Guide to Foreign Tax Withholding on Dividends for U.S. Investors (2023)

Foreign dividend-paying stocks can increase a portfolio's diversification and provide exposure to faster-growing emerging economies.

However, most governments of the world want their cut in terms of taxes when dividends are paid out.

Just as with U.S. dividend tax law, the fine details of how much you have to pay and what forms you need to fill out can be both time-consuming and a source of angst come tax time.

Let’s take a look at foreign dividend withholding taxes as it applies to U.S. investors to see what you need to know about generating overseas dividend income.

What is Withholding Tax on Dividends?

While the U.S. government taxes dividends paid by American companies, it doesn’t impose tax withholdings for U.S. residents.

In other words, each U.S. investor receives the full dividend amount and is responsible for reporting their annual dividends to the IRS each year and paying taxes accordingly.

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However, many governments automatically withhold taxes on dividends paid to nonresident shareholders by companies incorporated within their borders.

As a result, U.S. investors owning shares in most foreign companies will see a portion of their dividend payments withheld by their broker. That amount represents the foreign withholding tax on dividends.

Foreign Dividend Withholding Tax Rates by Country

The foreign withholding tax rate on dividends can vary wildly around the world. Here is the foreign tax on dividends by country for some of the largest nations:

  • Australia: 30%
  • Canada: 25%
  • China (Mainland): 10%
  • France: 25%
  • Germany: 25%
  • Ireland: 25%
  • Japan: 20.42%
  • Mexico: 10%
  • Netherlands: 15%
  • Switzerland: 35%
  • U.K.: 0%
  • U.S.: 30% (for nonresidents)

S&P Dow Jones Indices maintains a list of withholding tax rates for every country.

Some of the most popular foreign dividend companies, including those based in Australia, Canada, and certain European countries, have high withholding rates, between 25% and 35%.

Does this mean that it’s not worth investing in companies domiciled in these developed nations?

Not necessarily. Thanks to tax treaties between the U.S. and many countries around the world, the actual amount of dividends withheld from U.S. investors is often much less than these headline figures.

Tax Treaties Can Help Ease the Pain but Make for Extra Complexity at Tax Time

In order to avoid double taxation, in which dividend investors are taxed by both foreign governments and the IRS, the U.S. has worked out tax treaties with over 60 nations to reduce the foreign tax paid on dividends.

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As a result, most major countries have deals with the U.S. to apply only a 15% withholding tax to dividends paid to nonresident shareholders. Some examples include Australia, Canada, France, Germany, Ireland, and Switzerland.

To receive the lower rate, your broker or asset manager needs to have certain information on file, including a W-9 form which contains a U.S. investor's name, address, and Social Security number.

In our experience, major brokerages such as Vanguard and their custodians automatically file the necessary paperwork with foreign governments to enable their verified U.S. investors to obtain the preferential tax treaty rates for dividends. But it may be worth confirming with your broker.

Besides receiving the lower tax treaty rates on dividends paid by foreign companies, U.S. investors have another lever they can pull to reduce their withholding tax burden.

How to Minimize Your Foreign Dividend Tax Burden

There are two ways to at least partially offset your foreign taxes: a foreign dividend tax credit, or deduction. You need to make the decision about which to use for all of your foreign withholdings in any given year.

In other words, if you want to take a credit for some of your withholdings, than you need to take a credit for all of it, and vice versa. What’s the difference between the two?

  • Foreign Dividend Tax Credit: provides a dollar for dollar decrease in your tax liability
  • Foreign Dividend Tax Deduction: decreases your taxable income so that the actual tax liability reduction is based on your marginal tax bracket

The tax credit is usually the preferred choice, because it can save you more money.

The simplest way to obtain this credit is if your foreign tax withholdings are $300 or less per individual ($600 if filing a joint return), and you have received a 1099-DIV or 1099-INT form from your broker outlining your total foreign tax withholdings.

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In this case, you can claim the entire withholding amount as a tax credit, reducing your U.S. tax burden dollar for dollar and effectively eliminating the foreign dividend tax.

The catch is that you can deduct only an amount equal to your total U.S. tax liability in any given year. For example, say your total U.S. tax liability is $10,000 but you had $15,000 in foreign tax withholdings.

In that case, rather than sending you a $5,000 check, the IRS will only let you subtract $10,000 for that year (you owe nothing), and then rollover $5,000 in tax liability reduction into future years, limited to a decade.

