On first glance, the June 23, 2016, vote in the U.K. to leave the European Union (Brexit) wouldn’t seem to have much consequences for a U.S. investor. After all, it concerns Europe, not the U.S. Isn’t there enough turmoil in the U.S. by itself?
Why Should We Care?
In the aftermath of the vote, many companies that do business in Europe seemingly need to make decisions based on how Brexit will affect them. Since the financial and political fallout of Brexit are not clear, as yet no one knows what all the effects on business would be.
Prime Example
One of the largest companies of consumer brands in the world is Unilever. Currently it has two headquarters: London and Rotterdam, The Netherlands. It is listed on the London Stock Exchange, the Euronext exchange, and the exchange in Trinidad and Tobago. The two types of shares on the New York Stock Exchange are American Depository Receipts (ADRs): UL is for London shares and UN is for Dutch shares. (Disclosure, I am long UL.)
Taxes
As it happens, Dutch dividend taxes are withheld from Dutch-based shares, but no dividend taxes are withheld from London-based shares. As a result, UL shares are generally preferred for U.S. investors.
In the U.S, for non-retirement brokerage accounts, any foreign tax withheld is reported and can be a tax credit on one’s tax return as “Foreign Tax paid.” However, foreign tax paid on securities held in IRA and other retirement accounts cannot be credited on U.S. tax returns. As a result, in the case of Unilever, it was preferable for U.S. citizens to hold shares of UL rather than UN.
1918.
However, Changes
As a result of the Brexit vote, Unilever recently announced it is consolidating itself into one headquarters in Rotterdam. It is reported that Unilever will maintain an office in London, but will not have a headquarters there.
Thus, Unilever will likely be removed from the Financial Times and Stock Exchange index based in London, known as the FTSE 100.
Tax changes?
There have been reports that the Dutch government may eliminate the dividend withholding tax in 2019. This would be a strong positive action for U.S. shareholders of Unilever ADRs. However, it has been opposed by many Dutch domestic political parties.
ADR changes?
What will happen to ADRs of Unilever? As of this writing, there is no definitive announcement, but I would guess that shares of UL will be converted into shares of UN. This should have no effect on shareholder rights in the company or the dividend. If the Dutch withholding tax is eliminated, then conversion is irrelevant for U.S. shareholders. If the tax remains, since UN shares are subject to Dutch tax withholding, U.S. stockholders will be then be receiving a smaller dividend than previously expected.
Royal Dutch Shell
Another major company with dual U.K.-Dutch presence is Royal Dutch Shell, one of the largest petroleum companies in the world. It too has multiple classes of stock. Its Class A stock (RDS.A) has been subject to the Dutch dividend tax withholding, and B Class (RDS.B) share have not been subject to dividend tax withholding. For similar reasons as in the case of Unilever, the RDS.B shares have been preferable for U.S. investors. However, if the Dutch dividend withholding tax is eliminated, there would be no practical difference between RDS.A and RDS.B for U.S. shareholders.
What do you think? Do you hold Unilever or RDS ADRs? What do you think the fallout from Brexit will be? See Contact page how to respond.
The post Tax Consequences of Brexit for U.S. Investors appeared first in Smile If You Dare.