US securities income tax on for Japan residents

[N00bster]

Hi all,

I just realized that this point is still very blurry in my mind, even though it could be quite important to decide a good investment strategy.

As a (non-US citizen) resident in Japan, I can see on my Theo account that most, if not all, of my dividends are punctured by taxes at two levels.

First, from the country of origin (usually US): 外国源泉徴収税額.
Second, from Japan itself: 国内源泉徴収税額.

As I am fiscally resident in Japan, I completely expect to pay Japanese taxes on all my income worldwide, the rule is clear and easy to understand.

What is less clear, is in which circumstances am I also taxed by the US government? I suppose this only applies to transactions of US securities, but of which kind? And how can we limit this?

Would be grateful if someone with a better understanding than myself would be kind enough to explain the exact rules here.

[RetireJapan]

I believe the only tax is the US withholding tax on dividends (10% for residents of Japan).

I think some other countries also charge withholding taxes, but we generally can't access their stock markets

[N00bster]

Thanks for the answer! So that means you get just 10% withheld on dividends from US securities? No tax when you sell a security at a profit for instance?

Looks like the issue is much simpler than I initially thought...

[RetireJapan]

Yeah, I don't think there is anything on capital gains, etc.

One issue is that the US demands estate taxes on US things, including shares. I believe we get a big exemption as residents of Japan ($5m+), but it's another thing to consider.

[RetireJapan]

Here's a specific example of the withholding tax:

Vanguard's emerging market ETF VWO has expense ration of 0.14%. Its yield is 2.28%, so the withholding tax effectively increases the expense ration by 0.228% to 0.368%.

Also, Japan will credit you the US tax when calculating your Japanese tax on dividends (you pay 20% either way). The only time you lose out due to the withholding tax is if you are using a NISA account.

[adamu]

Vanguard's emerging market ETF VWO has expense ration of 0.14%. Its yield is 2.28%, so the withholding tax effectively increases the expense ration by 0.228% to 0.368%.

Also, Japan will credit you the US tax when calculating your Japanese tax on dividends (you pay 20% either way). The only time you lose out due to the withholding tax is if you are using a NISA account.

So that's how you do it. I've been wondering about the NISA US ETF problem and where the tradeoff is between paying the 10% dividend tax and the generally lower expense ratios available. Another example for practice (and because I hold it in my NISA ): VT's ER 0.11 and yield 2.12% making it effectively 0.322% ER (getting cheaper/more expensive if dividends fall/rise).

[N00bster]

Also, Japan will credit you the US tax when calculating your Japanese tax on dividends (you pay 20% either way).

Do you mean that in that case, Japan would only tax 10% to make up for the 10% taxed by the US?

Here is for instance the Theo dividend report for iShares Barclays MBS:

Dividend (配当金等金額): 1.07
US tax (外国源泉徴収税額): 0.10
Japan tax (国内源泉徴収税額): 0.18
Total received (受取金額): 0.79

So it looks like Japan is still taking about 20% after deducing the US withholding tax, which brings the total withheld closer to 28% in practice.

Or am I interpreting the numbers incorrectly?

[RetireJapan]

You need to claim the US taxes on your Japanese tax return. This is a pain as normally a tax-reporting account would mean you don't need to make a tax return.

You have to figure out if it is worth your while claiming.

[N00bster]

Ouch, that sounds very cumbersome. I did it already in order to reclaim the US tax on my company equity, and you need to input every single dividend received. At Theo's scale, this means over a hundred entries on that awful web form...

Very surprised that the tax-reporting account does not handle this automatically. Or maybe Theo gives you a pre-filled form every year that simplifies the procedure?

[RetireJapan]

I've never done it but I think you can use the total for the year you get on the end of year paperwork.

Otherwise