Another benefit of this credit is that you can use it in conjunction with your standard deduction, which the majority of Americans take rather than itemizing. In other words, as long as your foreign withholdings aren’t too large, you can use the standard form 1040 to do your taxes.

What if your foreign tax withholdings are above the $300 / $600 level for individuals and couples filing jointly? That’s where things get more complex.

To determine how much of a tax credit you can claim above the $300 / $600 limit you need to fill out form 1116, which gets attached to your form 1040 and has instructions that are 24 pages long.

You have to jump through these extra hoops rather than simply obtain a full foreign tax credit because not all foreign dividends qualify for preferential treatment.

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Guide to Foreign Tax Withholding on Dividends for U.S. Investors (1)

Fortunately, many of these exclusions don’t apply to most investors, other than the potential for Puerto Rican stocks, whose dividends aren’t qualified for a credit and must be itemized for a deduction.

However, there is one kind of tax credit disqualification that can affect regular investors and is the main reason why anyone with over $300 / $600 in foreign withholdings must fill out form 1116.

Any withheld dividends on stocks that you held for less than 16 days during the 31-day period that begins 15 days before the ex-dividend date are considered unqualified dividends that will decrease the total amount of foreign tax credit you can claim.

Can Foreign Tax Withholding on Dividends Be Avoided in IRAs and 401Ks?

Given the complexity of foreign withholding taxes, investors might think that owning these shares in a tax-deferred account might be a way to avoid the paperwork hassle.

However, that’s not usually the case since most nations (aside from Canada) still withhold taxes in retirement accounts.

Due to the tax-sheltered status of IRAs and 401(k)s, the IRS doesn’t allow you to take any credits or deductions for foreign withholdings for these accounts. In other words, you could be facing the loss of up to 35% of your dividends, with no beneficial U.S. tax liability offset.

The bottom line is that for tax-sheltered accounts, investors may want to make sure they only own U.S. stocks or companies domiciled in nations that have 0% withholding rates.

Closing Thoughts on Dividend Withholding Tax

Owning foreign dividend stocks can provide some benefits for building a diversified portfolio, but larger investors (those who face foreign withholdings above the $300 / $600 limit) will want to do research and be careful about which companies they buy.

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We generally prefer to invest in U.S. multinationals to gain exposure to faster-growing international markets and avoid many of the accounting and tax headaches that can come from investing in foreign companies directly.

FAQs

Do US citizens pay tax on foreign dividends? ›

Key Takeaways. When Americans buy stocks or bonds from foreign-based companies, any investment income (interest, dividends) and capital gains are subject to U.S. income tax and taxes levied by the company's home country.

Is there withholding tax on US dividends? ›

If the dividend income is from a U.S. source and paid to a nonresident, it is reportable for any amount in excess of zero. Withhold at 30% or lesser tax treaty rate (see Chart C, Withholding Tax Rates for Purposes of Chapter 3, in IRS Publication 515 as well as IRS Publication 901.)

How do I claim withholding tax on foreign dividends? ›

If you've had too much withholding tax (WHT) deducted from your foreign dividends, you can often reclaim the overpayment. Doing so involves writing to the tax authorities in the country that the company is based in and asking for a refund.

How do I recover my foreign withholding tax? ›

File Form 1116, Foreign Tax Credit, to claim the foreign tax credit if you are an individual, estate or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession.

Should I declare foreign dividends on tax return? ›

Dividend received by a domestic company from a foreign company, in which equity shareholding of such domestic company is less than 26%, is taxable at normal tax rate. The domestic company can claim deduction for any expense incurred by it for the purposes of earning such dividend income.

How much foreign income is exempt from US taxes? ›

However, you may qualify to exclude your foreign earnings from income up to an amount that is adjusted annually for inflation ($105,900 for 2019, $107,600 for 2020, $108,700 for 2021, and $112,000 for 2022). In addition, you can exclude or deduct certain foreign housing amounts.

Do US investors pay withholding tax? ›

While the U.S. government taxes dividends paid by American companies, it doesn't impose tax withholdings for U.S. residents. In other words, each U.S. investor receives the full dividend amount and is responsible for reporting their annual dividends to the IRS each year and paying taxes accordingly.

How do you calculate dividend withholding tax? ›

If you are resident in Ireland, Dividend Withholding Tax (DWT) will be deducted at a rate of 25% before you receive the payments.

Who is liable for withholding tax on dividends? ›

The tax is imposed on the beneficial owner of the dividend and not on the company, with the exception of in specie dividends. The payer of the dividend or regulated intermediary is required to deduct the 20% WHT from the payment.

How do you calculate foreign tax exclusion? ›

The maximum foreign earned income exclusion amount is adjusted annually for inflation. For tax year2021, the maximum foreign earned income exclusion is the lesser of the foreign income earned or $108,700 per qualifying person. For tax year2022, the maximum exclusion is $112,000 per person.

How do you avoid dividend withholding tax? ›

In some cases, dividend withholding tax can be avoided by taking additional shares as a dividend payment instead of cash.

How do I report foreign tax withheld on 1040? ›

To claim the foreign tax credit, file IRS Schedule 3 on your Form 1040; you may also have to file Form 1116. If you choose the foreign tax deduction route, use Schedule A.

How do I reclaim back US dividend withholding tax? ›

How do I reclaim the tax? You need to file Form 1040NR and add any supplemental pages AND add the tax withholding document. You may also have to apply for an ITIN number by filing Form W-7 with the application.

Can I get a refund on foreign tax paid? ›

If you claimed an itemized deduction for a given year for qualified foreign taxes, you can choose instead to claim a foreign tax credit that'll result in a refund for that year by filing an amended return on Form 1040-X within 10 years from the original due date of your return.

What happens to foreign withholding tax? ›

Federal Withholding Tax and Tax Treaties

In most cases, a foreign national is subject to federal withholding tax on U.S. source income at a standard flat rate of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign national's country of residence and the United States.

Do I need to report foreign dividends? ›

If you receive foreign source qualified dividends and/or capital gains (including long-term capital gains, unrecaptured section 1250 gain, and/or section 1231 gains) that are taxed in the U.S. at a reduced tax rate, you must adjust the foreign source income that you report on Form 1116, Foreign Tax Credit (Individual, ...

What happens if you don't declare foreign income? ›

The failure to report may results in penalties as high as 50% maximum value of the foreign account. The penalties can occur over several years. Still, the IRS voluntary disclosure program, streamlined programs, and other amnesty options can serve to minimize or avoid these penalties.

What rate are foreign dividends taxed at? ›

All persons ('withholding agents') making US-source fixed, determinable, annual, or periodical (FDAP) payments to foreign persons generally must report and withhold 30% of the gross US-source FDAP payments, such as dividends, interest, royalties, etc.

How does IRS know about foreign income? ›

One of the main catalysts for the IRS to learn about foreign income which was not reported is through FATCA, which is the Foreign Account Tax Compliance Act. In accordance with FATCA, more than 300,000 FFIs (Foreign Financial Institutions) in over 110 countries actively report account holder information to the IRS.

Who qualifies for foreign income exclusion? ›

How to Qualify for the Foreign Earned Income Exclusion
  • You have foreign-earned income. This would include a salary, wages, bonus, or self-employment income. ...
  • You have a tax home in a foreign country. ...
  • You have been physically present in a foreign country for at least 330 days out of any 12-month period.
25 Oct 2022

What is considered foreign income in US? ›

Generally, the IRS classifies income by where it is earned. So if you are living and working abroad, then your income is considered to be foreign earned income, even if you are being paid by a US company.

Do foreign investors need to pay taxes in the US? ›

U.S. Tax for Foreign Investors

As a general rule, foreign investors (i.e. non-U.S. citizens and residents) with no U.S. business are typically not obligated to file a U.S. tax return, including on income generated from U.S. capital gains on U.S. securities trades.

Who is exempt from US withholding tax? ›

Students, trainees, teachers, and researchers. Alien students, trainees, teachers, and researchers who perform dependent personal services (as employees) can also use Form 8233 to claim exemption from withholding of tax on compensation for services that is exempt from U.S. tax under a U.S. tax treaty.

How much is foreign withholding? ›

Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if an Internal Revenue Code Section provides for a lower rate, or there is a tax treaty between the foreign person's country of residence and the United States.

What is the 20% withholding rule? ›

A payer must withhold 20% of an eligible rollover distribution unless the payee elected to have the distribution paid in a direct rollover to an eligible retirement plan, including an IRA. In the case of a payee who does not elect such a direct rollover, the payee cannot elect no withholding for the distribution.

