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

[StockBeard]

Thanks Tokyowart. That's super informative.

[jcc]

This is basically why I've personally chosen to use japanese funds.

It's extremely hard to confirm this since everyone seems to say different stuff, but in past research I've found that the generally accepted wisdom is that dividends for everything inside the fund is taxed in its country of origin(though these may be exempts if the funds domicile is the same as the stock held). Then the fund itself generates dividends which are taxed in the funds country and the owners country.

The first layer is unavoidable unless the component parts are domiciled in the same country as the fund. The second and third can often be reduced to just one by using a japanese fund.

And so long as you're not in a tax exempt account, you can get a partial return on the double taxed dividends, but it's a lot of hassle for fairly minimal returns.

One nifty thing that japanese funds do(which there are rumors that people are trying to stop) is that they don't put out dividends, just reinvesting them into the fund. So the fund gains growth, so not only do you avoid the US picking off the funds generated dividends, but you also delay the taxation of your "dividends" by being instead taxed on growth all the way at the end when you actually sell.

Overall, this brings the total cost of low cost domestic funds to be lower than even the best available from vanguard/schwab, with the single exception of pure US funds(e.g. S&P funds and the like)

[TokyoWart]

This is basically why I've personally chosen to use japanese funds.

...

One nifty thing that japanese funds do(which there are rumors that people are trying to stop) is that they don't put out dividends, just reinvesting them into the fund. So the fund gains growth, so not only do you avoid the US picking off the funds generated dividends, but you also delay the taxation of your "dividends" by being instead taxed on growth all the way at the end when you actually sell.

You raise a number of points with which I heartily agree, but I just want to warn that this solution does not work for US citizens here in Japan. We still potentially have to pay US taxes on any dividends paid here (albeit the marginal tax rate for those dividends varies by total income and may even be zero if one is at a low-ish income). More importantly, because of the "nifty thing" you mention, the US IRS imposes a very complicated rule on reporting and paying taxes on this kind of fund even if one doesn't actually receive the dividend. I do think your suggestion would work well for many people who don't have US citizenship (and I am jealous of them ).

[jcc]

I do think your suggestion would work well for many people who don't have US citizenship (and I am jealous of them ).

I should preface every post with "ignore this if you're from the US". You're absolutely right

[RetireJapan]

I should preface every post with "ignore this if you're from the US". You're absolutely right

Pretty much the whole website needs to have that written across the top of it

[StockBeard]

I had a follow up phone call with my tax preparers.

They confirmed the following:

- Tax credit on US dividends can be received in Japan in the case of individual stocks. This company's interpretation of the law is that this doesn't apply to mutual funds or ETFs (in my case, the dividends come from broad index ETFs), and that in this case the double taxation is inevitable.

- they acknowledged that if I asked another company, their answer might be different as this is a particularly fuzzy point that is open to interpretation. They confirmed that they would not take that kind of risk (for me or for them. After all, their company name is also on my tax return) but that they had clients who ultimately decided to not work with them in similar cases, and instead go to tax preparers with a different interpretation of the law

[Logan5]

This is what always annoys me? Something so complicated that even the “tax professionals” don’t even know if they are doing it right.

I feel like looking for the most favorable interpretation of the tax laws would be in your best interest. I mean, if they are doing your taxes, are they responsible if something is wrong? Who takes the blame? Has anybody had the experience of the IRS coming after you because something was unknowingly reported wrong?

Seems a bit unfair that they would make the tax laws so complicated that it’s almost impossible to wade through yourself, then when you hire someone to do it, you can’t even be confident that they are doing it right!

[StockBeard]

- Tax credit on US dividends can be received in Japan in the case of individual stocks. This company's interpretation of the law is that this doesn't apply to mutual funds or ETFs (in my case, the dividends come from broad index ETFs), and that in this case the double taxation is inevitable.

I just wanted to confirm that the above statement was true but this has changed as of 2020 (for the tax returns starting this year, I mean):
https://www.daiwa.jp/doc/191220.html

It is now possible to declare foreign tax credit on ETF.

[Tkydon]

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.

[adamu]

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 correctly, 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.

This doesn't apply to Japanese brokers, right? It seems they apply the 10% US rate automatically.

But it seems they *don't* offset the Japanese tax by the amount of US witholding tax automatically, even in a Tokutei account, so you still have to claim the deduction as kizuki explained:

Below is how I have done with US securities in Japanese brokerage (Rakuten Tokukei account),
- US company pays dividend X and US withholds 10%
- JP Rakuten deducts 20.yy % of X and credits the remainder to my account (I believe it is 20.1%?)
- I do a kakutei Shinkoku tax filing during tax season and mention the total dividend amount and the amount withheld by US. The final tax amount calculated automatically adjusts for the amount already paid in US.

P.s. My status is Non-US person resident in Japan.

Finally getting around to looking into this for some ETFs I have sitting in an SBI Tokutei account, hoping to get it figured out by tax season.