Are non-US residents subject to withholding for tax purposes?
Overview:
Information relating to tax obligations is reported as required to the tax authorities within your country of residence as well as other countries if trading products subject to any local withholding requirements. Unless specifically directed by a taxing authority, IBKR does not withhold taxes on proceeds from security sales. We are required by US tax law, for example, to withhold US taxes on dividends paid by US corporations to foreign persons at a rate of 30%. This rate may be lower if the US has entered into a tax treaty with your country. In addition, investment interest income is not subject to US withholding. All withholdings for non-US persons and most entities will be reported on Form 1042-S at the close of each year. For further information refer to IRS publication 901 and/or your tax advisor.
My account was debited for a dividend payment (Payment in Lieu) for a short stock position which I don’t recognize. How did this occur?
Overview:
A short stock position may originate from an option position which you held in your account. For example, if you hold a long put position in your account, that position may be subject to automatic exercise by the clearinghouse if it is in-the-money by a defined threshold at expiration. This put exercise will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date.
Similarly, a short call position in your account is subject to assignment should a call purchaser elect to exercise their right to purchase the stock and your account be allocated through the random clearinghouse and broker assignment process. This call assignment will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date.
These payments will be reflected on your Activity Statement as a 'Payment In Lieu Of Dividend'.
What does Payment in Lieu refer to?
Overview:
A Payment in Lieu, or Pil, typically refers to a cash debit or credit made to an account in recognition of a stock dividend. A Pil in the form of a debit will be made when an account is holding a short position in a stock on its ex-dividend date. This debit occurs as the lender of the shares which facilitated the short sale remains entitled to all dividends paid throughout the duration of the loan period.
Conversely, a Pil in the form of a credit is made when a long stock position in an account has been loaned out on its ex-dividend date. Account holders should note that shares which are held long and which are the subject of a margin lien may be eligible to be loaned by the broker. In this situation the credit originates from payment by the borrower of the shares rather than from a dividend by the share issuer. U.S. taxpayers who are recipients of Pil credits should discuss the tax implications of Pils and non-qualified dividends with their tax adviser.
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