Globalization has introduced many investment opportunities for US investors. Nowadays it is quite common to diversify a portfolio with a variety of foreign stocks. Some of these investments generate foreign dividends. The issue that US investors face is a withholding overseas tax. Claiming the foreign tax credit is one of the options to get a credit for overseas taxes paid. However, it is essential to file an American tax return to claim the foreign tax credit. Additionally, investors can reclaim the withholding overseas tax from foreign authorities. There is a certain procedure in every country.
This is an email from one of our clients, US citizens and green card holders with overseas tax issues. “I live in the USA. However, I have extensive overseas investments that generate foreign dividends. I read about the foreign tax credit for US investors. In addition, I would like to understand how to claim the overseas tax at the source. What are the rules for Ireland and Switzerland?”
Let’s review the key options for US investors in regards to foreign dividends.
- Tax Treaty. The USA has tax treaties with more than 66 countries that provide the taxation of foreign dividends at reduced treaty rates. Consequently, if a withholding overseas tax rate is higher than a treaty rate, then the steps must be taken by US investors to decrease the withholding tax at the source to 15% treaty rate.
- French tax system. First, US investors must file Form 5000 that establishes a residency status. Second, to reclaim the overseas tax, investors have to file form 5001. Following this procedure will ensure that a withholding tax rate on foreign dividends is 15% treaty rate at a source in France.
- Spanish tax system. The procedure of reducing the overseas tax at a source is more complicated. First, form 210 must be submitted. Since this form is available only in Spanish, US investors are advised to use a tax representative in Spain who is required to file the form for the tax reclaim.
- Swiss tax system. First, the withholding tax rate in Switzerland is 35% so it is important to take steps to take advantage of 15% treaty rate. Second, Switzerland is praised for having the established financial system. Consequently, many corporations provide guidelines to its investors about the foreign dividends procedure. Finally, form 86 must be filed by US investors to reclaim a tax.
- German tax system. To claim a withholding tax in Germany, Kapitalertragsteuerstattung claim form must be filed. This form is available at the tax office website.
- Irish tax system. Investors must file the Non-Resident Form V2A to claim a lower rate. The form DWT Claim Form 1 must be used to claim refunds of tax on foreign dividends.
- American tax system. Foreign investors in the USA must complete form W-8BEN in advance to claim the 15% tax treaty and submit this form to the withholding agent. If this form is not filed timely, then foreign investors must file form 1040NR to claim a refund. Moreover, effective in 2013 the USA started to share the information about interest income of foreign investors.
US investors with foreign dividends or foreign investors in US securities must carefully review relevant tax treaties to achieve the tax savings. The investors are advised to contact an international tax CPA to facilitate the process. International tax experts at Artio Partners are here to help you.