The Inefficiency of US Dividends for Expat Growth Investors

Arc de Triomphe

The following article discusses the “U.S. Tax Withholding on Payments to Foreign Persons” and is NOT applicable to US citizens, regardless of their country of residence. This article also discussed the inefficiencies of US domiciled securities paying dividends, and does not apply to non-US domiciled securities

The content and accuracy of this article is subject to much debate, please read the comments section below

Historically speaking, the payment of dividends was perhaps the main reason that an investor would look to own a share of a company. Even today there are many investors that manage their portfolios in a way that seeks strong dividend paying companies.

One of my favourite financial blogs to read is Dividend Mantra which covers dividend investing as a strategy to replace employment income with dividend payments.

A tricky question I often think about is how will my investment portfolio replace my income in retirement?

Without holding assets that will pay off a regular dividend, the only other option would be to sell off assets in the portfolio and realize the capital gains that they have accumulated.
However, this feels quite counter-intuitive as selling off part of your assets will obviously reduce the growth potential and reduce the earning potential of the portfolio.

In theory, provided you sell off a smaller percentage than the amount by which your portfolio has grown in the set time frame, then your investments should continue to grow.

The problem here is that this approach requires you to sell off parts of your portfolio on a regular basis, regardless of current price, and in the ideal scenario you will be selling off assets that have a history of compounding growth.

That is to say, you would be forced to sell off shares in profitable and growing businesses in order to meet your day to day spending obligations.

It is for this reason that many people prefer to hold dividend paying stocks that will continue to pay out a sum of money on a regular basis that can be used to cover living expenses, without being required to reduce any of your holdings in those companies.

This intuitively feels like a much more sustainable plan that can be maintained indefinitely and provide a passive income.

In addition to this, getting a regular dividend payment feels a lot safer and more tangible than investing in a growth fund that gives no yield back on your investment until sold for a capital gain. A dividend payment, once made, can’t be taken back and allows the price of the underlying asset to move entirely sideways, or even fall (to some extent) and you remain happy that your investment has provided you a positive yield.

Many of the larger, and more mature companies, that are publicly traded pay regular dividends and tend to increase the dividend payment amount on a consistent basis.

For example if we look at the past 5 year performance of IBM, we can see the consistent, and growing, dividend payments every quarter:

IBM Stock Chart

IBM Stock Chart 5 years to November 2014

Here we can see that despite the fact that the stock has moved more or less sideways for the last 3 years, the dividends paid off during this time will have provided the investor a positive return on their investment.

This can be seen by running the numbers on a sample time-frame as follows:
For this scenario we will ignore the implications of tax and brokerage fees/commissions, and assume no dividend reinvestment, in the interests of simplicity.

Imagine a theoretical investor, Jeremy.

The date is the 15th April 2011, our boy Jeremy has $100k to invest and is looking to invest in something that will pay a steady stream of dividend income.

Jeremy notices that IBM stock is currently trading at $166.21 per share and pays a steady quarterly dividend in the region of 0.45%.

With this, Jeremy takes his $100k USD and purchases 601 shares of IBM, at a cost of $99,892.21 leaving him with 601 shares of IBM, and $107.79 in cash.

From the point of investment, until today the price of IBM shares has declined to the tune of -1.09%

However, Jeremy’s investment account currently stands at $106,364.59
An increase of 6.36%

More importantly, Jeremy has generated $6,364.59 despite the value of his shares falling by -$980.02, and without reducing his holding of 601 shares.

The breakdown over time can be seen here in the table below:

Date Div per share Div paid out Running Total
06/05/2011 $0.75 $450.75 $450.75
08/08/2011 $0.75 $450.75 $901.50
08/11/2011 $0.75 $450.75 $1,352.25
08/02/2012 $0.75 $450.75 $1,803.00
08/05/2012 $0.85 $510.85 $2,313.85
08/08/2012 $0.85 $510.85 $2,824.70
07/11/2012 $0.85 $510.85 $3,335.55
06/02/2013 $0.85 $510.85 $3,846.40
08/05/2013 $0.95 $570.95 $4,417.35
07/08/2013 $0.95 $570.95 $4,988.30
06/11/2013 $0.95 $570.95 $5,559.25
06/02/2014 $0.95 $570.95 $6,130.20
07/05/2014 $1.10 $661.10 $6,791.30
06/08/2014 $1.10 $661.10 $7,452.40

This demonstrates the return that an investor could expect from an investment in IBM through the dividends paid out.

What is particularly good about this as an investment, is the regularity and uniformity of the dividend payments.

By understanding that your investment will pay out a predetermined amount as a set date in the future, an investor can plan his or her finances around this predictable income much as one would manage their finances around the dependable income gained through employment.

It is easy to see then, why dividend paying stocks such as IBM make idea replacements for employment income to provide for the costs of living in retirement.

