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<<I've been reading a letter from a bank in Luxemburg concerning the new withholding tax on all US income that will apply as of 1.1.2001.>>


<<What I read.
Foreign banks can choose to become a "Qualified Intermediary" under an agreement with the IRS. These banks must disclose the identity of their clients taxable in the US (for ex. the US expatriates in Europe).>>


<<Failing disclosure, their clients will be subject to back-up withholding of 31 % on all income from US securities as well as on the proceeds or the sale of such securities.>>


If I read well, the withholding tax of 31 % will be levied on the amount of purchase or sale of the US securities and not on capital gains. Is this correct?>>

Sorry, but I don't know because I haven't really read the treaty between the US and Luxemburg. But it sounds like if you allow for the disclosure, then the withholding tax will not be imposed. And, even if it is imposed, it's not a TAX at all, it's simply withholding. So when you file your tax return, and report all of your worldwide gains and losses from all sources (Luxenburg accounts included), you'll receive credit for that prior withholding.

<<If yes, it is a rather severe burden. What was the background of the rule?>>

I can only GUESS that there are US citizens out there that are using foreign banks and brokerages who are not reporting their income and gains to Uncle Sammy. And I'm guessing that Uncle Sammy is applying some pressure to these countries to either disclose the identity of these US citizens, or institute withholding on any income and gains.

Chris Riser is our resident international guru. He might be kind enough to shed some additional light on this issue. In the meantime, you might want to check out IRS Publications 901, 593, and 514.

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