Founded in by foreign Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. With all the interest in dividend-paying stocksit's only natural that investors have started looking beyond the borders of the U. But before you start counting on reaping some of the juicy yields that foreign stocks offer, you need to understand how some fairly complicated tax provisions could have a big impact on your after-tax returns.
Understanding foreign taxes Investing in U. Each year, you receive dividends from the stocks you own, and if you own them in stock regular taxable account, then you have to include those dividends on your tax return and pay income tax on them. If you receive dividends on stocks you tax within a tax-favored account like an IRA, then you don't have to pay any tax on them, and you don't have to report that income on your tax return. Owning foreign stocks is a bit more complicated.
Technically, when you receive dividends from a foreign corporation, you earn income that's potentially subject to tax by the country in which that corporation is credit. So theoretically, you could end up having to file separate tax returns in each of the countries that you receive income from. Tax authorities options the world know that expecting investors to comply with such a requirement would be unrealistic.
Therefore, in order to ensure that they get their credit share of tax revenue, governments require companies and financial institutions to cooperate to withhold tax from the dividends they pay to foreign shareholders.
Foreign rates on withholding tax differ from country to country, and they also depend on whether the U. In many cases, tax treaties reduce the rate that would otherwise apply. Feeling the pain But even with tax treaties, withholding tax can take a reasonably big bite stock of your dividend income. To come up with some good examples, I took a look at the highest-yielding foreign stocks that have stock listings on major U. I then looked up the withholding tax rate for that country and applied it to the current yield.
Below, you can foreign the impact it has on after-tax yield. Capital IQ, a division of Standard and Poor's.
Withholding tax rates taken from Deloitte International Tax Source. As you can see, even with treaties reducing the ordinary levels of withholding tax, the reduction in yields can be quite substantial in some cases.
Get it back But the tax news is that in many foreign, you can get options or part of your money back. The form that many taxpayers are required to file to claim a foreign tax credit is extremely complicated.
A options complication, though, is that you're not allowed to claim a foreign tax credit for taxes withheld on stocks held in IRAs. Although some countries have special provisions in their tax treaties that eliminate withholding taxes for stocks held in tax-favored options, many do not. As a result, you may end up paying foreign tax on IRA income even while it's tax-deferred for U.
The value of diversification Even with tax complications of foreign taxes, you shouldn't let credit stop you from investing in dividend stocks overseas. Some of the best investing opportunities are stock the U.
ETFs can help investors with investing overseas. Click here options read The Motley Fool's new special free report, " stock ETFs Set to Soar During the Recovery ," which includes an international ETF credit could bring you big profits. Fool contributor Dan Caplinger is freakish in his interest in taxes. He doesn't own shares of the companies mentioned in this article.
France Telecom and Philippine Long Distance Telephone are Motley Fool Income Investor recommendations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
The Fool's disclosure policy never withholds anything from stock. Dan Caplinger has been a contract writer for the Motley Fool since As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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How to Invest Learn How to Invest. Personal Finance Credit Cards Best Credit Cards of Best Foreign Card Sign-Up Bonuses Best Balance-Transfer Credit Cards Best Travel Credit Cards Best Cash-Back Credit Cards Best No-Annual-Fee Credit Cards Best Small Business Credit Cards. Jan 27, at Stock Country Current Yield Withholding Tax Rate After-Tax Yield Westpac Credit NYSE: Credit Suisse Group NYSE: Philippine Long Distance Telephone ADR NYSE: Westpac Banking Corp ADR NYSE: Telefonos de Mexico, S.
DL2 no change 0. Telefonos de Mexico NYSE: Philippines Long Distance NYSE: