US Dividend taxes: 10% US + 20% Japan, no way around it?

[adamu]

This jblogger seems to be discussing that exact case and looks like it's pretty exhaustive. I'm also exhausted, so one for next weekend.

https://hiromethod.com/tax-on-dividends

[TBS]

Thanks as @Tkydon.

This jblogger seems to be discussing that exact case and looks like it's pretty exhaustive. I'm also exhausted, so one for next weekend.

https://hiromethod.com/tax-on-dividends

Thanks this is great. It is the most comprehensive blog post so far. It's conclusion: it all depends on personal details.

As Tkydon points out, for the most likely case for foreigners here (separate taxation best due to base income level) the differences in taxation rates between the different filing options look quite small. Unless we're talking millions of yen in dividends here, perhaps not worth getting too deep into this topic?

[Tkydon]

It appears that you can choose to leave the residence tax part of the dividend income as "undeclared" / 申告不要 meaning that rather than being calculated under the information in the tax return, the tokutei kouza handles it. This is the method recommended in the first post I mentioned and that TBS also mentioned above.

What I can't understand is if that is really allowed when claiming the foreign tax deduction. Because as I (and Tkydon) said above, when claiming the tax deduction, the amount of Japanese tax needs to be recalculated based on the full dividend *before* the foriegn tax was deducted. However, if you leave the residence tax as undeclared, then it will be the tokutei kouza's 5% of the dividend after the foreign tax was deducted, even though the foreign tax was credited back in the tax return. I've not found any information discussing this case. For national income tax, this would be like claiming the foreign tax deduction, but not declaring the income on the tax return (case 3 in my post above).

No, if you choose this route and do not declare the Dividend Income, 申告不要, then you cannot claim the Foreign Tax Credit of 10% or 15% (depending on country), so I'm not sure it makes sense at all for Foreign Dividends, leaving that amount on the table...

However, the Residents' Taxes are partially reduced by the fact that the Broker calculated and withheld the Residents' Taxes on the amount of the dividend net of Foreign Tax; 5% of 90% = 4.5% or 5% of 85% = 4.25%, depending on country.

https://hiromethod.com/tax-on-dividends
総合課税の税率が申告分離課税の税率を上回るかどうかのボーダーラインは課税所得金額330万円のところにあります。したがって、課税所得金額が330万円以下であれば総合課税を、課税所得金額が330万円を超えたら申告分離課税を選択することで配当税率は低くなります。

[emikami]

So, after going through a world-renowned company to handle my JP and US taxes this year, I have reached the conclusion that it doesn't seem to be possible to avoid being double taxed on US-based dividends.

A few specificities of my situation:
1) Note that I'm neither a US nor a JP citizen, if that makes a difference.
2) I live in Japan but currently have the bulk of my investments in a US-based brokerage account (Schwab) for historical reasons.
...
What I have experienced is that the US withholds 10% of the (US based companies) dividends as tax. Then Japan taxes 20% of the rest. For a total of close to 30% of taxes on dividends (technically, 10% + 20%*90% so maybe closer to 28% total).
...
When my US tax return came, I saw that none of the 10% withheld was coming back my way.
I asked the US folks if I was being double taxed, copy/pasting the statement from the JP folks. The US folks replied:

[...]Non-resident cannot claim foreign tax credit. Foreign dividend income is not taxable for US Non-residence. The US withheld of $xxx (on dividend income) is been reported as US tax withheld on your form 1040NR page 2.
...
I do not fully trust these people to do their job diligently to be honest. In their preparation work of my US tax return, they made a mistake for my nationality.
...
Would love to hear if people have different interpretations on this. Having gone through professionals for that I feel I got a pretty definitive answer, even if I find it surprising.

Ok, I tried to reduce the length of the quote to items which are specifically relevant to your situation. Since you're neither U.S. Citizen nor a Japanese Citizen, I have to make one assumption that is not in your post to try to explain what's going on. That assumption is that you have lived in Japan for more than 5 years in the last 10 years thus despite your nationality, you are a permanent resident for Japanese tax purpose. If that is the case, your situation is no different than if you were a Japanese citizen living in Japan.

By U.S. Japan Tax treaty, the U.S. tax withholding rate is 10%. That is the tax that U.S. will not return to you period. By Article 23, paragraph 1, Japan will provide foreign tax credit on that 10% _based on their own rules_. Japanese foreign tax credit first applies to the national level (Shotoku zei) and if that is not high enough to claim all 10%, it trickles to inhabitant tax (Shimin zei - City tax, and Kenmin zei - Prefecture tax). The limits of those are 12% and 18% of what was claimed in your shotoku zei. In other words, you can only claim 1.3 times your shotoku zei amount for that income. So if you paid 5% in shotoku zei, then the most Japan will give back is 6.5% total thus causing a 3.5% deficit. That 3.5% is carried forward for the next 3 years just in case you're able to claim it in those years based on the same restrictions in place. But if your situation doesn't change that much, most likely outcome is those unused foreign tax credit expire worthless after 3 years.

