Can you use options to minimize exposure to the US withholding tax on dividends?

[Daal]

Because I'm not a US resident nor resident of a country with a tax treaty with the US, dividends paid to my positions have a 30% tax withholding to them. I'm considering putting a position on a country ETF but instead of using the underlying, using leaps on the ETF instead. I would sell a put option and buy a call of the same expiration (jan 2018) and strike price (effectively a synthetic long). I assume the dividend rate priced in options models take into account pre-tax (or very low tax) dividends. Is that assumption correct? Is there a flaw in this thinking? Capital gains are tax free and suffer no 30% withholding

 

[Daal]

The puts have a 44% implied vol and the calls 38% (same strike, same expiration), does that provide an extra benefit to the strategy?

 

[newwurldmn]

Yes. The put call parity price is the gross dividend in the U.S.

 

[Daal]

Yes. The put call parity price is the gross dividend in the U.S.

Could the margin requirement to hold such option strategy ever rise to something bigger than using the underlying outright?

 

[rmorse]

Could the margin requirement to hold such option strategy ever rise to something bigger than using the underlying outright?

If you have a portfolio margin account, the OCC margin is the same. House risk rules at some clearing brokers might be different, but it is my expectation that they will be very close. One thing you have to be mindful of is the cost of entering the trade. Most option markets are much wider than the common. Look at what that will cost you over time vs the cost of the withholding. If the dividend is small, the option spreads will be a higher cost. Also, position your long call, short put so the call will not likely be ITM enough on X-date, that you should be exercising the call. It will cost you money not to and you don't want to. You will end up rolling the position just before X-date, which will have another cost.

 

[ktm]

At the end of the year, do you really owe the 30% tax? I understand the withholding is mandatory, but if you got an ITIN and filed a US return - would you get much of the funds back?

 

[Daal]

At the end of the year, do you really owe the 30% tax? I understand the withholding is mandatory, but if you got an ITIN and filed a US return - would you get much of the funds back?

I don't think so because my country has no treaty with the US. I know this because a book I published in the US has withholding and getting the ITIN (I was told by different authors) all it could do was reduce the rate to the treaty rate, which in my case, doesn't exist

 

[luisHK]

I suffer from the same tax as Daal and despite doing much efforts to avoid holding US stocks through dividends still end up losing more than I wished each year in dividends (definetely over 10k)
Why would funds be refunded if filing a US return ? I heard long ago it might work for companies generating most of their profits overseas, like Philip Morris but not sure wether it works nor wether it's worth the hassle. It seems everytime I receive dividends fron US companies or US listed funds IB hit me with witholding tax. I'm even afraid to hold emerging markets etfs through dividends (maybe from past bad experience). Daal do you have experience with those, taxwise I mean ?
Otherwise, yes, using options or futures are ways to go around the tax if you don't get hit on your cap gains.

 

[luisHK]

Besides if you trade from a country enjoying a tax treaty with the US and a reduced witholding tax rate, IB will take this into account and withold at the reduced rate, without u needing to go through the US tax filing.

 

[ktm]

Withholding is one thing...the tax you actually owe may be quite another. If you guys filed, would you get a personal exemption or any deductions? I think the personal exemption for non-resident aliens is around 4K.