brian E. Foont]

While I appreciate that A Shot in the Dark's inquiry ended up with a discussion of whether such plans may hold a foreign security, the discussion does not appear to have returned to his/her original question, "Is there a procedure or method to have the withholding returned to the trust?" From a generic perspective, the answer to that question is often yes. Much depends on the specific countries and the entities/types of accounts involved. The United States is, for example, party to 58 bi-lateral tax treaties (including with Canada) under which U.S. entities, particularly pensions, are often able to recover all or a portion of withheld taxes. With regard to Canada, U.S. pensions are not exempt from Canadian Unit trust income tax, but they are entitled to the 15% treaty rate on that sort of income.

With regard to whether such securities may be held, please note, for example, that there are over 1,500 American Depositary Receipts that trade on U.S. exchanges and that are accessible by retirement accounts. There are also other methods by which retirement funds may be invested abroad.

Please note that the company for which I work, Globe Tax Services, Inc. will be hosting a free webinar on this subject at 1:00 PM EDT on August 13, 2012. More information on that may be found here: http://benefitslink.com/events/detail.php?id=48797. I hope that you will join us.

Have a good day.

Sincerely,

Brian

While the trust may be able to recover the taxes withheld from the foreign nation's taxing authority, the accountant's fees for preparing the foreign tax return will usually exceed the amount of taxes withheld. This is why it is better to hold foreign securities in a taxable account where the amount of taxes withheld can either be taken as an itemized deduction or a tax credit against US tax.

While it is true that recovery may be economically inefficient in some cases, that should certainly not be presumed. When recoveries can be many thousands, if not tens or hundreds of thousands of dollars, such a presumption could very well result in the trustees leaving funds on the table. The EBSA has, for example, cautioned plans regarding this. In one case, a plan with over $100,000,000 in assets was warned regarding their failure to recover less than $20,000.

[JJA]

"Owner Only or Solo 401(k) Plan". ERISA does not apply I was told by the DOL EBSA today. You can buy any foreign stock or other assets and not worry about ERISA 404(b) or other ERISA restrictions, which are explicitly meant to protect employees, not solo owners.