What Are Foreign Dividends? A Guide to Global Investing

This piece deconstructs what foreign dividends are, how various countries tax them, and what you should know if you're investing overseas—or if you're an expat abroad.

What Are Foreign Dividends?

Foreign dividends are simply dividends made by a company outside of your home country.

Here are two brief examples:

• If you are in the US and you have shares in an Australian company, any dividends that you receive will be foreign dividends.
• Conversely, if you are in Australia and you have shares in a US company, those dividends are "foreign" when determining your Australian taxes.

Put simply, any dividend that you receive from a company outside your country of tax residence is a foreign dividend.

How Do You Receive Foreign Dividends

There are several forms of investment by which investors receive foreign dividends:

• Direct foreign stock investment – Picking up shares on a foreign stock exchange.
• American Depositary Receipts (ADRs) – US-listed securities evidencing ownership of foreign companies.
• Mutual fund or ETF – Even when you invest in a US fund, if it contains foreign equities, the pass-through dividends you are paid can be foreign.

How Are Foreign Dividends Taxed

The frustrating aspect of foreign dividends is taxation. Since the income crosses borders, both your country of residence and the foreign country could both demand a portion.

1. Foreign Withholding Tax

Foreign nations tend to withhold tax automatically prior to remitting dividends to foreign investors. For instance, France would withhold 15–30% straight off the top of your dividend payment.

2. Taxation in Your Home Country

Your home country also typically taxes you on foreign dividends. For US taxpayers, it is done by reporting it on your return. Depending on the nature of the dividend, it's taxed either at common rates of tax or the lower qualified dividend rates.

3. Relief Under Tax Treaties

Tax treaties also cut withholding taxes. A treaty might, for example, lower that French withholding tax rate to 15% from 30%. But treaty abuse typically entails more paperwork.

4. The Foreign Tax Credit (FTC)

To avoid being taxed twice, the US permits you to claim a Foreign Tax Credit for already paid taxes in another country. That lowers your US tax, but you have to file it correctly for the credit to qualify.

Example: A US Expat in Australia

Suppose you're a US expat living and working in Australia and you have US and Australian stock investments:

• US stock dividends: You're sure you're protected overseas, but the IRS still gets taxes on them.
• Australian stock dividends: South of the equator, perhaps they'll tax them there, but the IRS will have them reportable as part of your foreign income.

That's where things get tricky—attempting to cope with two taxation systems simultaneously.

Reporting Foreign Dividends to the IRS

As a U.S. taxpayer (although you're an expat), you are required to report all foreign dividends. In your case, you may have to file:

• Form 1040 – To report dividends as income.
• Schedule B – If dividends are over certain limits.
• Form 1116 – To claim the Foreign Tax Credit.
• FBAR (FinCEN Form 114) – If the foreign accounts where the investments were kept ever totaled over $10,000 during the year.
• FATCA (Form 8938) – If your foreign assets are over reporting thresholds.

You could be penalized for not reporting foreign dividends, so it's important to comply.

Why This Matters for US Expats

US expats have it tough because the US taxes expats on worldwide income. That is:

• Investment dividends in your host nation continue to be foreign to the IRS.
• Both nations are able to both tax the same dividend, with double taxation weighing in the balance.
• Tax credits and treaties can ease the impact, but will not eliminate the necessity of reporting everything.

Tips for Handling Foreign Dividends as an Expat

• Keep everything in line – Maintain statements from US and foreign brokers.
• Check withholding rates – Each country is different; verify whether a tax treaty applies.
• Use the Foreign Tax Credit – It’s one of the best ways to minimize double taxation.
• Seek expert advice – International taxation is complex, especially if you’re juggling accounts in multiple countries.

FAQs About Foreign Dividends

1. What counts as a foreign dividend? Any dividend paid by a company that isn’t based in your country of tax residence.

2. Can foreign dividends be double-taxed? Yes, in the absence of treaties or credits, each country has the potential to tax the same income.

3. Do I have to report foreign dividends in the US if I've already taxed them overseas? Yes. The IRS demands that all global income be reported. You can generally credit the tax using the Foreign Tax Credit.

4. Are foreign holdings' mutual fund or ETF dividends foreign dividends? Yes. Domestic funds can also distribute foreign dividend income.

5. Can tax entirely avoid foreign dividends? Not really. Treaties can restrict withholding tax, but at least one nation will normally tax the income.

Foreign dividends are a wonderful part of an overseas investment plan, but the tax consequences never are straightforward. For American expats, they have the potential to trigger both US and home country tax liabilities, thereby subjecting the investor to actual double taxation risk unless done correctly.

Understanding how to report—and knowing when to use treaties or credits—can be the difference between a smooth experience and a nightmare.

At Expatustax.com, we assist US expats to stay compliant with IRS regulations without making taxes any more complicated than they have to be. Regardless of where you are investing in Australia, Europe, or elsewhere, we will ensure that your foreign dividends are processed properly.