In fact, the ~2% yield of IBM is actually on the lower end of the scale, with many “blue chip” stocks paying closer to 4% a year in regular, scheduled, dividends.

So, given the many benefits of investing in a dividend paying stock, why would an expat investor not want to load up their portfolio with some high yield dividend stocks and earn a steady stream of income from their capital?

Uncle Sam Taxman

Uncle Sam

US Withholding Tax

The principal reason why investing in a high yielding, US domiciled, dividend stock, is not an optimal strategy for a non US citizen is the application of “U.S. Tax Withholding on Payments to Foreign Persons

Any dividend payment made from a US domiciled assets will be subject to a hefty tax withholding of upto 30%, which takes a substantial margin out of your reinvestable assets[source1][source2].

In particular, if you live in a tax-free domicile, such as the United Arab Emirates, or a low tax domicile, such as Hong Kong, the tax withholding will be substantially higher than your rate of income tax.

In a region that has a low, or zero, rate of capital gains tax a more optimal solution would be for the the company to reinvest its profit into the business, or hold it on its balance sheet as a cash asset.

As a result, the individual share price would theoretically rise by an amount equal to the dividend that would have been paid out.

For many growth companies this is typically how they operate, and this makes them more efficient vehicles for expat investors.

However, this is but one aspect to bear in mind when evaluating and potential investment.

This issue of tax withholding does not apply to any funds that are domiciled outside of the US, for example a European stock, or a Japanese stock.

It is also worth noting that many Exchange Traded Funds that contain US domiciled assets choose to be domiciled in Ireland and traded on the London Stock Exchange.

This is due to the fact that a tax treaty is in place between the US and Ireland to reduce the level of tax withholding from 30% down to 15%.

Given the option between investing in a US domiciled ETF, or and Irish domiciled ETF that tracks the same index, there is a substantial tax benefit to be realized by investing in the Irish domiciled fund, but where possible it is better still to reduce the amount of dividends paid out from US domiciled assets.

Like many financial products, dividends are a great tool that can deliver good returns on your investment. However, when used incorrectly dividends can be an inefficient drag on any portfolio yield for any expatriate investor.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation.

34 Comments

  1. Dividend Mantra

    1st November 2014 7:38 pm, Reply

    Dan,

    Thanks for the mention!

    I caught this article from your link on Twitter.

    It’s an interesting scenario. However, I don’t understand what you’re trying to say. If I wanted to live in, say, Thailand year-round, I’ll still be looking at advantageous taxes on qualified dividends (0% through the 15% marginal bracket). I’ll still be a US citizen, and I’ll still have to file taxes just as if I were to live here. My residency would still be based in my current state (Florida), but I’d just be living somewhere else. I don’t automatically become a “foreign person”. At least, not to my knowledge.

    Furthermore, how would dividend income, in your scenario, be any different from capital gains? You’d still have to sell assets and pay this “30% tax” as a tax on your income.

    I know of a blogger, Jeremy @ GoCurryCracker, that lives off of his investment income while he and his wife travel the world. They don’t pay this 30% tax, from what I understand.

    I’m not quite sure the information in your article is accurate.

    Best regards!

    • Dan Clarke

      1st November 2014 8:47 pm, Reply

      The issue is that I am not a US Citizen, and for the most part neither are the intended readers of the article, I should perhaps be more clear on that 😛

      If you live in Thailand you will be liable to taxation at whatever the rate is in Thailand.

      I currently live in the UAE and pay 0% income tax and 0% CGT, my country of nationality (The UK) does not impose taxation on citizens overseas, and as such my personal income tax burden is 0%.

      In the above scenario of a non-US citizen living as a permanent resident in the UAE, there would be 0% capital gains to pay when selling any assets, but dividends on US domiciled assets are hit with a 30% tax withholding before they are even paid out to your brokerage.

      In the scenario that a non-US expat remains resident in the UAE (or other tax free domicile) then getting hit with a 30% tax withholding on dividends is a real inefficiency versus realizing the same profit as a capital gain.

      This is reduced to 15% when utilizing Irish domiciled funds, but even that is an inefficiency versus the 0% paid on capital gains.

      Does this make sense?
      I’m worried I’m perhaps overlooking something, which is why I reached out for input tbh 😀

  2. Dividend Mantra

    1st November 2014 9:11 pm, Reply

    Dan,

    I’m certainly no expert on foreign taxation, and do not pretend to be. It’s hard enough to keep up with US tax laws inside the US as a US resident.

    The title of the article and the content is confusing, however. You’re using the term “expat” in the title, then referencing IRS links inside the article. Furthermore, you’re discussing US blue chip stocks. So I, as a reader, assume you’re referencing US expats living abroad and paying taxes on their US-sourced income.

