Hi Koreba! Since the shares were lent out, dividends were paid to the borrower, who can not reclaim the withholding tax as it is not the beneficial owner (I am). On the other side, my IB statement does not show that I paid the withholding tax (which I did not, of course, since it was paid by the borrower), but only shows that I received a given amount for “payment in lieu of dividends” (and this amount is 65% of the dividends). I live in Ticino, and I just can’t see how can I claim back something that I never paid. As others I have said, I would need to discuss this with the help of a professional, and the costs are likely to overcome any benefit.
I think that the problem is with IB. They should forward 100% of the dividends, and the fact that the borrower can not reclaim the withholding tax should be just part of their risk. I have terminated participation in their SYEP since the unpredictable advantage is not guaranteed to cover the certain disadvantage of being heavily taxed.
I expect the borrower to be someone who is shorting the stock. I.e. they sold the borrowed stock and thus, do not get any dividends. The buyer of the borrowed stock is unaware of this (shares are fungible) and will get regular dividends with withholding tax deduction.
I agree. It doesn’t make sense to me at all that the borrower would only have to pay 65% of the dividends to you. I’d expect them to be liable for the whole dividends. Have you already contacted IBKR support? I would simply report that the payment in lieu does not match the declared stock/ETF dividend and you expect a correction.
Do participants in the Stock Yield Enhancement Program receive dividends on shares loaned?
Stock Yield Enhancement Program shares that are lent out are generally recalled from the borrower before ex-date in order to capture the dividend and avoid payments in lieu (PIL) of dividends. However, it is still possible to receive a PIL.
I checked my statements. I had 2 payments in lieu of divs in 2020 on 1 Germany domiciled ETF and 1 German stock. Both of the payments I received were the full gross dividend (no tax deduction). But… even though I am participating in the SYEP, none of the two securities were lent out during ex-date. I have no idea why the payments were in lieu payments.
Did you have a margin loan at this time? If yes, IB takes your shares as a collateral and then they lend it. Same if you bought shares less than 2 days ago and they had not been settled yet.
Run Activity statement for the ex dividend date and see what “Collateral for Customer Borrowing” section says.
True, could be that but not 100% clear match from the IB statements. On ex-date, none of the collateral was lent out but a day before pay date and on pay date some of the shares were lent out.
I find the concept of securities lending quite interesting (in theory, at least). It would allow ETF-holders to participate in option trading profits, no matter if the stock markets fall or rise (benefiting from volatility). So returning to the original question:
Does anyone know what the average return on investment is for ETF lending, e.g. regarding VT, VTI or VXUS? I imagine it’s a lot lower than for Gamestop, Tesla and the likes.
On the concept of ETF lending vs. stock lending: I’m still not sure whether this leads to a double lending situation, a) the ETF provider lending the stocks within the ETF and b) the individual ETF-owner lending the ETF as whole. To me, that seems kind of unsettling.
I assume ETF providers earn way more by lending the stocks within an ETF than we can earn by lending our whole ETF, due to much higher trading levels on an individual stock level. Wouldn’t it be fair for ETF-providers to let us participate in these profits?
Just to be clear: As ETF-owners we don’t own a single stock contained in our ETF. Vanguard or Blackrock’s the owner of the individual stocks. Hence, we have no shareholder rights. Has anyone ever been bothered by that?
That’s possible even without ETFs. If someone borrows a stock and then sells it, the buyer can’t tell whether the stock was borrowed or not and that buyer can lend the ‘same’ stock again. Theoretically, even to the same short seller. The possibility of more stocks being shorted than total free float may indeed be concerning for a particular company. E.g. hedge funds excessively shorting a single company. I don’t expect this to be an issue in practice for an ETF.
Investors do profit from funds lending stocks. It effectively reduces the ongoing charges. You can see the profits from stock lending in the annual report of each fund.
Thanks for sharing, very interesting! Now, for small positions securities lending might not be worth your time, but what about a portfolio of, say, 500k VT? Any idea how much annual yield (percentage of total position) this would amount to?
So there’s the problem: VT’s not been lent out, but I’m sure IBKR has made substantial profits for example from the FAANGs inside your VT. Are you sure these are all passed on to you as lower ETF-costs?
What would be “unfair” about it?
It would just be costs you incur for your additional income from securities lending.
There’s no such thing as a free lunch.
Who says the borrower is necessarily eligible for such refund? Couldn’t there be borrowers that are not eligible for such a refund?
The whole Cum-Ex Scandal is proof that it does matter who actually paid.
Thanks for the update, that’s very interesting, good luck with your query, I’m really curious how they’ll respond to it!
So no problem with US-domiciled ETFs then, if I understand you correctly?
But so far, your VT has never been lent out? That’s kind of surprising, because there clearly is an options market for VT, just look at the options chain on IB or any other broker.
