In this article, we explain the additional withholding tax on US dividends and how it differs from the lump-sum tax credit.
Overview
| Withholding tax USA gross | Withholding tax (if held through a qualified intermediary) | Withholding tax USA net | Additional withholding tax | Total tax | |
| 30 % | 15 % | 15 % | 15 % | 30 % | |
| Example of US dividends converted intoCHF 1,000 | CHF 300 | CHF 150 | CHF 150 | CHF 150 | CHF 300 |
Net withholding tax can be claimed via the lump-sum tax credit.
The additional withholding tax can also be reclaimed (like withholding tax).
Additional withholding tax USA explained
US withholding tax is generally 30%.
In principle, the United States levies a 30% withholding tax on dividends and interest. In Switzerland, we know this system as withholding tax. Withholding tax in Switzerland is 35%.
The purpose of this type of tax is to ensure that the income obtained is correctly declared on the tax return. The tax is then recovered. It is therefore a kind of pledge.
Lower withholding tax thanks to double taxation agreement
If the US deducts 30% tax on dividends and the net dividends are also taxable in Switzerland (income tax), there is double taxation. However, double taxation is undesirable, which is why countries try to agree on rules to avoid double taxation by means of corresponding agreements.
Switzerland signed such a treaty with the United States in 1996. This double taxation agreement defines the maximum amount of US tax on dividends when the beneficiary of the dividends is resident in Switzerland:
in the case of dividends :
- 5% for qualifying corporate holdings in the company paying the dividend. A qualifying holding is deemed to exist when the company holds more than 10% of the shares in the company paying the dividend.
- 15% in all other cases.
in case of interest :
- 0% for interest (under the double taxation agreement, interest is only taxable in Switzerland).
The reduction in US withholding tax from 30% to 5% or 15% is only possible for custodian banks that have Qualified Intermediary status. This status is awarded by the US tax authority IRS. Qualified intermediaries must be able to guarantee that dividends and interest are paid to foreigners (e.g. natural or legal persons domiciled in Switzerland).
Additional withholding tax on US dividends paid by Switzerland
In addition to the tax mentioned in the first chapter, there is a tax deducted at source in the United States. This is known as additional withholding tax. This amounts to
in the case of dividends :
- 25% for qualifying corporate holdings in the company paying the dividend. A qualifying holding is deemed to exist when the company holds more than 10% of the shares in the company paying the dividend.
- 15% in all other cases.
in case of interest :
- 30 %
Why an additional tax deduction?
Without additional tax retention in Switzerland, there might no longer be any incentive to declare income in the tax return. The additional withholding tax therefore serves to restore tax honesty.
Recovery of additional withholding tax
Individuals can apply for a refund of the additional withholding tax by completing form R-US 164 “Application for refund of additional US withholding tax” as part of their tax return. In many cantons, form R-US 164 is integrated with form DA-1 “Application for offset of foreign withholding tax on foreign dividends and interest”, so that a single form applies, allowing both the application for reimbursement of the additional withholding tax and the lump-sum tax offset (see next section).
Form DA-1 uses the term “imputation” because the refund is offset against the tax liability. The tax debt you owe on your income and assets is reduced by the credit claimed for the additional tax deduction.
Individuals who fail to declare dividends and interest in their tax return lose the right to a refund of the additional withholding tax three years after the end of the tax period in which the income was generated.
Ordinance on the US-Swiss double taxation agreement
Difference with flat-rate tax credit
The result of the lump-sum tax offset is the same as that of reclaiming the additional withholding tax on US dividends. You can offset the tax on foreign income against your own tax liability, thereby paying less tax.
Basically, however, this is another part of tax on foreign income, namely the part that cannot be reclaimed abroad and is definitively due.
Another difference is that the additional tax deducted is refunded even if no tax is payable. In contrast, in the case of flat-rate tax offset, an offset is only possible if income tax is due for the year in question. The income tax liability defines the maximum amount of the lump-sum tax credit. If there is no tax liability, no credit is possible. In addition, a lump-sum tax credit is only granted for amounts of CHF 100 or more.
The lump-sum deduction of foreign withholding tax on dividends is described as “lump-sum” because the deduction is not apportioned between the various Swiss taxes (income tax, wealth tax, etc.). But in fact, the word ‘flat-rate’ is more confusing than useful.