    I cannot speak for global taxation. But I want to make it clear to readers that this content isn’t reflective of a US citizen who builds a blue chip stock portfolio and then decides to live off of the dividend income while they travel the world. They’d still be a US citizen subject to US tax law. Moreover, the current taxation on qualified dividends is quite favorable, as I’ve discussed before. And that’s true regardless of whether you’re currently eating, walking, and talking in the US or you’re visiting another country on a lengthy basis engaging in those same activities.

    Best regards!

    • Dan Clarke

      1st November 2014 9:31 pm, Reply

      Hi Jason, I think you are applying your own situation to the article. Perhaps I am guilty of the same and that is why you find it unclear.

      The article, and indeed the entire website, could really do with clarification that some content is not applicable to US-Citizens owing to the draconian FATCA legislation, and the US enforcement of taxation on its citizens overseas.

      However, with the exception of Eritrea, no other country imposes taxation obligations on its citizens who are settled residents of other countries.

      As a US citizen, you will be under US income tax for as long as you live, unless you give up your citizenship, and as a result you will pay a level of taxation on US domiciled dividends regardless of where you live.

      For non-US citizens who are resident outside of the US, a tax withholding of 30% will be applied to dividends (unless your country of residence has a tax treaty in place to reduce that tax burden).

      The reason I highlight the IRS documentation is because this is the law that is applied to US domiciled securities and dictates the tax withholding that is applied.

      As a non-US citizen, investing in US domiciled securities, this IRS legislation applies to me.
      The point of the article is that paying 30% tax withholding on dividend distributions is inefficient, compared to investing in growth stocks that reinvest their profits into the business or hold them as cash, which would drive up the share price and allow the investor to sell and realize capital gains that would face no IRS imposed tax withholding.

      TL;DR:
      US citizens will continue to have the same tax obligations, regardless of where they live/visit.
      non-US citizens should look to avoid inefficient tax withholding on US domiciled dividend distributions.

      sources for this are the IRS documentation in the article, and the following discussion thread Bogleheads Forum

  3. Dividend Mantra

    1st November 2014 9:49 pm, Reply

    Dan,

    “US citizens will continue to have the same tax obligations, regardless of where they live/visit.:

    Sure. But those tax obligations on dividends for US citizens are fairly advantageous. For instance, you can earn $35,000/year in qualified dividends and pay 0% tax on those dividends, regardless of where you happen to be staying.

    We US investors also pay foreign withholding taxes on certain stocks that represent equity in companies that are domiciled abroad. But we’re lucky in that we get a dollar-for-dollar tax credit up to $300. Furthermore, there are a number of countries around the world that have treaties with one another in regards to dividends.

    I appreciate the mention once again, but I guess I’m just unclear as to why you wanted me to read the content when it doesn’t apply to me and I’m not at all an expert on foreign dividend taxation. I suppose this material just applies to an audience that I’m not a part of.

    I actually have plans to do some long-term travel at some point in the far future, and it’s great to know that my dividends are taxed at much more favorable rates than if I were someone still living and working in the US.

    Best regards!

    • Dan Clarke

      1st November 2014 10:00 pm, Reply

      I didn’t know the dividend tax relief was so advantageous for US citizens, that’s really good, I can understand now why dividend stocks are such a viable strategy for US citizens.

      I wanted to get your thoughts on the article as it seems that US dividends as a growth strategy is an inefficient plan for any non-US citizen to follow, owing to the tax withholding issues. This would lead me to think that any non-US citizen following your lead in the dividend investment plan would probably be better advised to a more tax efficient plan.

      This is a shame because it limits the number of people who can emulate your approach 🙁

  4. Dividend Mantra

    2nd November 2014 3:40 am, Reply

    Dan,

    “This is a shame because it limits the number of people who can emulate your approach”

    I disagree. They’d simply have to customize the strategy to work for their particular situation. For instance, focusing on local assets or stock domiciled in other countries with different taxation may be necessary.

    Furthermore, there are a number of countries around the world that have tax treaties with the US on certain income sources. I mentioned that earlier. That allows me, for instance, to invest in UK-domiciled stocks and pay 0% dividend tax to the UK government.

    You can see a list of countries here:

    http://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties—A-to-Z

    Best regards!

    • Dan Clarke

      2nd November 2014 5:41 am, Reply

      Hi Jason,

      “I disagree. They’d simply have to customize the strategy to work for their particular situation. For instance, focusing on local assets or stock domiciled in other countries with different taxation may be necessary”

      The problem here is that investing in local companies is problematic for several reasons:
      1. There are often only a handful of dividend paying stocks
      2. Market regulation may not be as stringent as the US
      3. Disclosure rules and access to data may not be as stringent as the US
      4. The “Systematic Risk” of investing in an emerging market is far, far, higher than that of investing in the US Markets.
      5. In many cases this will come with assuming a currency risk if your portfolio is otherwise denominated in US Dollars
      6. Any company disclosure or news may not be in English

      The only real option is investing in developed markets such as Europe and Asia, however the above points are also applicable to some extent, but still, for the most part, sub-optimal to holding US securities.