Also, I’ve read that quite some people are following conservative options strategies with VTI / VT like covered calls, it’s become pretty mainstream. And looking at the current volatility, options trading should be running hot.
Withholding tax exists to make that securities income gets taxed (“properly”), even in an cross-border context. While it is, in principle, often refundable, there’s often cases where it’s not. In other words: Withholding tax having been deducted doesn’t guarantee that it can be reclaimed.
That doesn’t mean that WHT can’t become a cost though. Compare it to Irish ETFs: They aren’t able to have 15% US withholding on US stocks refunded either. It’s an additional cost, as opposed to holding US ETFs.
Yes - but I suspect (and am asking you) whether you did quote the appropriate paragraph, see here…
This is, as I understand it, no. 3.2.2 in the tax administration’s document you linked (rather than 3.2.3). Also, what about “Weiterveräusserung” in this context?
“Sofern der letzte Borger in der Transaktionskette die geborgten Wertschriften zur Erfüllung einer Lieferverpflichtung verwendet oder veräussert…” (the linked ESTV document)
Doesn’t this happen - or couldn’t it, with IBKR’s lending program?
…kann keine der in der Transaktionskette involvierten Parteien einen Anspruch auf Rückerstattung der auf der Originalzahlung erhobenen Verrechnungssteuer geltend machen. Der Anspruch auf Rückerstattung der auf der Originalzahlung erhobenen Verrechnungssteuer steht grundsätzlich der Person zu, welcher die Wertschriften vom letzten Borger in Erfüllung einer Lieferverpflichtung oder infolge Veräusserung übertragen wurden" (ESTV again)
No refund for you, unless I misunderstand or am missing something, am I?
(…which I may. I just gave this a cursory glance. Also do note that IBKR warns you of potential adverse tax consequences of securities lending)
For me personally, I have my doubts whether it’s that clear (see my previous post).
Also, I noticed someone else in your reply above:
Please refer back to the ESTV document.
Both these diagrams refer to a domestic borrower: “eine Person mit Sitz oder Wohnsitz im Inland (B)”.
I’m pretty sure that IBKR (whatever their entity applicable) is not considered a domestic resident
Oh, it definitely is a reporting issue.
But that is the thing with withholding taxes:
They do exist (partly) for that very reason: Because reporting on the ultimate beneficial owner of and recipient isn’t always available or possible.
Also, the practical refundability of withholding tax is subject to reporting and/or proof. Which can get hairy, once you cross borders multiple times.
What should not be a big (but a mere reporting) issue in theory, may very well become an insurmountable in practice.
Coming back to the ESTV guidance (my: remarks in bold)
"Borgt eine im Ausland ansässige Person (IBKR) von einer in- oder ausländischen Gegenpartei (you) Wertschriften, deren Erträge der Verrechnungssteuer unterliegen, und verleiht sie diese an eine ebenfalls im Ausland ansässige Gegenpartei (unknown, but probably foreign) weiter, sind folgende Konstellationen zu unterscheiden:
b) Sofern der letzte Borger in der Transaktionskette die geborgten Wertschriften zur Erfüllung einer Lieferverpflichtung verwendet (IBKR: “When you lend your Fully-Paid Securities, it is likely that such securities will be used to (…) satisfy delivery requirements”) oder veräussert, kann keine der in der Transaktionskette involvierten Parteien einen Anspruch auf Rückerstattung der auf der Originalzahlung erhobenen Verrechnungssteuer geltend machen. Der Anspruch auf Rückerstattung der auf der Originalzahlung erhobenen Verrechnungssteuer steht grundsätzlich der Person zu, welcher die Wertschriften vom letzten Borger in Erfüllung einer Lieferverpflichtung oder infolge Veräusserung übertragen wurden."
What’s wrong with my reasoning?
(…that they’re may be cases where you’re not entitled to reclaim WHT. Except that you don’t like the result or amount of substitute payment Which may, I guess, be the reason why don’t report a tax withheld on their statements)
Damn, what a rabbit hole! So you basically have no control over how your securities will be used. How often do you think your lending results in “satisfying delivery requirements”? Is that basically the case whenever call options are exercised?
Anyway, if that’s really the case I think IB should have to pay you the full dividends in these cases, without WHT, otherwise it’s an unfair deal.
By reading and partipating to this forum, you confirm you have read and agree with the disclaimer presented on http://www.mustachianpost.com/
En lisant et participant à ce forum, tu confirmes avoir lu et être d'accord avec l'avis de dégagement de responsabilité présenté sur http://www.mustachianpost.com/fr/
Durch das Lesen und die Teilnahme an diesem Forum bestätigst du, dass du den auf http://www.mustachianpost.com/de/ dargestellten Haftungsausschluss gelesen hast und damit einverstanden bist.
This is, as I understand it, no. 3.2.2 in the tax administration’s document you linked (rather than 3.2.3).
Which may, I guess, be the reason why don’t report a tax withheld on their statements)