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

[beanhead]

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:

Total deduction for US dividends seems to be just over 28% for me. (Rakuten)

[adamu]

Note to self: SBI have a help page explaining how to claim this: https://search.sbisec.co.jp/v2/popwin/i ... oujyo.html

[Tkydon]

See Article 10, Paragraph 2(b) of the Japan US Tax Treaty

https://www.mof.go.jp/english/policy/ta ... st_en.html

ARTICLE 10
1. Dividends paid by a company which is a resident of a
Contracting State to a resident of the other Contracting
State may be taxed in that other Contracting State.

2. However, such dividends may also be taxed in the
Contracting State of which the company paying the dividends
is a resident and according to the laws of that Contracting
State, but if the dividends are beneficially owned by a
resident of the other Contracting State, except as provided
in paragraphs 4 and 5, the tax so charged shall not exceed:

(a) 5 percent of the gross amount of the dividends if the beneficial owner is a company that owns
directly or indirectly, on the date on which
entitlement to the dividends is determined, at
least 10 percent of the voting stock of the
company paying the dividends;
(b) 10 percent of the gross amount of the dividends in all other cases.

https://www.irs.gov/forms-pubs/about-form-w-8-ben

You owe 20.315% Tax in Japan and can claim a Foreign Tax Credit for that 10%

To claim the 10% Foreign Tax Credit, after US Tax Day in April, you go back and revise your Kakutei Shinkoku filed in March, Form B - Page 1 - Item 46~47 and enter the 10% amount...
And they send you that 10 % back in a refund... Job done.


Of course, the owner of the shares in an ETF is the ETF Company, and not the person who owns units in the ETF... The Units of the ETF and the underlying stock are different things...

[adamu]

To claim the 10% Foreign Tax Credit, after US Tax Day in April, you go back and revise your Kakutei Shinkoku filed in March, Form B - Page 2 - Item 146 (last year) and enter the 10% amount...

I'm not sure this is necessary for Japanese Brokers. It looks like you can just claim the 10% amount at the regular tax return time, using the annual statement the broker prepares. Still investigating though.

[Tkydon]

To claim the 10% Foreign Tax Credit, after US Tax Day in April, you go back and revise your Kakutei Shinkoku filed in March, Form B - Page 2 - Item 146 (last year) and enter the 10% amount...

I'm not sure this is necessary for Japanese Brokers. It looks like you can just claim the 10% amount at the regular tax return time, using the annual statement the broker prepares. Still investigating though.

I guess any documentary evidence will suffice.

The US Tax Filing Deadline is April 15th., after the Japanese Tax Filing Deadline of March 14th.
At least if you hold the Stock in your name and they pay the Dividend to you, and you have filed your W8-BEN correctly, and then you will receive your 1042S (the Japanese equivalent of the Gensenchosuhyo) in April before US Tax Filing Date, but after the Japanese Tax Filing Deadline.
You would need that to claim the Foreign Tax Credit...
Anyway, you can go back anytime up to 3 years after filing a Kakutei Shinkoku and revise it, with certain caveats... The big one being, if you selected Aggregate Taxation Method for Dividends at the time of filing, you cannot go back and change that selection to Separate Taxation Method for that year at a later date...

[Tkydon]

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.

This year a reputable company handled my taxes in both countries. I won't name them as this post contains my interpretation of what they told me, so I don't want to bring anyone any trouble.

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).

I was first taxed on the JP side. They looked at how much I received in dividends, minus fees and US withholding. Then they told me this was taxed at 20%. I asked them if this meant I would be able to claim back the 10% withheld from the US, to which they replied:

We will be sharing your finalized Japan Tax Return with our colleagues in US who will then work on claiming the foreign tax credit on your US Tax return for the double taxed income. Generally speaking, you should be able to claim the foreign tax credit on your US Tax Return for the amount of Japan tax paid on the double taxed income in both countries.

This was non committal, but I understood it as "yes, you won't be double taxed, and should be able to claim back the money that was withheld in the US, given that you are already paying taxes to JP for those US dividends"

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.
Basically this isn't explaining much but it didn't seem like it was even a possibility for me to claim anything back on the dividend withheld tax.

