Last week, we took a look at some of the better dividend payers from all around the world. Many pay considerable dividends and offer good diversification which certainly makes them attractive picks. A few visitors were quick to point out that withholding taxes can have a significant impact on those dividends.
What are withholding taxes?
When a foreign company decides to pay back its investors through dividends, there is often a part of that amount that is taken by the government where that tax is being paid. For example, foreign investors that decide to a buy a French stock will receive a dividend like any others but the French government (and almost every other government in the world) takes part of that income. Why? There are many reasons but it’s a form of tax on money leaving the country. These are not necessarily easy to track but they are generally between 0% and 30% depending on the country.
Suppose that an investor receives a dividend of $100 from that French stock. The investor will end up only receiving $75 as the French government will take a 25% cut. That is one of the most expensive countries to buy stocks in and is certainly worth considering when looking at those attractive dividend yields.
It’s Not All Bad Though
It’s important to remember that you end up paying taxes on US dividends as well. The main difference is the rate (lower in this case but that’s not always the case) so you are simply paying this amount of taxes upfront rather than when filing your taxes. Another key point is that in almost all cases, there will not be “double taxation”. That means that the dividend that you receive will not be taxed by the US government since you already paid your share to the French government.
Each Country Is Different
It’s important to look carefully at the rules for each country. Some have higher rates, others are lower, for some you don’t get hit by withholding taxes in your non-taxable accounts, etc. I don’t think that these things make a huge difference in most cases and it still makes a lot of sense to add international dividend stocks to almost any portfolio.
Have You Had Any Experience With Withholding Taxes?