Paying or Avoiding Taxes on Dividends from Foreign Companies

When American companies pay you a dividend, your brokerage tracks them and sends you a 1099-DIV form at the end of the year adding them all up. If the dividends were paid in a regular brokerage account, you pay tax on them on your annual IRS tax return (anywhere from 0%-40% depending on your tax bracket and the type of company paying the dividend, but most average investors pay 15%). If your stock was held in a tax-advantaged account (like an IRA), you don't have to pay tax on it.

But when a foreign company pays you a dividend, often you will see on your brokerage statement that the tax was paid immediately to that country and debited from your account. But not always...

Some countries have tax treaties with the US to either not charge dividend tax to Americans or to at least respect the US's tax-free holding status in IRAs, but most countries don't. For example, A Canadian company will tax your dividends in a regular account, but will not charge you tax in an American IRA. As another example, Panamanian companies won't charge you tax at all in either kind of account thanks to their own treaty. But many other countries take their tax out either way.

Generally, I hold foreign dividend payers in my regular taxable account instead of my IRA, because then I can at least claim the foreign tax as a credit on my income taxes to reduce what I pay Uncle Sam. I make exceptions for companies from those tax-treaty countries like Canada, Panama, and the UK though, and hold those in my IRA.

More in-depth reading about foreign dividends and taxes:

• How to Avoid Foreign Dividend Withholding Tax
• Withholding Tax Rates By Country For Foreign Stock Dividends
• Stocks That Avoid Unrecoverable Foreign Dividend Withholding In Tax Deferred Accounts
• Foreign Tax Credit And Withholding Tax Rates

Some of those are a few years old, so the specific tax rates may be out of date, but the general explanation is there. Google the headquarters country on a case-by-case basis when thinking about buying a foreign company to decide which account to buy it in.

I'm not a tax advisor; you should talk to your own advisor for specific advice about your portfolios and the companies involved.