      “Furthermore, there are a number of countries around the world that have tax treaties with the US on certain income sources. I mentioned that earlier. That allows me, for instance, to invest in UK-domiciled stocks and pay 0% dividend tax to the UK government.”

      True.
      This means that you would not have to pay any tax on the dividend to the UK exchequer, but would still be hit with a 30% tax withholding from the IRS, which in the case of UK/Ireland is reduced to 15% as mentioned in Article 10 2 b) of the tax treaty (http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf)

      It seems, any which way you look at it, any non-US retail investor cannot efficiently invest in US dividend stocks as part of their portfolio apart from a few corner cases in which the tax withholding is lower than the rate of tax that would be due on the dividend income in the resident country and local taxation of foreign dividend payments is waived. Though I am yet to think of a scenario in which this would be the case.

      In any scenario that a non-US retail investor receives a dividend payment, there is always a minimum of 15% tax withholding applied, which does not lead to an efficient growth portfolio IMO.

  5. Dividend Mantra

    2nd November 2014 6:24 am, Reply

    Dan,

    “The problem here is that investing in local companies is problematic for several reasons:
    1. There are often only a handful of dividend paying stocks
    2. Market regulation may not be as stringent as the US
    3. Disclosure rules and access to data may not be as stringent as the US
    4. The “Systematic Risk” of investing in an emerging market is far, far, higher than that of investing in the US Markets.
    5. In many cases this will come with assuming a currency risk if your portfolio is otherwise denominated in US Dollars
    6. Any company disclosure or news may not be in English”

    What does it matter if the company’s disclosure is in English if your local market isn’t English? I just said you can buy stocks on YOUR exchange in YOUR country. I didn’t say that country necessarily spoke English. I personally interact with dividend investors all over the world that buy stocks domiciled in their own countries – Canada, Australia, the UK, China, etc. The US isn’t the only stock market in the world. You keep acting as if everyone, no matter where they live, must buy US stocks and abide by the IRS. And you’re also acting as if we’re the only developed economy in the world with a “safe” stock market. I guess you must think Europeans can’t buy European stocks? Or Canadians fear their own economic security? Or Germans? Or the Japanese? An expat isn’t confined to buying US stocks. They can buy stocks anywhere in any country. You pull up the 30% withholding and automatically condemn an entire strategy. I find your logic flawed and your comments not related to what I’m talking about.

    “True.
    This means that you would not have to pay any tax on the dividend to the UK exchequer, but would still be hit with a 30% tax withholding from the IRS, which in the case of UK/Ireland is reduced to 15% as mentioned in Article 10 2 b) of the tax treaty (http://www.treasury.gov/resource-center/tax-policy/treaties/Documents/uktreaty.pdf)”

    Dan, what does the IRS have to do with buying UK stocks???????? If you’re a German expat and and buy Unilever Plc shares, why would that investor care about the IRS???? Please explain that to me. Please. And please tell me what the UK government would withhold from the Unilver Plc dividend to a German investor.

    You act as if every investor in the world is ONLY able to buy US stocks.

    I specifically mention buying UK stocks as an alternative to US stocks and their tax treaty with foreign investors and then you pull up documents relating to our government and our taxation. I’m flabbergasted.

    Please get back to me on the German expat example with the Unilever shares. Because, you know, not every expat is originally from the US or needs to buy US stocks. It’s a big world out there.

    Best regards!

    • Dan Clarke

      2nd November 2014 7:39 am, Reply

      “What does it matter if the company’s disclosure is in English if your local market isn’t English? I just said you can buy stocks on YOUR exchange in YOUR country”

      The dividends paid form those stocks would be taxable at your local rate of tax.

      If a British person living in Hong Kong invests in a UK stock and receives a dividend, that dividend payment will be taxable at the applicable rate of tax in Hong Kong.
      The UK will not impose any tax withholding.

      With regards to US stocks, if the rate of tax of dividends in HK is lower than the rate of tax withholding that the IRS applies to dividend payments then this is an inefficiency and you pay a higher level of tax than you would if you were invested in a non-US domiciled stock.

      “Dan, what does the IRS have to do with buying UK stocks????????”

      You, yourself, made the link between the IRS US/UK tax treaty and dividends suffering tax withholding.

      The article itself speaks ONLY about investing in US domiciled stocks.
      The article itslef states this here:

      “The principal reason why investing in a high yielding dividend stock, is not an optimal strategy for a non US citizen is the application of “U.S. Tax Withholding on Payments to Foreign Persons”

      Any dividend payment made from a US domiciled assets will be subject to a hefty 30% tax withholding, which takes a substantial margin out of your reinvestable assets.”

      and here:

      “This issue of tax withholding does not apply to any funds that are domiciled outside of the US, for example a European stock, or a Japanese stock.”

