Need to declare overseas dividends if living in Japan for less than 5 years?

[TokyoWart]

My understanding is that the US taxes dividends at source but not capital gains.

That is an interesting point! Is this true? Anyone here can share their experiences?

So when a non-US citizen overseas holds some assets and sells them and gains, does he declare taxes to the US? To his home country? To both?

Sorry that is not what I meant. When someone (whether Japanese or not) in Japan holds a US mutual fund or stocks at a Japanese brokerage firm part of the dividend payment is withheld at the brokerage firm before it ever reaches you, as is required by the US. For people in Japan I think 10% is withheld (for some other countries there is higher withholding). However that is not true of capital gains. If you held AMZN in a Japanese brokerage which you had bought at $1000 and sold at $3000 you won't get 10% of the gain withheld for the US. You will get 20.315% of the gain withheld for Japan and you will still need to report the gain on your US taxes, but you can also claim the 20.315% taken by Japan as a Foreign Tax Credit using Form 1116 on your US taxes. Because of this difference in handling the only US stocks I try to hold in my Japanese brokerage accounts are those that don't pay dividends (e.g. AMZN, BRKB, etc.).

[TBS]

> You asked a hypothetical question, but if you are planning to stay long-term in Japan and became a permanent tax resident at some point, it might be worth seeking professional advice on this, or at least speaking to the local tax office and reading up on the relevant taxation treaties.

Indeed that is exactly what I thought of doing lately! Now is not a good time as the tax office is busy with people who actually have to declare while I do not need to yet.

> Most non-US nationals here find it easier tax reporting-wise (and often cheaper) to invest via Japanese brokers.

This is exactly what I'm doing since moving to Japan. However the assets already invested before moving here is a different matter.

> It might be worth bringing your assets over before or around the time your Japan tax status changes.

I am curious that you suggested this! This is the first thing I thought but I got the impression that moving over would entail a tax event (i.e. capital gain tax on all gains) at the moment of transfer, is that not true?
Perhaps it is because the assets would move from a joint account to a non-joint account?

I currently use Rakuten in Japan but I'm investing in index following funds and not ETFs like I used to overseas, I wonder how will these transfer.

You won't be able to move the ETFs directly to Rakuten, you would need to liquidate them first and remit cash over. As you bought the ETFs before moving to Japan, under the current tax rules selling them as an NPR would count as foreign source income. As you say, the capital gains would then become taxable by Japan if you remitted the cash in the same tax year. However my understanding is if you remitted in a subsequent tax year they would not be liable.

Whether transferring the money this way is worthwhile will depend on the rates of capital gains tax abroad, the continued dividends taxes you could expect to pay if kept the ETFs abroad, how much you could potentially save on Japan capital gains tax now and future Japan dividend/capital gains taxes by re-buying in Japan etc. If the capital gains tax you will have to pay abroad is higher than the 20.315% rate here, there is potentially no benefit as I guess the double taxation treaty/foreign taxation credit will make the Japan-side taxes zero or minimal.

Also remember the tax office assumes any remittances you make will be taxable income first regardless of whether it is existing cash or not. So if routinely you are making transfers between the country where you currently hold the ETFs and Japan every year, the above strategy will not work.

Furthermore the joint name account issue is a complicating factor, as Japan does not recognize jointly held assets. The tax office might ask for some evidence as how to separate the ownership of the ETFs in the foreign account appropriately, e.g. original payment statements.

If you are consider re-buying the same ETFs in Japan, also look at mutual fund equivalents. These can be more tax efficient here as they are allowed to reinvest dividends net before Japanese tax.

[kanpanela]

TokyoWart,

I understand. Thanks for the clarification.

You will get 20.315% of the gain withheld for Japan and you will still need to report the gain on your US taxes, but you can also claim the 20.315% taken by Japan as a Foreign Tax Credit using Form 1116 on your US taxes. Because of this difference in handling the only US stocks I try to hold in my Japanese brokerage accounts are those that don't pay dividends (e.g. AMZN, BRKB, etc.).

Is this referring to US citizens? "Your US taxes" makes it sound as if you are speaking to a US citizen, I never did US taxes before, do I need to do this even as a non-US citizen? Hopefully not!

[TokyoWart]

TokyoWart,

I understand. Thanks for the clarification.

You will get 20.315% of the gain withheld for Japan and you will still need to report the gain on your US taxes, but you can also claim the 20.315% taken by Japan as a Foreign Tax Credit using Form 1116 on your US taxes. Because of this difference in handling the only US stocks I try to hold in my Japanese brokerage accounts are those that don't pay dividends (e.g. AMZN, BRKB, etc.).

Is this referring to US citizens? "Your US taxes" makes it sound as if you are speaking to a US citizen, I never did US taxes before, do I need to do this even as a non-US citizen? Hopefully not!

Sorry, I misunderstood you but see now that you clearly wrote you are not a US expat. I think only the US (and maybe Ethiopa) taxes their citizens in Japan so you don't have to worry about filing a US tax return (but I do). However, the US, like many countries, withholds taxes from passive investments which are based in the US but held by people outside the US. That is why you would have 10% of dividends from a US fund like VTI withheld before you receive them even though you hold VTI in a Japanese brokerage confusion. My apologies for the confusion!

[kanpanela]

...

Thanks for your reply, TBS

> Whether transferring the money this way is worthwhile will depend on the rates of capital gains tax abroad, the continued dividends taxes you could expect to pay if kept the ETFs abroad, how much you could potentially save on Japan capital gains tax now and future Japan dividend/capital gains taxes by re-buying in Japan etc.

Just thinking of trying to calculate this put my head in overload.
If you know of professional accountants who eat these kinds of things for breakfast, I would
be glad to receive a recommendation!

