The subject of foreign dividend taxation treatment is a very complex one. In United States, the Internal Revenue Service (IRS) imposes taxes to all income, whether it was obtain in United States or in another country.
A solid knowledge on how foreign dividends are being taxed can help you save a lot of money. If you get dividends from a foreign company, those dividends are taxed in the country of origin.
Dividend double taxation problem
To avoid double taxation, you could claim a tax credit from IRS. For example, if your dividend income was taxed by $100 in a foreign country, you have the right to claim $100 tax credit, reducing the income of taxes paid in US. You really need a certified accountant to help you deal with all the forms you need to file, in order to benefit from foreign dividends tax credit.
Requirements of foreign dividends tax credit
In order to benefit from US tax credit for foreign dividend income, there are some criteria you need to comply. First of all, the income needs to be passive (like dividends or interest).
Also, the qualified foreign taxes can’t be higher then $300 and you need to fill form 1099-DIV or 1099-INT for all your gross foreign income. If you have shares to a mutual fund with important holdings of foreign stocks, you will probably be able to claim the tax credit on the foreign income taxes paid by the fund. However, you need to be careful: the mutual funds that have shares to other foreign funds don’t qualify for tax credit. That’s because they are not actually paying the foreign taxes themselves.
How to benefit from tax credits
If you want to benefit from tax credit for your foreign dividend income, you should buy shares to mutual funds that qualify. If you’re unsure about the tax credits that you can claim, you should call directly the fund, to find out all the details on dividend distribution and the foreign tax per share already withheld. In order to claim your foreign tax credit, you have to file Form 1116 or you can enter the information on Form 1040. However, since the procedures related to foreign dividend taxation can be quite tricky, you should ask advice from a certified accountant or a tax attorney.
Dividends from foreign companies can be treated as qualified dividends
Qualified dividends give you access to low tax rates: in 2011 and 2012, you can benefit, for those dividends, from tax rates of 0% to 15%. The main conditions are to have held the stock for at least 61 days during a period of 121 days, which starts with 60 days prior to ex dividend date.
The ex dividend date comes two days prior to the shareholders Record Date, performed by a company. In other words, qualified dividends generally come from long-term investments. Also, the dividends need to be paid by companies from countries that signed tax treaties with US.
Qualified Dividend per countries:
There is a list of fifty-two countries that can offer you qualified dividends: Australia, Austria, Belgium, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Latvia, Lithuania, Luxembourg, Mexico, Morocco, Netherlands, New Zealand, Norway, Pakistan, the Philippines, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, Trinidad and Tobago, Tunisia, Turkey, Ukraine, United Kingdom, and Venezuela.
Also, if the foreign company that pays you dividends is incorporated in a US possession (American Samoa, Northern Marianas, Guam, Palau, Marshall Islands, Puerto Rico, Federated States of Micronesia or US Virgin Islands) they can also qualify for low tax rates. Foreign stocks that are traded on established US securities markets offer you the opportunity of qualified dividends.
Final Thoughts on Foreign Dividend Tax Treatment
If your portfolio contains shares to a lot of foreign companies and you want to claim your tax credit, the taxes already paid need to be detailed for each country. This rather painful activity will be charged extra by your accountant or your tax attorney, so you need to find out if it’s worth applying for the tax credits.
Generally, the foreign taxes withheld by international mutual funds are around $30 for holdings of $10 000. If the effort to claim the tax credit is worth it has to do with the size of your portfolio.
You might as well invest in an international ETF or mutual fund including dividend payers instead of running into this dividend tax treatment nightmare!
We have written specific article on tax treatment for Americans and Canadians:
Dividend Tax Treatment in United States
Dividend Tax Treatment in Canada
Useful Dividend Taxation Form:
Form 1116: Foreign Tax Credit
Form 1099-DIV: Dividend & Distribution Income
Form 1099-INT: Interest Income