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. I can see how it can be confusing that I live in Japan, have to report US income, and be neither of these nationalities, but it's just a copy/paste they have to do from a questionnaire that I filled personally. It's not a hard job, and that's after my return was delayed by weeks because it went through "managerial review". So multiple pair of eyes went through that yet they made obvious mistakes such as my nationality. But if I dn't want to have to navigate this legal maze, the only reasonable thing I can do is ask them to confirm that the double tax here is expected. And I believe they are saying that yes, this is how it works.

Bottom line is, unlike what I thought, US-based dividends are taxed at roughly for JP residents 30%: 10% in the US as tax-withholding, then 20% as dividends in JP. (I was hoping it would be the JP 20% only)
The US witholding impact on a typical portfolio, where dividends represent roughly 2% of gain per year, is an increase of 2%*10% = 0.2% on the portfolio fees.
So my Schwab indexes, with their super low fee of about 0.05%, actually cost me 0.25%.
Not the end of the world, but I feel this aligns with some of the fees we can see on "world index" ETFs in Japan.

The "good" news is that it means it's probably not even worth filing a US tax return just to try and claim those taxes back (for those who wouldn't have to file a US tax return otherwise), since that doesn't seem possible.

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.

Categorically, the World Renowned company of which the OP spoke was categorically WRONG!

"What I have experienced is that the US withholds 10% of the (US based companies) dividends as tax. "

Yes, This is correct if you (or your broker) have filed the W8-BEN correctly

https://www.mof.go.jp/tax_policy/summar ... 1107a2.pdf


"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)."

No, This is categorically the wrong way to calculate this. Japan taxes 20% of the Gross Dividend amount before US Withholding Tax
20.315% to be exact (15% National, 0.315% Reconstruction and 5% Residential Taxes)

Then you claim the Foreign Tax Credit in Japan for the 10% Withheld in the US
Kakutei Shinkoku Form B - Page 1 - Item 46-47

This has the effect of reducing the 15% National tax to 5% National Tax, meaning that the total amount with US and Japanese Taxes Combined is 20.315%

If the 10% cannot be completely deducted from the actual amount of National Tax, then the deduction is then applied to the Reconstruction Tax, and if there is still un-accounted-for deduction, then up to 30% of the 10% = 3% can be deducted from Residents' Taxes.

"We will be sharing your finalized Japan Tax Return with our colleagues in US who will then work on claiming the foreign tax credit on your US Tax return for the double taxed income. Generally speaking, you should be able to claim the foreign tax credit on your US Tax Return for the amount of Japan tax paid on the double taxed income in both countries. "

BS!!! If they (the world renowned company) told you that, you need to FIRE them!

"[...]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.
Basically this isn't explaining much but it didn't seem like it was even a possibility for me to claim anything back on the dividend withheld tax."

BS!!! If they (the world renowned company) told you that, you need to FIRE them!

What they said is partially correct, but totally irrelevant in this case. This is not Foreign dividend income (from the US perspective). It is US Sourced Dividend Income, and the US has the right to 10% of it under the Japan US Tax Treaty, (15% or 20% under other countries' tax treaties with the US) or 30% if no tax treaty applies. (See Links at the bottom). As a US Non-resident Alien, the correct form is not the 1040NR, but 1042-S, which the Broker has to file with the IRS on your behalf.

As a Permanent Resident of Japan, you cannot claim the Tax Credit on the US Side. This will never come back. Japan US Tax Treaty - Article 10 - Paragraph 2(b) refers. Japan has First Call on your Tax AND the US has the right to 10% of your income earned in the US.

https://www.mof.go.jp/tax_policy/summar ... 1107a2.pdf

They Withhold 10% Tax on the US Side. this is unavoidable, unless you want them to withhold 30% instead.
You File in Japan for 20.315% Tax and then claim the Foreign Tax Credit for the US 10% here in Japan.
As a non-US Citizen or non-Green Card Holder, you do not get a 1040NR. You get a 1042-S, which is the US equivalent of a Japanese Gensenchoushuhyo for the taxes withheld in the US.

"The "good" news is that it means it's probably not even worth filing a US tax return just to try and claim those taxes back (for those who wouldn't have to file a US tax return otherwise), since that doesn't seem possible."

Yes. That is correct. The US is entitled to their 10% under the Tax Treaty, and there is nothing you can do by filing a US tax return.

https://www.irs.gov/individuals/interna ... -must-file

https://www.irs.gov/individuals/interna ... ithholding

https://www.irs.gov/individuals/interna ... fic-income

https://www.irs.gov/forms-pubs/about-publication-515

https://www.irs.gov/pub/irs-pdf/p515.pdf
See Page 3 - Withholding of Tax

In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld (chapter 3 withholding) from the payment made to the foreign person.

You have to correctly submit a Form W8-BEN to claim the reduced rate under a tax treaty between the foreign person's country of residence and the United States. I found that some brokers do this for you based on the information submitted when you opened the brokerage account, so you may not have seen the W8-BEN filed on your behalf. If the Tax Rate of Withholding is 10%, then that has been done.

https://www.irs.gov/forms-pubs/about-form-w-8-ben

"So my Schwab indexes, with their super low fee of about 0.05%, actually cost me 0.25%. "


If you are holding these funds in a Schwab Account, then get your 1042-S from Schwab, and claim the Foreign Tax Credit in Japan.


I see that Adamu referred to a page on the SBI Website regarding claiming Foreign Tax Refund. I didn't know about this.
It seems they do the paperwork to reduce the US Withholding from 30% to 10% for Japanese Tax Residents, file the W8-BEN on your behalf, and send you a Japanese Gensenchoushuhyo showing the US Taxes withheld, which is equivalent to the 1042-S, which they must file with the US IRS.

You take the amount of Foreign Tax Paid from this form and enter it in the Kakutei Shinkoku Form B - Page 1 - Item 46~47


IRMC

Oh, Strongly recommend
https://zaik.jp/books/472-4.html

[captainspoke]

...
A few specificities of my situation:
1) Note that I'm neither a US nor a JP citizen, if that makes a difference.
...

I'd only note that in contrast: US citizens are in a very advantageous situation. First there is no US withholding on dividends/distributions or capital gains. Yes, you settle up when filing at tax time--but second, with the FEIE your earned income can effectively be zero, and there need to be significant dividends/gains to even begin to be taxed on those.

Yeah, poor americans...

[adamu]

The US Tax Filing Deadline

W8-BEN

Sorry Tkydon, I'm still not following. I don't file US taxes and have no idea what a W8-BEN is, or a 1042S for that matter. I think the premise of this thread was non-US citizen holding US stocks. And I'm adding to that: in a tax-collecting account at a Japanese broker. In that case, there seems to be no requirement to do anything on the US side - just get the report provided by the Japanese broker (特定口座年間取引報告書), and put the numbers into the Japanese tax return to get the Japanese deduction (外国税額控除) - which is the process I'm currently trying to figure out (albeit a few months early).

[Tkydon]

Please read this document.

https://www.irs.gov/pub/irs-pdf/p515.pdf
Withholding of Tax on Non-Resident Aliens and Foreign Entities

See Page 3 -
"Withholding of Tax
In most cases, a foreign person is subject to U.S. tax on its U.S. source income. Most types of U.S. source income received by a foreign person are subject to U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. The tax is generally withheld (chapter 3 withholding) from the payment made to the foreign person."

Page 4 -
"Forms 1042 and 1042-S Reporting Obligations
<Withholding Agents> are required to report payments subject to chapter 3 withholding on Form 1042-S and to file a tax return on Form 1042. (See Returns Required, later.) <WAs> also are required to report withholdable payments to which chapter 4 with-holding was (or should have been) applied on Form 1042-S and to file a tax return on Form 1042 to report the payments."

Therefore, default Withholding Tax from US sourced income for Non-Resident Aliens is 30%. However, if you (the beneficial owner of securities, real estate property, etc.) are Tax Resident in a Country that DOES have a Tax Treaty with the US, then the Withholding Tax that the Withholding Agent is obligated to withhold on US Sourced Dividend Income (Interest, etc.) from US Companies is determined by the details of the Tax Treaty between the US and your country of Tax Residence.

Please read this document
https://www.irs.gov/individuals/interna ... fic-income


You claim the reduced rate of withholding under a Tax Treaty by submitting Form W8-BEN to the Withholding Agent. The Withholding Agent will then withhold the lower rate of Tax. (Maybe Japanese brokers do this automatically, if they know that you are a Permanent resident of Japan for Tax Purposes)

Please read this document
https://www.irs.gov/forms-pubs/about-form-w-8-ben

Article 10 - Paragraph 2(b) of the Tax Treaty between the US and Japan defines the reduced rate of US Taxation on US Sourced Dividend Income for Tax Residents of Japan to be 10% in the US.

