The Overlooked Tax Trap Lurking in Your Dividends

It’s hardly fair, and it never is. You do all the work, take all the risk, and then someone steps in to claim a slice of the reward. Of course, that “someone” is government.
It’s not just our government either. Foreign governments are equally eager to get their slice. Depending on the country a company is tax domiciled, a big chunk of its dividends are unlikely to come your way.
European countries, in particular, are keen to tax withhold (and to keep) a portion of your dividend income. German companies must withhold 26.375% of the dividends they pay to foreigners. French companies withhold 30%, as do Swedish companies.
Swiss and Czech governments are especially avaricious. Both countries apply a 35% dividend withholding tax. The majority of foreign dividends will have a withholding tax applied. Its impact on your dividend income can be consequential.
Let’s say you own a reliable dividend payer like Novartis AG (NYSE: NVS). The Swiss health care giant pays $2.67 in annual dividends per share. But you as a U.S. citizen aren’t getting $2.67; you’re getting $1.74. Because of Switzerland’s tax withholding, your effective yield is lowered to 1.7% from 2.5%.
Uncle Sam provides some relief from this tax trap, but as with everything tax related, it gets complicated quickly. You can choose to take either a tax credit or a deduction for all your qualified foreign taxes. If you itemize deductions on Schedule A of Form 1040, taking a deduction for foreign taxes paid is the path of least resistance. It’s also the path of least efficiency.
If you’re in the 30% income tax bracket, a $300 deduction would only reduce your taxes by $90. A tax credit, on the other hand, would reduce your taxes by the full $300. Common sense says go with the tax credit, but there’s a catch. The foreign tax credit has limitations and requires you to fill out Form 1116, which can be complex and require the services of a tax accountant. The benefits of claiming the tax credit can be offset by fees paid to claim the tax credit.
I’m sure a light bulb has gone off in many readers’ minds at this point: “I’ll just own foreign stocks in my retirement account. After all, everything is tax deferred.”
The problem is that foreign governments couldn’t care less about your retirement goals. Our own government isn’t fawningly sympathetic either. Because you’re excused from paying current taxes on investment income in your retirement account, there’s no deduction or credit available for foreign taxes paid on investments held in these accounts.
So, is it best to avoid foreign dividend payers? No, the outlook for many foreign companies, along with their portfolio-diversifying benefits, make them worthwhile investments. Economics should always trump taxes when vetting opportunities.
The good news is that economics can be supplemented with simplicity. To simplify life and to capture more immediate income, I frequently recommend income investors consider companies domiciled in countries with no dividend withholding taxes. There are a few, and you need to discriminate. Oman, Cyprus, Bahrain and Mauritius all have zero dividend tax withholding, but there isn’t a stock among the four that interests me.
One country, though, does interest me. It’s especially tax efficient – no dividend withholding taxes, and NO income taxes to boot. Both corporations and individuals get off scot-free. No income taxes across the board means more money that flows to companies domiciled there. It also means more no-strings-attached dividends that flow to investors – all investors.
Equally important, this country is home to investment-quality dividend payers. Indeed, I’ve found two quality high-yield dividend payers that call this tax-advantaged country home. Both pay dividends that yield over 7%. Every cent of these high-yield dividends flows directly to shareholders.
If you’re interested in high-yield foreign dividends, you won’t be disappointed. Click here to learn about these two exceptional tax-efficient high-yield dividend opportunities.

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