What is the dividend tax rate for 2022? ›

Qualified dividends are taxed at 0%, 15%, or 20%, depending on your income level and tax filing status. Ordinary (nonqualified) dividends and taxable distributions are taxed at your marginal income tax rate, which is determined by your taxable earnings.

What dividend income is tax exempt? ›

Up until March 31, 2020, dividends up to ₹10 lakhs were tax-free for shareholders. However, with effect from April 1, 2020, no dividends are tax-free in India as per the new amendments put forth in the Finance Act, 2020.

What dividend income is exempted from income tax? ›

The deduction should not be more than 20% of the dividend income. You cannot claim a deduction for any other expenses paid such as commissions or salary expenses for earning the dividend income. In the example above, if Mr Ravi borrowed money to invest in equity shares. He paid Rs 2,700 in interest during FY 2021-22.

What is the difference between foreign tax credit and foreign income exclusion? ›

The Foreign Earned Income Exclusion is only applicable to earned income, whereas the Foreign Tax Credit can be applied to both earned and unearned income. Earned income is defined as pay for personal services performed, such as salaries and wages, commissions, bonuses and self-employment income.

Do I need to file 1116 for foreign tax paid? ›

Taxpayers who paid taxes to a foreign country or U.S. possession may be able to take a nonrefundable foreign tax credit. Generally, to claim the credit, taxpayers are required to file Form 1116.

Do I need to file Form 1116? ›

File Form 1116 to claim the foreign tax credit if you are an individual, estate, or trust, and you paid or accrued certain foreign taxes to a foreign country or U.S. possession.

Are foreign dividends tax free? ›

Foreign dividends and taxes

Also, foreign dividends are usually subjected to foreign tax, which is deducted before each dividend is paid to the investor. This foreign withholding is generally between 15% and 25%. To address this foreign tax, there is a federal, and sometimes provincial, foreign tax credit available.

Are foreign dividends subject to regular tax? ›

Income earned through a foreign subsidiary is taxed only when paid to a Philippine resident shareholder as a dividend.

Do US citizens pay tax on UK dividends? ›

You would pay US taxes on the dividend portion as you paid no UK tax so there is no claimable foreign tax credit. With this income level, that dividend will be subject to 15% US tax.

What are exempt foreign dividends? ›

Most foreign dividends accrued to or received by South African residents are exempt from tax if the resident holds at least 10% of the equity shares and voting rights in the company.

What foreign dividends are qualified? ›

In order to be considered “qualified”, dividends received must meet three conditions: The dividends must have been paid by a U.S. corporation or a qualified foreign corporation. The dividends are not of those listed under “Dividends that are not qualified dividends”. The holding period requirement is met.

Do you get taxed twice on foreign income? ›

United States citizens who work in other countries do not get double taxed if they qualify for the Foreign-Earned Income Exemption. Expats should note that United States taxes are based on citizenship, not the physical location of the taxpayer.

Are foreign dividends included in gross income? ›

Accordingly, dividend and foreign dividend is included in gross income and is subsequently exempt from normal tax.

Do US citizens have to report foreign income? ›

Yes, if you are a U.S. citizen or a resident alien living outside the United States, your worldwide income is subject to U.S. income tax, regardless of where you live. However, you may qualify for certain foreign earned income exclusions and/or foreign income tax credits.

What happens if you dont report foreign income? ›

The failure to report may results in penalties as high as 50% maximum value of the foreign account. The penalties can occur over several years. Still, the IRS voluntary disclosure program, streamlined programs, and other amnesty options can serve to minimize or avoid these penalties.

How much dividend is tax free in USA? ›

For single filers, if your 2022 taxable income was $41,675 or less, or $83,350 or less for married couples filing jointly, then you won't owe any income tax on dividends earned. The numbers increase to $44,625 and $89,250, respectively, for 2023.

Are dividends taxable in US non residents? ›

Filing Requirements for Nonresident Aliens

It is taxed for a nonresident at the same graduated rates as for a U.S. person. FDAP income is passive income such as interest, dividends, rents or royalties. This income is taxed at a flat 30% rate unless a tax treaty specifies a lower rate.

What is the tax rate on foreign dividends? ›

All persons ('withholding agents') making US-source fixed, determinable, annual, or periodical (FDAP) payments to foreign persons generally must report and withhold 30% of the gross US-source FDAP payments, such as dividends, interest, royalties, etc.

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