U.S. does allow foreign tax credit on Form 1116, Certain Income Re-sourced by treaty but in your case, because you are not a U.S. Citizen nor a U.S. green card holder, it won't work. This is covered in Article 23, Paragraph 3b and 3c. It is only for situation where you pay more than 10% in U.S. tax for those dividends. Since you're a non-U.S. Citizen, you are paying 10% in U.S. tax for that dividend thus U.S. will not give any foreign tax credit. This is true even if you were a Japanese Citizen with the same income.

Side note is that there are now some Japanese mutual funds that have wrapper around U.S. Index ETF that automatically takes care of the foreign tax credit on the Japanese side. Unlike the limits of 1.3 times shotoku zei rule, such fund actually returns the full 10% that is paid to the U.S. and the total tax paid will be 20.315% just like what you would pay if you were invested in Japanese stocks. You can put it in a tokutei koza and use shinkoku fuyo seido to avoid any tax filing with such fund at a Japanese brokerage firm.

Believe me, you've actually been spared because you aren't a U.S. Citizen in this case. Because otherwise you will likely pay more to the U.S. and it'll be that much harder to avoid double taxation. My trick with the new Japanese fund with U.S. Index ETF will not work nearly as well for U.S. Citizen because that fund will be treated as Passive Foreign Investment Company and you end up losing qualified dividend treatment and claiming it as Section 1293 (Qualified Electing Fund) on Form 8621. But this must be done from the first
year you invest in a PFIC fund, otherwise, it'll be even less favorable in terms of taxation.

[Matt_Black]

If you are not a US Citizen (or Green Card Holder), then you will be taxed in the US on Dividends by Withholding, but not on Capital Gains.

You have to claim the Foreign Tax Credit against your Japanese Taxes on the Kakutei Shinkoku Form B - Page 1 - Item 46.

For Dividend Income

You need to file a W8-BEN Form with your broker to claim the benefit of the US-Japan Tax Treaty.
If you do not file a W8-BEN or if your broker doesn't file your W8-BEN correctly on your behalf, then you will be subject to US Withholding Tax at 30%.
If you correctly file the W8-BEN, under the US-Japan Tax Treaty you will only be subject to US Withholding Tax at 10%. This tax is payable to Uncle Sam for US derived income.

Any Foreign National (non-US Citizen), including Japanese, who is filing a W8-BEN should in Part II state:

Part II Claim of Tax Treaty Benefits (for chapter 3 purposes only) (see instructions)
9. I certify that the beneficial owner is a resident of ___JAPAN___ within the meaning of the income tax treaty between the United States and that country.
10. Special rates and conditions (if applicable—see instructions): The beneficial owner is claiming the provisions of Article and paragraph
_10 2(b), 11 2(b)_ of the treaty identified on line 9 above to claim a ___10___ % rate of withholding on (specify type of income):
___Dividend and Interest Income___
Explain the additional conditions in the Article and paragraph the beneficial owner meets to be eligible for the rate of withholding:
___As A Resident Of Japan for Tax Purposes.___

The Broker will then withhold US Tax due to Uncle Sam at 10%

In Japan, you need to file a Kakutei Shinkoku by Mar 15, and you need to select the Separate Self-Assessment Taxation method (Form B - Pages 1&2 And Page 3).
Under the Separate Self-Assessment Taxation method, you will be liable to 20.315% Dividend Tax (15% National, 0.315% Reconstruction, and 5% Residential Taxes).

You should then receive a 1042-S Statement of US Taxes Withheld from your broker, around the beginning of April, in time for US Tax Filing (Apr 15).

You can then revisit and amend your Kakutei Shinkoku and claim the Foreign Tax Credit for the 10% Tax paid in the US - Form B Page 1 - Item 46.
So then your taxes become 10% US Withholding, 5% National, 0.315% Reconstruction, and 5% Residential Taxes.

This old thread seems to be very relevant to my situation so allow me to resurrect it.

I'm a non-US citizen with a filled W8-BEN form which results in my RSU dividends having 10% withholding tax applied to them. I'm preparing for the kakutei shinkoku and wanted to make sure I correctly understand how to declare the dividend income and claim the foreign tax credit (FTC).

1. Use the separate taxation method for the dividend income.
2. Declare the gross US dividend income (before deduction of the US 10% witholding tax).
3. Complete kakutei shinkoku and pay my taxes.
4. Receive 1042-S statement of US taxes withheld - I typically receive it in March.
5. Amend the kakutei shinkoku to claim the FTC.

Thanks in advance!

[ChapInTokyo]

If you are not a US Citizen (or Green Card Holder), then you will be taxed in the US on Dividends by Withholding, but not on Capital Gains.

You have to claim the Foreign Tax Credit against your Japanese Taxes on the Kakutei Shinkoku Form B - Page 1 - Item 46.