> If the capital gains tax you will have to pay abroad is higher than the 20.315% rate here, there is potentially no benefit as I guess the double taxation treaty/foreign taxation credit will make the Japan-side taxes zero or minimal.

It is indeed higher 25%.

I am not sure what you are saying about the double tax treaty, but interestingly enough I just have another thread on this forum (titled "Keisan NTA e-tax form ignores double tax treaties?")
where I mention that I tried filling the e-tax form hypothetically for if I was earning on selling assets and paying 25% capital gain tax overseas to see what happens, and the calculation
does not differ between dividends and capital gain tax, i.e. I still pay to Japan tax in addition to the 25% overseas and the form does not even take into consideration which country
the tax was paid to so there is no way for it to heed double tax treaties.
Since you just mentioned "the Japan-side taxes zero or minimal", I wonder do you have some
experience with this? Is there a process to adjust the miscalculation of the e-tax form that
you are aware of?

> Also remember the tax office assumes any remittances you make will be taxable income first regardless of whether it is existing cash or not. So if routinely you are making transfers between the country where you currently hold the ETFs and Japan every year, the above strategy will not work.

I am not sure what you mean about "if routinely". If it is not routinely then no problem?
Also, how about instead of remitting money and buying through Rakuten, how about transferring
the asset to an international broker such as Interactive Brokers? I never used them before,
but would that be a viable option? Is the reason to prefer a Japanese mutual-fund lies in the
ability to reinvest dividends? I assume that with capital gain tax would not be held at source,
and then I just pay to Japan 20.315% and am done with it? Also it would provide some flexibility if I end living in a different country if something were to happen in Japan?

> Furthermore the joint name account issue is a complicating factor, as Japan does not recognize jointly held assets. The tax office might ask for some evidence as how to separate the ownership of the ETFs in the foreign account appropriately, e.g. original payment statements.

The original payment statements are under the same joint name but the original source of the money in the account is all my paychecks so that should be easily proven. Even if not, if push comes to shove, the partner in the account will just leave the account and it will go back
to being just under my name, but I will only do this if I decided to move all the assets over.

> If you are consider re-buying the same ETFs in Japan, also look at mutual fund equivalents. These can be more tax efficient here as they are allowed to reinvest dividends net before Japanese tax.

Indeed! That is what I currently do with the money I earn in Japan. Thanks!

[kanpanela]

Sorry, I misunderstood you but see now that you clearly wrote you are not a US expat. I think only the US (and maybe Ethiopa) taxes their citizens in Japan so you don't have to worry about filing a US tax return (but I do). However, the US, like many countries, withholds taxes from passive investments which are based in the US but held by people outside the US. That is why you would have 10% of dividends from a US fund like VTI withheld before you receive them even though you hold VTI in a Japanese brokerage confusion. My apologies for the confusion!

Don't worry about it!
Interestingly enough the US withholds 25% (not 10%) of dividends from my US assets in a brokerage outside Japan!
But I guess there is not much I can do about it except move the assets to a brokerage in a different country where conditions are better?

[TokyoWart]

Interestingly enough the US withholds 25% (not 10%) of dividends from my US assets in a brokerage outside Japan!

Interesting indeed. May I ask which country gets that higher withholding rate by the US? (Just curious so please don't feel like you have to answer.)

[TBS]

...

If the dividend and capital gains tax rates are higher in the abroad country and you are here long term, I imagine it would make sense to invest either via Japan or IBKR instead.

I am not familiar with the Australia-Japan double taxation treaty, but are you sure you have worked out to enter everything correctly through e-tax to claim the foreign tax credit? It's US-specifc, but this nice walkthrough for claiming dividend foreign tax credits was shared on reddit recently.

Routinely was not the best word. Basically if you do want to keep your foreign source capital gains out of Japan's taxation scope as a non-permanent resident, you need to be careful not to transfer any funds (regardless of source) from Aus to Japan in the same tax year.

[kanpanela]

I contacted two broker one in Belgium and one in Singapore. Both told me they do not apply US Japan treaty and therefore my dividends on US stocks would be taxed at 30%. So I opened interactive broker and they use the correct 10%.

There you go that's exactly what I meant.
Good to know it is solved with IBKR. I will try to do the same.
How is IBKR buy/sell fees, are you satisfied with them?
Do they offer services to report taxes for you?

[kanpanela]

...

> If the dividend and capital gains tax rates are higher in the abroad country and you are here long term, I imagine it would make sense to invest either via Japan or IBKR instead.

Indeed. I think that IBKR makes sense no matter where I stay as it is portable between countries (if I understand correctly)
Is there a big disadvantage to using it rather than a broker in Japan? I am currently using Rakuten for IDECO and NISA
and for a bit of 特定 but I think that 特定 investing (just index following mutual fund) might perhaps be better through IBKR? At least my overseas stuff might be better with IBKR unless they have some disadvantage like horrendous fees or really complicated tax handling/reporting.

> It's US-specifc, but this nice walkthrough for claiming dividend foreign tax credits was shared on reddit recently.

Wow this link is pretty detailed! I will to go over it slowly but surely and make sure it is identical to what I tried.

However, I mentioned that Japan only taxes 7.5% on those dividends despite the fact that normally it's over 20% so that means some reduction have happened here right?
There is another post on this forum about someone getting taxed 10% from US and 20% from Japan. Although 30% is less than my 25% + 7.5%, at least the Japan portion was reduced

Perhaps following that link will bring it to 0%? Will have to find out.

> Routinely was not the best word. Basically if you do want to keep your foreign source capital gains out of Japan's taxation scope as a non-permanent resident, you need to be careful not to transfer any funds (regardless of source) from Aus to Japan in the same tax year.

Sure, I understand. And no need to transfer anything since this is solely savings for retirement

Thanks!