For non US based investors (but will accept all input): Dividend withholding tax

[BroKon]

Hi,

 

I was just interested in seeing what other investors did in terms of dividend withholding tax, especially when there is no DTA in place. In general, do you still invest and just pay the tax (and view it as cost of doing business), only invest in very low to zero yielding shares (my solution to date - but pretty limiting - although as yields keep coming down less so), sell and buy around the ex-div date, or the nuclear option avoid totally.

[writser]

For an average company the dividend yield is what, ballpark 3%? I don't know your tax circumstances but where I live US dividends fall under a tax treaty and 15% is withheld. That implies a slippage of ~0.5% annualized. If I really like a specific company and it pays out a dividend in the low single digit range I would consider that slippage acceptable. I don't bother selling / buying back around the dividend but you could do that, though I think a certain amount of withholding taxes is usually priced in.

 

But of course the correct answer is: it all depends. On your tax situation, the size of the dividend, how much you like a stock vs. the alternatives, etc. etc.

[bizaro86]

I buy dividend stocks from the USA in my retirement account, because the Canada-US tax treaty means no withholding tax is taken.

 

For countries where that isn't true, I buy dividend stocks in my non-registered accounts. My tax situation is such that I can generally use the tax credit from foreign withholding taxes, so it doesn't change the amount of total tax I pay, it just changes who I pay it to.

[KCLarkin]

My tax situation is such that I can generally use the tax credit from foreign withholding taxes, so it doesn't change the amount of total tax I pay, it just changes who I pay it to.

 

I assume this is generally the case in Canada (TFSAs being a very notable exception). The withholding tax isn't the problem (this just shifts taxes from Canada to US). The issue is that foreign dividends are taxed at your marginal tax rate. Eligible Canadian dividends might be taxed at 27% and US dividends might be taxed at 45%. I tend to keep higher dividend US stocks in my retirement account. I prefer buybacks or growth stocks in my taxable account.

[Jurgis]

For US based investors, there are two questions:

 

1. Is foreign dividend qualified?

2. Is foreign tax withheld?

 

Based on the answers to these questions, the best you can do:

1. No 2. No. - hold in tax deferred account. Holding in regular account will result in US marginal tax rate.

1. Yes 2. No. - hold in tax deferred account. Holding in regular account will result in US qualified dividend tax rate.

1. No 2. Yes. - hold in taxable account if withholding rate is > marginal tax rate (unlikely?); you pay (lose) marginal tax rate. Otherwise hold in tax deferred account; you pay (lose) withholding rate.

1. Yes 2. Yes. - hold in taxable account if withholding rate is > qualified dividend tax rate (likely); you pay qualified dividend tax rate. Otherwise hold in tax deferred account; you pay (lose) withholding rate.

 

However, since OP is not based in US, this does not help them. It will depend on the laws of their country, which can have all kind of special situations/treatments.

 

In general, you just account for the tax you have to pay and invest accordingly. Also like Writser says unless you are relying on income from divvies, the tax slippage might not be large to be concerned about. Yeah, I have held securities with 1. Yes 2. Yes in tax deferred accounts and lost >20% withholding tax to foreign withholding. However, let's say you have a stock that you might sell at 50% realized gain that also pays 6% divvie. So even at long term realized gain tax rate, you will lose more by holding this in taxable account and paying tax on realized gain than what you lose by foreign country withholding 20% of the divvie. So...  8)

 

Yeah, I know, things get complicated if you hold long, you lose divvie withholding every year, but would not sell the stock for 20 years, etc. 

Honestly, though the bigger loss might be from holding losing stock in tax deferred account and not being able to take tax loss on its sale... but then you should not buy stocks that go down...  8)

[BroKon]

Thanks for the replies, I have a preference for cash generators (mainly due to my inability to pay the current multiples required to buy good compounders - maybe something I need to work on). I could live with 15%, which is what I have to pay for most stocks (if I do the paperwork) outside UK, Singapore, HK and a few others, but US is taxed at 30% where I am based, which I can't quite get my head around.