      The whole issue is that the IRS impose tax withholding on dividend payments made from US domiciled securities to non resident aliens.

      “If you’re a German expat and and buy Unilever Plc shares, why would that investor care about the IRS???? ”

      You wouldn’t.
      I never suggested you would.
      If you are invested in entirely non-US domiciled securities then the IRS is of no concern to you.

      “And please tell me what the UK government would withhold from the Unilver Plc dividend to a German investor.”

      Nothing, as mentioned in the article this applies only to US domiciled securities.

      “I specifically mention buying UK stocks as an alternative to US stocks and their tax treaty with foreign investors and then you pull up documents relating to our government and our taxation. I’m flabbergasted.”

      My understand was that you mention the UK and its tax treaty with regards to the tax withholding on US security dividends, as this article deals only with the inefficiencies of US domiciled securities dividends.

      Anyone can invest in UK securities and pay 0% withholding tax on the dividends.
      The article does not dispute that.
      The issue is entirely with US domiciled securities and the IRS tax withholding.

      In order to avoid ANY IRS tax withholding, an investor would wither have to avail non-dividend paying securities in the US, or avoid the US market entirely.

      Considering that the US market is a substantial share of the global equity markets, avoiding it altogether is not a great idea.
      Being smarter with which investments you make in the US markets, to reduce your tax withholding hit from the IRS, perhaps is a smarter idea.

      • Dividend Mantra

        2nd November 2014 7:46 am, Reply

        Dan,

        I really have no motivation to continue this argument. You continue to use information that isn’t correct:

        “Any dividend payment made from a US domiciled assets will be subject to a hefty 30% tax withholding, which takes a substantial margin out of your reinvestable assets.”

        That’s not true, as I’ve already pointed out using just one example. I’m sure if I spent the time going through every tax code there are more. Sigh.

        You title an article vaguely, concentrate on one stock market, fail to discuss how there are alternatives out there, talk about drags that aren’t always applicable, and then condemn a strategy when there are actual real-life investors replicating this from all over the world.

        I wish you luck with your blog and your investments, but this has been a big waste of my time.

        Best regards!

        • Dan Clarke

          2nd November 2014 7:58 am, Reply

          I’m sorry that you were not able to understand my article.

          Thank you for the feedback, I will try and make the points more clear.
          “Any dividend payment made from a US domiciled assets will be subject to a hefty 30% tax withholding, which takes a substantial margin out of your reinvestable assets.” has been changed to:
          “Any dividend payment made from a US domiciled assets will be subject to a hefty tax withholding of upto 30%”
          to reflect the reduced tax rate applied to countries such as Ireland owing to the tax treaty.

          This is true.
          You may be able to use tax systems in your local country to offset this tax or provide credit against it, but the tax withholding WILL be applied.
          Though I suppose we are devolving into an issue of semantics.

  6. Dividend Mantra

    2nd November 2014 6:30 am, Reply

    Dan,

    “The “Systematic Risk” of investing in an emerging market is far, far, higher than that of investing in the US Markets.”

    I found this one most amusing. So any market that isn’t US is an emerging market?

    Best regards!

    • Dan Clarke

      2nd November 2014 6:57 am, Reply

      That is not what I said at all.

      What I said was that the systematic risk of investing in an emerging market is far higher than that of investing in the US Markets.

      Investing in Thailand, the Philippines, or Brazil, has a far higher systematic risk than investing in the US.
      Thailand experienced a military “coup d’état” in May this year, the US did not.
      The Philippines experienced a devastating Typhoon in November 2013 that rocked the economy, The US did not.
      Brazil has experienced significant economic troubles owing to ongoing protests and political instability, the US did not.

      Thailand, the Phillipines, and Brazil, are all “emerging markets”

      Investing in the UK Markets does not have a far higher risk than investing in the US.
      The UK is not an emerging market.

      This can be seen when looking at sovereign bonds for these countries.
      I have not checked, but I would feel quite certain that Thailand, the Philippines, and Brazil have higher yields on Government bonds than the yield on US government bonds.

      The yield on UK sovereign bonds will likely be very similar to that of US Government bonds.

      A nice proxy indicator of systematic risk.

      If you are an expat, living in an emerging market, your advice of “investing in domestic stocks” as solution to avoiding tax withholding on US dividends will mean that an investment IS exposed to a higher level of systematic risk.

      To suggest that I am implying “any market that isn’t US is an emerging market?” is untrue, and unbecoming.

  7. Dividend Mantra

    2nd November 2014 7:01 am, Reply

    Dan,

    “In any scenario that a non-US retail investor receives a dividend payment, there is always a minimum of 15% tax withholding applied, which does not lead to an efficient growth portfolio IMO.”

