HSBC 2002 Annual Report Download - page 317

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Taxation – US residents
The following is a summary of the US Federal tax
considerations that are likely to be material to the
ownership and disposition of Shares or ADSs by a
holder that is a resident of the United States for the
purposes of the income tax convention between the
United States and the United Kingdom (the ‘Treaty’ ),
and is fully eligible for benefits under the Treaty (an
‘eligible US holder’ ). The summary does not purport
to be a comprehensive description of all of the tax
considerations that may be relevant to a holder of
Shares or ADSs. In particular, the summary deals only
with eligible US holders that hold Shares or ADSs as
capital assets, and does not address the tax treatment
of holders that are subject to special tax rules, such as
banks, tax-exempt entities, insurance companies,
dealers in securities or currencies, persons that hold
Shares or ADSs as part of an integrated investment
(including a ‘straddle’ ) comprised of a Share or ADS
and one or more other positions, and persons that own,
directly or indirectly, 10 per cent or more of the voting
stock of HSBC Holdings. This discussion is based on
laws, treaties, judicial decisions and regulatory
interpretations in effect on the date hereof, all of
which are subject to change. Representatives of the
United Kingdom and United States signed a new
income tax treaty on 24 July 2001 and a protocol to
the new convention on 19 July 2002. As of the date
hereof, the new treaty has not yet been ratified by the
United States Senate or the government of the United
Kingdom, and there can be no assurance that it will
enter into force. If the New Treaty is ratified and
enters into force, eligible US holders will no longer be
entitled to claim a special foreign tax credit in respect
of dividends that is available under the terms of the
Treaty, except for a limited period of time during
which such holders may elect to apply the Treaty in its
entirety in preference to the New Treaty.
Holders and prospective purchasers should
consult their own advisers regarding the tax
consequences of an investment in Shares or ADSs in
light of their particular circumstances, including the
effect of any national, state or local laws.
In general, the beneficial owner of a Share or
ADS will be entitled to benefits under the Treaty (and,
therefore, will be an eligible US holder) if it is (i) an
individual resident of the United States, a US
corporation, or a partnership, estate or trust to the
extent its income is subject to taxation in the United
States as the income of a resident, either in its hands
or in the hands of its partners or beneficiaries; and (ii)
not also resident in the United Kingdom for UK tax
purposes. Special rules, including a limitation of
benefits provision, may apply in limited circumstances
to certain investment or holding companies and tax-
exempt entities. The Treaty benefits discussed below
generally are not available to US holders that hold
Shares or ADSs in connection with the conduct of a
business through a permanent establishment, or the
performance of personal services through a fixed base,
in the United Kingdom.
Taxation of dividends
The Treaty contains provisions that are intended to
extend the benefits of the UK integrated tax system to
eligible US holders. The UK tax credit available to
persons who are resident for tax purposes in the
United Kingdom in respect of dividends is currently
equal to one-ninth of the cash dividend, or the
equivalent of 10 per cent of the sum of the dividend
and the UK tax credit. The Treaty provides that an
eligible US holder is entitled to receive a payment
from the UK Inland Revenue equal to the amount of
the tax credit, reduced by any deduction withheld
from the payment. The UK withholding tax (which,
under UK law, may not exceed the UK tax credit)
fully offsets the UK tax credit, and eligible US holders
are no longer entitled to receive a cash payment from
the UK Inland Revenue.
To claim foreign tax credit benefits under the
Treaty, eligible US holders must report an election on
IRS Form 8833 to include in their income, as an
additional dividend, an amount equal to the tax credit
that is available to UK resident investors, currently
one-ninth of the amount of the dividend that is
received by such a holder in cash.
If an eligible US holder makes this election, the
holder will be treated for US tax purposes as if a UK
tax equal to the amount of the credit had been
withheld from the dividend. The holder will not be
entitled to receive an additional cash payment from
HSBC or from the UK Inland Revenue. For example,
if HSBC pays such a holder a dividend of 90, the
holder may elect to include 100 in its income. By
making this election, the holder will be treated as
having income of 100 that is subject to a UK
withholding tax of 10. Subject to generally applicable
limitations, this tax may be claimed as a credit against
the holder's US tax liability. Foreign tax credits are
not allowed for withholding taxes imposed in respect
of certain short-term or hedged positions in securities