Little-Known Tax Treaties Can Save You Thousands
Wednesday, June 9, 2010
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Little-Known Tax Treaties Can Save You Thousands
-- By Carla Pasternak

If you want to find the highest yields available, you have to venture outside the U.S. markets. But there is one pitfall: Many countries withhold some of the dividends paid to foreign investors. That's why I've rounded up a list of those countries with zero withholding... so you can maximize your income stream. (Full Story Below)

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Get the important facts here...

Little-Known Tax Treaties Can Save You Thousands

My friend Chris was irate. "My broker just ripped me off!" he pouted. "Royal Dutch (NYSE: RDS-A) said in a press release they would pay $0.84 a share, but instead my broker gave me $0.714 a share."

I tried to explain to Chris that it's not his broker's fault. The broker doesn't withhold the amount. Royal Dutch is a foreign company. It's based in the Netherlands. It's required to withhold the tax he owes on the dividend.

"But I pay taxes in the U.S.," Chris insisted. "The U.S. government will get 15% of my dividend. It's not fair that I pay some foreign government taxes, too."

I agreed with him it doesn't seem fair. But I asked him to look at it in another way. The foreign government is just trying to recoup millions of dollars in lost taxes it incurs when a company pays dividends or interest to foreign taxpayers outside their country.


The United States does the same thing. Just about every country does. Greece withholds 30% to U.S. taxpayers, the Philippines take off 25%, and South Korea shaves 16.5% off the top. Most other countries take 15% off the dividends to U.S. taxpayers and, in turn, the U.S. takes 15% of their country's dividends payments. Interest and royalty payments are also taxed, but the rates tend to vary depending on the country. For a handy list of foreign withholding taxes, check out the Deloitte & Touche website.

Foreign withholding taxes would be even greater if the U.S. didn't have tax treaties to promote mutual investment with many countries. For instance, the statutory withholding tax for the Netherlands is 25%. But the tax treaty brings the statutory rate down to 15%. That's why Chris got 85% of the declared dividend, or $0.714 per share.

Generally, the higher yields you can get from foreign equities can make up the difference. For example, Royal Dutch's nearly 7% yield is more than twice that of Texas-based Exxon Mobil (NYSE: XOM), and the yields on Canadian royalty trusts such as Pengrowth (NYSE: PGH) are even higher.

Also, you can claim credit or take a tax deduction for the foreign tax withheld by filing IRS Form 1116. But when the foreign security is an ADR that's held in a tax-deferred IRA or 401(k) type of account, you generally can't recoup the tax. However, since you're not dinged with the 15% U.S. dividend tax in this account, the taxes you pay to a foreign country are equivalent to what you pay Uncle Sam in a taxable brokerage account, so it's a wash.

Besides, there are exceptions.

Germany, for one, exempts IRAs from the German withholding tax under a revised treaty with the U.S. Germany withholds 15% of the dividend from your taxable account, but refunds the withholding tax on German dividend-paying corporations held in an IRA or other qualified U.S. pension fund.

Canada recently revised its tax treaty with the U.S. as well. As of 2009, Canadian corporate dividends and interest income are exempt from the 15% withholding tax if they are held in an IRA or 401(k). That means you should now be able to hold converted income trusts in an IRA without being dinged the 15% withholding tax.

0% Withholding Tax
Hong Kong
South Africa
United Kingdom

But the best news is there are about a dozen major equity markets around the world where the withholding tax on qualifying dividends is zilch. You pay no withholding tax and you get to pocket every penny of the dividend. To the right is a list of some of these foreign tax havens.

Some of these countries also offer compelling yields, making them exceptionally attractive as a destination spot for income investors. For instance, in High-Yield International, I've loaded my model portfolios with such high-yielding, high-performance equities as Ireland's Babcock & Brown (NYSE: FLY), which yields over 7% and has returned more than +60%.

And without the foreign withholding taxes, the after-tax returns are that much sweeter.

Good Investing!

Carla Pasternak's Dividend Opportunities

P.S. -- Based on the info above, I was keen to find an income investment for High-Yield International from the U.K., one of a select group of countries where U.S. taxpayers pay 0% withholding tax on either dividends, interest income, or royalties.

I was delighted, therefore, to discover an exchange-traded note for my June issue now yielding close to 7% that also trades on the NYSE. To learn more about this find, I invite you to try a risk-free subscription to High-Yield International. Visit this link to learn more.

Income Notes

Embattled oil producer BP (NYSE: BP) will pay $2.63 billion to shareholders on June 21st.

Lawmakers have put pressure on the company to put off future payments in light of the massive costs to clean up the disastrous oil spill.  Currently, BP is projected to pay more than $10 billion in dividends this year.

-- Research Staff

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Click here to learn more (including names and ticker symbols)...

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