    Again, just not true. A Canadian investor, for instance, can buy US dividend-paying stocks inside an RRSP and not have to pay any US dividend taxes to the IRS – 15% or 30%. And, last I knew, they also had access to a dollar-for-dollar credit for the 15% they pay (after the treaty) to avoid double-taxation in unregistered accounts.

    I’m sorry if I’m coming across crass, but your article is far too generalized and sweeping to have any real value. If I’m a German expat traveling, for instance, I would find very little value in this article. Germans have a boatload of great companies already available to them, and, furthermore, have access to worldwide markets.

    So the whole “you’ll always pay at least 15%” argument in this article is bunk. I’m sorry, but I just want readers to understand that your information here isn’t totally accurate. It really all depends on individualized situations because taxation is an incredibly localized and complicated subject to write one article about for expats all over the world, regardless of their nationality.

    Best regards!

  8. Dividend Mantra

    2nd November 2014 7:04 am, Reply

    Dan,

    “If you are an expat, living in an emerging market, your advice of “investing in domestic stocks” as solution to avoiding tax withholding on US dividends will mean that an investment IS exposed to a higher level of systematic risk.”

    I didn’t say an expat had to be living in an emerging market. Are there not expats from a variety of developed countries out there traveling? You wrote this whole article specifically saying how this strategy might not work for you and used JUST ONE COUNTRY as your whole basis. It’s completely bunk, my friend. You didn’t touch on any other options, when there are plenty of them.

    And, again, your basis is flawed anyway, as I just pointed out in the above comment.

    Best regards!

    • Dan Clarke

      2nd November 2014 7:24 am, Reply

      “You wrote this whole article specifically saying how this strategy might not work for you and used JUST ONE COUNTRY as your whole basis. It’s completely bunk, my friend. You didn’t touch on any other options, when there are plenty of them.”

      Well, actually this principal applies to the vast majority of countries in the world.
      In fact I would go so far as to say that the countries that this does not apply to are a select handful (such as Canada).

      Explain to me how an German investor in Hong Kong can avoid paying 15%-30% on US domiciled dividends?
      What is he lives in Iceland, or France, or Spain, or South Africa, or the Philippines, or Qatar?

      To the best of my knowledge, in all of these cases the investor would take a tax withholding hit on dividends paid out from US domiciled stocks as I am aware of no provisions here to offer any such “dollar-for-dollar” tax credit on the tax withheld.

      Of course, if there are such schemes available then I would be delighted to hear about them and learn something new.
      The best way to learn something new is to be wrong about it on the internet.

      • Dividend Mantra

        2nd November 2014 7:36 am, Reply

        Dan,

        Ahh, so where you wrote in your article:

        “Any dividend payment made from a US domiciled assets will be subject to a hefty 30% tax withholding, which takes a substantial margin out of your reinvestable assets.”

        We can now admit that’s not true.

        “Explain to me how an German investor in Hong Kong can avoid paying 15%-30% on US domiciled dividends?”

        Again, you act as if the US stock market is the only market in the world. If I were a German investor you can bet your bottom dollar I’d be invested in companies like Siemens, BASF, SAP, Henkel, etc., etc. I can think of at least 30 dividend stocks on the DAX just off the top of my head. And I’d live wherever I want while I collected the dividend checks from those stocks.

        You wrote this article and used one stock market as your basis, and then the information on that one market regarding taxes wasn’t even correct!

        I don’t have time to research every country’s tax laws. But you can bet that if I ever wrote an article about dividend taxes for expats I’d do the research necessary. Or I wouldn’t bother.

        I beg of you to carefully consider your words and information. People out there rely on this stuff.

        Best regards!

        • Dan Clarke

          2nd November 2014 7:48 am, Reply

          Jason,

          I’m not sure that you read the article.

          “Again, you act as if the US stock market is the only market in the world.”

          This is absolutely untrue.
          The article relates to the inefficiency of investing in US domiciled securities, and makes no mention of non-US domiciled securities as they do not suffer the same level of tax withholding.

          The article outlines that this is a problem specific to the US market and is not applicable to other markets:

          “The principal reason why investing in a high yielding dividend stock, is not an optimal strategy for a non US citizen is the application of “U.S. Tax Withholding on Payments to Foreign Persons”

          Any dividend payment made from a US domiciled assets will be subject to a hefty 30% tax withholding, which takes a substantial margin out of your reinvestable assets.”

          I think this perhaps should be revised to say “”The principal reason why investing in a US DOMICILED high yielding dividend stock, is not an optimal strategy for a non US citizen”

          To make the distinction more clear, though it is mentioned in the article a few lines lower “This issue of tax withholding does not apply to any funds that are domiciled outside of the US, for example a European stock, or a Japanese stock.”

