Foreign Dividends and Withholding Tax

Buy a dividend stock from Switzerland, Germany or Japan, or an international dividend ETF, and you’ll notice the payments are smaller than the declared dividend. The difference is foreign withholding tax: the company’s home country taxes the dividend before it ever leaves. The good news is that in a taxable account you can usually get most or all of it back.

How withholding works

Most countries tax dividends paid to foreign investors at the source. Tax treaties with the US usually cut the rate to around 15% for American investors. A few countries, such as the United Kingdom, don’t withhold tax on dividends at all. Others start higher, and some, like Switzerland, withhold more than the treaty rate and expect you to reclaim the difference through paperwork.

The foreign tax credit

The US doesn’t want you taxed twice on the same income, so it lets you subtract foreign tax paid from your US tax bill. That’s the foreign tax credit.

• If your total creditable foreign tax is $300 or less ($600 married filing jointly) and it all comes from passive income like dividends reported on 1099s, you can usually claim it directly on your return without Form 1116.
• Above that, you file Form 1116, which limits the credit to the US tax on that foreign income.
• You can choose a deduction instead, but the credit is almost always worth more.

Why it’s lost in an IRA

The credit offsets US tax. Inside a traditional or Roth IRA, dividends aren’t taxed as they’re paid, so there’s no US tax to offset, and the foreign withholding is simply gone. On a fund yielding 4%, losing 15% of the dividend costs about 0.6% a year.

That’s why a common rule of thumb is to hold international dividend funds in taxable accounts where possible, and US funds in IRAs. It’s a small edge, so it shouldn’t override bigger considerations, but it adds up over decades. See Which Account Should Hold Your Dividends?.

International dividend ETFs

A US-listed fund that holds mostly foreign stocks can elect to pass the foreign tax it paid through to you. Your share appears in box 7 of your Reading Your 1099-DIV, and you claim the credit just as if you’d paid it yourself.

Can foreign dividends be qualified?

Yes, if the company is from a country with a US tax treaty, or its shares (or ADRs) trade on a major US exchange, and you meet the usual holding period. Many large foreign companies qualify. Fund statements show how much of an international fund’s dividends were qualified. Read more in How Dividends Are Taxed.