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I have been reading the thread on implications of the Ebay/PayPal

Resolved Question:

I have been reading the thread on implications of the Ebay/PayPal split. It has been announced that shareholders will receive PayPal shares via a dividend. Given this can you give information on the tax implications? If not what else would you need to know.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Which thread are you refering to?
Customer: replied 2 years ago.

http://www.justanswer.co.uk/tax/93tbh-i-m-based-uk-own-ebay-shares-will-paypal-spin.html

Expert:  TonyTax replied 2 years ago.
Thanks.

You read my answer to another question on this subject. Can you point me at the webpage where the announcement is please. Are you a UK shareholder?
Customer: replied 2 years ago.

Hi

Yes I am a UK shareholder and tax payer. Details here. https://separation.ebayinc.com/2015/06/ebay-inc-board-directors-approves-completion-ebay-paypal-separation/

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer. It will take a while so please bear with me.
Expert:  TonyTax replied 2 years ago.

Hi again.

I read the announcement and, whilst it mentions a distribution of Paypal shares, it doesn't say that it will be a dividend for tax purposes as far as I can see.

If the issue to Ebay shareholders is treated as a dividend for UK tax purposes and you have to remember that this is a US company, then the cash equivalent of the dividend will be grossed up for UK tax purposes at 10% (£90 net = £100 gross) as any US stock dividend for a UK resident shareholder would under the terms of the UK/US double tax treaty. You will only have further tax to pay if you are a higher rate taxpayer in the tax year the "dividend" is paid.

In its simplest form, the original cost of the Ebay shares will be split between the Ebay and Paypal shareholdings in proportion to their respective market values at the time of the demerger for Capital Gains Tax purposes. Given how imminent the demerger is, I'm surprised that there has been no information on the tax implications as there was with the Vodafone/Verizon demerger months in advance which leads me to believe that the Ebay/Paypal demerger will be a much more straightforward event in terms of the tax implications with no cash involved.

Where there is a straight issue of shares and no cash is involved, there are usually no immediate Capital Gains Tax considerations.

Whether the issue of Paypal shares will be treated as a stock dividend for UK tax purposes remains to be seen. I doubt it as there would appear to be no intention to "return value" to Ebay shareholders as there was with the cash payments to Vodafone shareholders. I may be wrong of course and I can see why one may come to the conclusion that the Paypal shares are being issued by way of a dividend because of the use of dividend language such as "ex-distribution".

I hope this helps but let me know if there any further questions.

Customer: replied 2 years ago.

Hi

Let's assume it is a dividend, and that I am a high rate tax payer. Using an example whereby I receive PayPal shares with a value of $1000 can you explain the type of tax I would be liable for (I assume income) and the $ value I would owe. I don't quite understand the 10% grossing up.

Expert:  TonyTax replied 2 years ago.
If you receive a dividend of £900 from a UK company, for tax purposes is it is £1000 gross. That's because the company pays dividends out of net of corporation tax profits. In effect, the government gives you a credit for part of the corporation tax paid which is deemed to cover your personal tax liability at the basic rate.

If you are a 40% taxpayer, the higher dividend tax rate is 32.5%. So, on a £1,000 gross dividend, you would have a higher rate tax liability of £325.00. You would deduct from that the 10% tax credit of £100 to leave you with a net liability of £225 (or 25% of the net cash dividend).

If you are a 45% taxpayer, the higher dividend tax rate is 37.5%. So, on a £1,000 gross dividend, you would have a higher rate tax liability of £375.00. You would deduct from that the 10% tax credit of £100 to leave you with a net liability of £275 (or 27.5% of the net cash dividend).

US dividends carry a 15% withholding tax. You can either reclaim that as a UK shareholder which can be a complicated process or you can offset the US withholding tax against your UK tax liability.

Take a look here for information on how this works. If you are a basic rate taxpayer, you are limited to offsetting a 10% tax credit. If you are a higher rate taxpayer, you can offset the full 15% withholding tax. Look here for more information on foreign tax credit relief.

If you receive Paypal shares with a value of $1,000, it carries a 15% withholding tax of $176 so the gross dividend is $1,176. The gross dividend for UK tax purposes is $1,111 or £708. A 40% taxpayer would pay higher rate tax of:

£1,111 x 32.5% - £112 ($176 / 1.57) = £249 or $391

A 45% taxpayer would pay higher rate tax of:

£1,111 x 37.5% - £112 ($176 / 1.57) = £305 or $479.

Take a look here for information on how dividend tax works.
Expert:  TonyTax replied 2 years ago.
My apologies. Here is a revision:

£708 x 32.5% - £112 ($176 / 1.57) = £118 or $185

A 45% taxpayer would pay higher rate tax of:

£708 x 37.5% - £112 ($176 / 1.57) = £154 or $242.

You will pay UK, not US tax.
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