For Dividend Income

You need to file a W8-BEN Form with your broker to claim the benefit of the US-Japan Tax Treaty.
If you do not file a W8-BEN or if your broker doesn't file your W8-BEN correctly on your behalf, then you will be subject to US Withholding Tax at 30%.
If you correctly file the W8-BEN, under the US-Japan Tax Treaty you will only be subject to US Withholding Tax at 10%. This tax is payable to Uncle Sam for US derived income.

Any Foreign National (non-US Citizen), including Japanese, who is filing a W8-BEN should in Part II state:

Part II Claim of Tax Treaty Benefits (for chapter 3 purposes only) (see instructions)
9. I certify that the beneficial owner is a resident of ___JAPAN___ within the meaning of the income tax treaty between the United States and that country.
10. Special rates and conditions (if applicable—see instructions): The beneficial owner is claiming the provisions of Article and paragraph
_10 2(b), 11 2(b)_ of the treaty identified on line 9 above to claim a ___10___ % rate of withholding on (specify type of income):
___Dividend and Interest Income___
Explain the additional conditions in the Article and paragraph the beneficial owner meets to be eligible for the rate of withholding:
___As A Resident Of Japan for Tax Purposes.___

The Broker will then withhold US Tax due to Uncle Sam at 10%

In Japan, you need to file a Kakutei Shinkoku by Mar 15, and you need to select the Separate Self-Assessment Taxation method (Form B - Pages 1&2 And Page 3).
Under the Separate Self-Assessment Taxation method, you will be liable to 20.315% Dividend Tax (15% National, 0.315% Reconstruction, and 5% Residential Taxes).

You should then receive a 1042-S Statement of US Taxes Withheld from your broker, around the beginning of April, in time for US Tax Filing (Apr 15).

You can then revisit and amend your Kakutei Shinkoku and claim the Foreign Tax Credit for the 10% Tax paid in the US - Form B Page 1 - Item 46.
So then your taxes become 10% US Withholding, 5% National, 0.315% Reconstruction, and 5% Residential Taxes.

This old thread seems to be very relevant to my situation so allow me to resurrect it.

I'm a non-US citizen with a filled W8-BEN form which results in my RSU dividends having 10% withholding tax applied to them. I'm preparing for the kakutei shinkoku and wanted to make sure I correctly understand how to declare the dividend income and claim the foreign tax credit (FTC).

1. Use the separate taxation method for the dividend income.
2. Declare the gross US dividend income (before deduction of the US 10% witholding tax).
3. Complete kakutei shinkoku and pay my taxes.
4. Receive 1042-S statement of US taxes withheld - I typically receive it in March.
5. Amend the kakutei shinkoku to claim the FTC.

Thanks in advance!

I think that you have the right workflow there, although I am not sure how you might determine the date of each dividend payment from the 1042-S.

In the kakuteishinkoku, you would need to account for the dividend in yen terms using the exchange rate applicable to the date of each payment. Perhaps they let you use the average exchange rate for the entire year?

In my case, I usually file for foreign tax credit on the basis of the dividend history that I can download from my broker's site, and then submit that as documentary evidence, together with a spreadsheet printout showing the calculated yen amounts of the gross dividend amount, and the foreign tax withheld amount.



If you have the stocks at a Japanese broker, you'd be able to get the yen amounts from the 特定口座年間取引報告書 which has the foreign tax deducted denominated in yen. I haven't tried this yet, but I might do it this year since I'd be able to get back quite a bit of foreign tax paid...

[Tkydon]

https://www.nta.go.jp/english/taxes/ind ... /12017.htm

[ChapInTokyo]

Just thought it would be useful to remind everyone that the tax code changed in 2022 so that starting with the kakuteishinkoku filings for 2023, it is no longer possible to select different filing methods for individual income tax and resident tax.

【配当所得】所得税と住民税で異なる課税方式の選択は不可に（令和5年度確定申告より）

[Matt_Black]

In my case, I usually file for foreign tax credit on the basis of the dividend history that I can download from my broker's site, and then submit that as documentary evidence, together with a spreadsheet printout showing the calculated yen amounts of the gross dividend amount, and the foreign tax withheld amount.

Thanks for the info. The statement I get from the broker has all the info also, so using that would allow for accurate USD to JPY conversion.

Just to clarify, do you still proceed with the kakutei shinkoku submission based on the gross dividend income first and then you revisit it to file for the FTC?

[Tkydon]

Just thought it would be useful to remind everyone that the tax code changed in 2022 so that starting with the kakuteishinkoku filings for 2023, it is no longer possible to select different filing methods for individual income tax and resident tax.

【配当所得】所得税と住民税で異なる課税方式の選択は不可に（令和5年度確定申告より）

There was a rumor that they would remove the Circle check box from the Juminzei section on Page 2 of the Form, that says 自分で納付, so the taxation method used would automatically be notified to the Prefecture and Municipal Tax Offices, but finally, they did not, and this option is still on the form for 2023 and 2024...