          The US market makes up around 1/3 of my portfolio.
          To suggest that I think the US is the only market in the world is utterly flawed.

          I would argue that one of us has an understanding that the US market is the only market in the world.

  9. Dividend Mantra

    2nd November 2014 7:07 am, Reply

    Dan,

    I see you also ignored my earlier example of a German expat wanting to buy Unilever Plc shares. Or, for that matter, what about a German expat wanting to buy shares in a domestic company – like Munich Re?

    I find it laughable that you so quickly dismissed my earlier point about buying domestic companies and then just point to “emerging markets”.

    What exactly is your definition of an expat??

    Best regards!

    • Dan Clarke

      2nd November 2014 7:18 am, Reply

      Your other comment appears to have been flagged by the spam filter, but I will dig it out and respond.

      “What exactly is your definition of an expat?”

      I think this is where the confusion comes.
      You mention “travelling” a lot in your responses, as though a German expat will be under German taxation rules regardless of where they live because they are simply “travelling”

      An expat is a person from one country who is a permanent resident in another.
      This has nothing to do with travelling.

      An expat who is resident in a country is subject to the taxation laws of that country, not their native country, with the exception of the US and Eritrea.

        • Dan Clarke

          2nd November 2014 7:42 am, Reply

          At no point have I ever said this.
          At no point have I ever hinted at this.

          I am an expat myself and I am not invested ONLY in US stocks.

          In the article itself mentions this very line:

          “This issue of tax withholding does not apply to any funds that are domiciled outside of the US, for example a European stock, or a Japanese stock.”

          The argument you make here is utterly ridiculous.

          • Dividend Mantra

            2nd November 2014 7:51 am,

            Dan,

            “At no point have I ever said this.
            At no point have I ever hinted at this.”

            You hinted at this by focusing your ENTIRE article on US stocks.

            “In the article itself mentions this very line:

            “This issue of tax withholding does not apply to any funds that are domiciled outside of the US, for example a European stock, or a Japanese stock.”

            I’m fairly certain you edited that line in. I didn’t see it the first time I read the article. And I know FOR SURE your note at the beginning wasn’t there the first time:

            “The following article discusses the “U.S. Tax Withholding on Payments to Foreign Persons” and is NOT applicable to US citizens, regardless of their country of residence”

            But you can edit your article as you go and then fail to make notes about your edits. Just make sure you edit out the piece about 30% since I already proved you wrong and you still haven’t rectified that.

            Again, this has been a big waste of time. Please refrain from shouting out at me on Twitter the next time you want to publicize information that isn’t true and then edit it as you go.

            Best regards!

          • Dan Clarke

            2nd November 2014 8:15 am,

            “This issue of tax withholding does not apply to any funds that are domiciled outside of the US, for example a European stock, or a Japanese stock.”

            Was there from the beginning.

            “The following article discusses the “U.S. Tax Withholding on Payments to Foreign Persons” and is NOT applicable to US citizens, regardless of their country of residence”

            Was added on the basis of your feedback that the article was not clear enough, 🙂

            “You hinted at this by focusing your ENTIRE article on US stocks.”
            This isn’t really very fair now.
            Among other things the sidebar has a ticker of European domiciled funds.

            “But you can edit your article as you go and then fail to make notes about your edits. Just make sure you edit out the piece about 30% since I already proved you wrong and you still haven’t rectified that.”

            I still disagree with you on this, owing to my research turning up information such as:

            US tax law requires the withholding of tax for non-US persons (non-resident aliens) at a rate of 30% on payments of US source stock dividends, short-term capital gain distributions and substitute payments in lieu.

            An not least the information directly from the IRS website itself:

            Most types of U.S. source income paid to a foreign person are subject to a withholding tax of 30%, although a reduced rate or exemption may apply if stipulated in the applicable tax treaty.

  10. Dividend Mantra

    2nd November 2014 7:21 am, Reply

    Dan,

    Perhaps some have been caught by the spam filter, but they’re showing up for me. I’d like you to specifically respond to this comment. You seem to be ignoring the fact that you keep using information here about US dividend taxation that just isn’t true:

    “In any scenario that a non-US retail investor receives a dividend payment, there is always a minimum of 15% tax withholding applied, which does not lead to an efficient growth portfolio IMO.”

    Again, just not true. A Canadian investor, for instance, can buy US dividend-paying stocks inside an RRSP and not have to pay any US dividend taxes to the IRS – 15% or 30%. And, last I knew, they also had access to a dollar-for-dollar credit for the 15% they pay (after the treaty) to avoid double-taxation in unregistered accounts.

    I’m sorry if I’m coming across crass, but your article is far too generalized and sweeping to have any real value. If I’m a German expat traveling, for instance, I would find very little value in this article. Germans have a boatload of great companies already available to them, and, furthermore, have access to worldwide markets.

