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One of the factors that investors need to consider when investing in foreign stocks is taxes since it reduces the effective rate of return on an investment. Governments of most countries try to recoup millions in taxes from dividends that are paid to foreign investors by companies located in their countries. For example, when a U.S.-based investor invests in France Telecom (NYSE:TEF) ADRs, the French government will deduct 25% in taxes on all dividends paid. Hence, though TEF currently has a 6.98% dividend yield, the actual yield that this investor receives will be less. However, the IRS allows a foreign tax credit (filed with IRS Form #1116) to be taken using which this investor can deduct the taxes paid to the French government. This is done to avoid double taxation of dividends. There is a maximum limit to this tax credit.

A few countries do not charge any taxes on dividends paid to foreign investors. So foreign investors receive the entire dividends paid by companies based in those countries. For example, the U.K. charges no taxes on dividends paid by British companies (excluding REITS) to U.S. investors. So an investor in National Gird Plc (NYSE:NGG) will receive the complete dividends paid at the current dividend yield of 4.68%.

The table below lists the countries that have no withholding taxes on dividends paid to U.S. residents:

S.No. Country Tax Withholding Rate for Dividends
1 Argentina 0.00%
2 Bahrain 0.00%
3 China - Red Chips 0.00%
4 Colombia 0.00%
5 Croatia 0.00%
6 Cyprus 0.00%
7 Egypt 0.00%
8 Estonia 0.00%
9 Hong Kong - Local Shares ^ 0.00%
10 India 0.00%
11 Jordan 0.00%
12 Mauritius 0.00%
13 Oman 0.00%
14 Qatar 0.00%
15 Singapore 0.00%
16 Slovakia 0.00%
17 South Africa 0.00%
18 Tunisia 0.00%
19 UK 0.00%
20 UAE 0.00%
21 Vietnam 0.00%

The following table below shows the withholding tax rates by country on dividends paid to U.S. residents:

S.No. Country Withholding Tax Rate for Dividends
1 Australia 30.0%
2 Austria 25.0%
3 Bangladesh 15.0%
4 Belgium 25.0%
5 Bosnia 5.0%
6 Brazil 15.0%
7 Bulgaria 15.0%
8 Canada 15.0%
9 Chile 35.0%
10 China - A Shares* 10.0%
11 China - B Shares** 10.0%
12 China - C Shares*** 10.0%
13 Czech Republic 15.0%
14 Denmark 28.0%
15 Finland 28.0%
16 France 25.0%
17 Germany 26.4%
18 Greece 10.0%
19 Hungary 10.0%
20 Iceland 15.0%
21 Indonesia 20.0%
22 Ireland 20.0%
23 Israel 20.0%
24 Italy 27.0%
25 Japan 10.0%
26 Kazakhstan 15.0%
27 Kenya 10.0%
28 Kuwait 15.0%
29 Latvia 10.0%
30 Lebanon 10.0%
31 Lithuania 15.0%
32 Luzembourg 15.0%
33 Macedonia 10.0%
34 Malaysia 25.0%
35 Malta 35.0%
36 Mexico 10.0%
37 Moroccco 10.0%
38 The Netherlands 15.0%
39 New Zealand 30.0%
40 Nigeria 10.0%
41 Norway 25.0%
42 Pakistan 10.0%
43 Peru 4.1%
44 Philippines 30.0%
45 Poland 19.0%
46 Portugal 20.0%
47 Romania 16.0%
48 Russia 15.0%
49 Saudi Arabia 5.0%
50 Serbia 20.0%
51 Slovenia 20.0%
52 South Korea 27.5%
53 Spain 19.0%
54 Sri Lanka 10.0%
55 Sweden 30.0%
56 Switzerland 35.0%
57 Taiwan 20.0%
58 Thailand 10.0%
59 Turkey 15.0%
60 UK - REITS only 20.0%
61 Ukraine 15.0%

*Companies incorporated in mainland China and listed in Shanghai and Shenzhen. These companies are quoted in Renminbi and are only available to Mainland and Qualified Foreign Institution Investors (QFII).
** Companies incorporated in mainland China and listed in Shanghai and Shenzhen. B-shares in Shanghai are traded in U.S. dollars, while B-shares in Shenzhen are traded in Hong Kong dollars. B-shares are available to mainland and foreign investors.
***Companies incorporated in mainland China and listed on the Hong Kong Stock Exchange.
^Companies incorporated in Hong Kong and listed on the Hong Kong Stock Exchange.

Source: Dow Jones Indexes, Other

Note: Please note that the above information is known to be accurate from the sources used. These rates do not apply to non-U.S. residents. Consult with a tax adviser before making any investment decisions.

Some points to remember before investing in foreign stocks:

1. Germany charges 26.4% tax on dividends only on stocks held in taxable accounts. Due to the tax-treaty between U.S. and Germany, Germany does not deduct any taxes on dividends paid by German firms to U.S. investors who hold the stock in their IRA and other qualified pension accounts.

2. The following countries have tax-treaties with the U.S. which allows favorable treatment of dividends earned by US investors investing in those countries:

Australia, Austria, Bangladesh, Barbados, Belgium, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Korea, Latvia, Lithuania, Luxembourg, Mexico, Morocco, Netherlands, New Zealand, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russian Federation, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Trinidad and Tobago, Tunisia, Turkey, Ukraine, United Kingdom, and Venezuela.

Source: The IRS

Without the tax treaties U.S investors will pay higher taxes.The Netherlands has a statutory tax rate of 25%. But due to the special tax treaty with the U.S., American investors in Dutch companies are charged only 15% as shown in the table above.

3. It is generally not advisable to hold foreign dividend-paying ADRs in IRAs and other non-taxable accounts since one cannot recover the taxes paid to a foreign country.

4. Canada charges a 15% tax on dividends held in non-taxable accounts. But due to a policy change in 2009, dividends and interest income are exempt from this 15% tax if the investments are held in IRA or 401(K) accounts. So U.S. investors can hold Canadian banks such as bank of Novo Scotia (NYSE:BNS), Royal Bank of Canada (NYSE:RY) or other dividend-paying stocks like Enbridge (NYSE:ENB) in their IRAs for the long-term without worrying about taxes on dividends.

5. Though the above table shows that Chile has a 35% withholding tax rate, in my personal accounts the depository has deducted only about 22% in taxes on my Chilean dividends. This could be due to any recent change in Chilean tax laws.

For more information about U.S. tax treaties with other countries refer to the Publication 901 on the IRS web site.

Click to download the Withholding Tax Rates by Country document in pdf.

Disclosure: Author long BNS and RY

Source: Withholding Tax Rates By Country For Foreign Stock Dividends