    So the whole “you’ll always pay at least 15%” argument in this article is bunk. I’m sorry, but I just want readers to understand that your information here isn’t totally accurate. It really all depends on individualized situations because taxation is an incredibly localized and complicated subject to write one article about for expats all over the world, regardless of their nationality.

    Best regards!

  11. YellowJoe

    24th April 2015 4:36 am, Reply

    Hi Dan and Dividend Mantra,

    Let me chime in here. I studied this dividend tax issue extensively.

    I tried to read your comments to each other as much as I could and skimmed over some of it as well…

    Without getting too lengthy, here is the deal and my recommendation.

    1st:

    If you are a NON-USA citizen and resident (no greencard), it is probably BEST to not invest directly in USA stocks and USA Domiciled ETF’s. PERIOD.

    However, for a diversified portfolio, you must include USA stocks somehow.

    The best way to invest to invest in USA stocks is various ETF’s that are domiciled in either Ireland, Luxemburg and Germany.

    Reasons: 30% dividend tax automatically taken out by USA and 40% Estate Tax for any amount over $60,000 USD. You will have a 15% dividend tax from Ireland domiciled ETF’s covering US stocks but 15% is better than 30% and no 40% estate tax for investments more than $60,000 USD.

    2nd:

    For individual stocks, I recommend UK, Euro Zone and some Hang Seng Index stocks. There are more than enough good strong dividend growth stocks in these indexes for DGI type investing. There are like a good 200+ good dividend stocks to choose. Euro Stoxx 50, FTSE 100, Hang Seng Index (50 stocks).

    Let me recommend 2 stocks: CKH Holdings from Hong Kong and Nestle from Switzerland.

    Reason: little or NO dividend tax. No estate tax. Basically, you escape FATCA as much as you can by not investing in any stocks or ETF that is USA domicile.

    Again, you must be NON-USA citizen or resident.

    If you are a USA citizen or resident (greencard holder) it doesnt matter where you live around the world, you are subject to US taxation laws…

    There are more to this converations but I will end it here.

    summary: a non-usa person, stay out of USA domiciled stocks / ETF’s. That is my recommendation…

    • Dan Clarke

      24th April 2015 5:12 am, Reply

      Hi, YellowJoe.

      Thanks for the comment.
      This is pretty much exactly how I understand the situation and is why I am invested in ETFs domiciled in Ireland (for the reduced 15% withholding on dividends of US domiciled securities)
      This is the advice I give to all NON-USA citizens or residents.

      My experience is that as a NON-USA citizen/resident, direct investment into US domiciled securities is problematic and often tax inefficient.

      • YellowJoe

        24th April 2015 6:18 am, Reply

        hi dan,

        I agree!

        Do you by chance know the dividend tax rate of Germany Domiciled ETF’s? for both US and Non-usa stock ETF’s?

        This information I can not seem to find.

  12. YellowJoe

    24th April 2015 5:13 am, Reply

    I want to reiterate the point of ESTATE tax of 40% from USA on any stock / ETF that is domiciled in USA. This is a far greater risk than 30% dividend Tax and a more important point to realize for any non-USA citizen/resident.

    So basically, if you pass-away, USA takes out 40% of GROSS investments and leaves 60% remaining to your heirs!

    As opposed to non-USA domiciled stocks / ETFs; no capital gains (for many, not all), no estate tax issues, little or no divident tax.

    • Dan Clarke

      24th April 2015 5:20 am, Reply

      Absolutely.
      The 40% estate tax is very important to consider too.
      You would be insane to hold your portfolio entirely in US domiciled funds if you were a NON-USA citizen/resident with significant dependents or assets over >$60k.

      But the post was mostly talking about the inefficiency of US dividends for NON-USA Citizens/Residents and that’s why I focused more on this issue 🙂

  13. YellowJoe

    24th April 2015 5:22 am, Reply

    Hi Dan,

    you are welcome! Dividend Mantra has some good points in being a DGI’er but just apply it to non-USA individual stocks.

    A sample portfolio:

    30% US index ETF’s domiciled from ireland / germany / luxemburg
    I like ishares S&P 500 0.07% TER, spdr S&P Dividend Aristocrats 0.25% TER, ishares S&P 600 0.40% TER) 10% in each

    40% UK, Euro-Zone, Hang Seng DGI stocks of 30-50 stocks

    30% mix of Cash, High Yield, Govt, Treasury Bond ETF’s of USD, GBP, Euro, HKD currencies (all Non-USA domicile)

  14. Rudy SMT

    10th June 2016 1:46 pm, Reply

    Hi Dan,

    Thanks for your article. It was a while I was looking for an answer to this problem of mine.

    I need ETFs with exposure to US but I got hit by a 30% dividend TAX. Shocking!

    I will look into more ETFs from HK. I like the 0%.

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