The Withholding Agent will withhold the Tax (either at the default 30% or the lower rate defined by a Tax Treaty) and file a Return on your (the Beneficial Owner's) behalf with the IRS. The Form for filing the Tax Return on behalf of a Non-Resident Alien is the 1042-S Form. The Withholding Agent will file a separate 1042-S for each different type and rate of Withholding Tax. The Withholding Agent will provided the 1042-S form(s) to the IRS and should provide copies to the Non-Resident Alien. If this covers the US tax liability, no further US Tax Filing is necessary. The 1042-S then servers as a Certificate of Withholding (Gensenchoshuhyo equivalent).

Note to self: SBI have a help page explaining how to claim this: https://search.sbisec.co.jp/v2/popwin/i ... oujyo.html

This doc is a Japanese translation of the 1042-S that they had to submit to the IRS on your behalf.


Please read this document
https://www.irs.gov/individuals/interna ... -must-file

If US Tax withheld is at the 30% level and the Beneficial Owner is a Non-Resident Alien covered under a Tax Treaty, then he/she may claim a refund of Tax paid to the IRS over the required rate as defined in the Tax Treaty. If your Withholding Agent withheld 30% Tax on Dividends, you can claim the lower rate under the Japan-US Tax Treaty, and the IRS will refund 66.667% (Two Thirds of the Tax Paid, 10% to 30%; i.e. 20%). Otherwise, the IRS will not provide a Tax Refund, and in any case will never refund the 10%, which under the Tax Treaty is due to the US. (The reciprocal holds true for US recipients of Dividends on Japanese Stocks...)

If US stocks are held through a Japanese Broker, maybe the Japanese Broker files on their customer's behalf, and doesn't ask for the W8-BEN Form, but they are required to withhold Japanese Tax at 20.315%, and so (I think) you may find that you have paid 10% Tax in the US and 20.315% in Japan.

As a Permanent Resident for Tax Purposes in Japan, the issue of Dual Taxation is take care of by filing the Kakutei Shinkoku in Japan, declaring the Gross US Dividend Income (before deduction of the US 10% Tax) which is taxable at 20.315% (15% National, 0.315% Reconstruction, and 5% Residential Taxes), and then claiming the Foreign Tax Credit against the 10% Tax paid in the US (Form B - Page 1 - Item 46~ 47).
Japan will then reduce the 15% National tax to 5%, to remove the double taxation and account for the 10% Tax already paid in the US.

The Net total taxation on the US Sourced Dividend Income will then be 20.315% (The Japanese Dividend Tax Rate), but will now consist of 10% US, 5% National, 0.315% Reconstruction, and 5% Residential Taxes. Therefore, this eliminates Double Taxation on the same Dividend Income.
(Double Taxation refers to actually paying the Tax twice, not the fact that taxes are due and payable in both countries).

The OP was trying to claim the 10% back from the US. This is not possible. That tax IS due to Uncle Sam.
The Foreign Tax Credit has to be reclaimed in Japan against Japanese Tax for the 10% due and paid in the US.
Documentary evidence is required for this. I guess maybe the Statements from the Financial Institution are acceptable. The US Form 1042-S also serves as the equivalent of the Japanese Gensenchoshuhyo and shows the actual US Taxes withheld and paid to the US IRS.

...
A few specificities of my situation:
1) Note that I'm neither a US nor a JP citizen, if that makes a difference.
...

I'd only note that in contrast: US citizens are in a very advantageous situation. First there is no US withholding on dividends/distributions or capital gains. Yes, you settle up when filing at tax time--but second, with the FEIE your earned income can effectively be zero, and there need to be significant dividends/gains to even begin to be taxed on those.

Yeah, poor americans...

So, Non-Americans should file the value of the Foreign Tax Credit as the Withholding Statement (1042-S or Japanese Broker provided equivalent).
Americans should file the value of the Foreign Tax Credit as the actual tax paid on the Dividend Income in the US from the 1099.

[adamu]

in a tax-collecting account at a Japanese broker. In that case, there seems to be no requirement to do anything on the US side - just get the report provided by the Japanese broker (特定口座年間取引報告書), and put the numbers into the Japanese tax return to get the Japanese deduction (外国税額控除) - which is the process I'm currently trying to figure out (albeit a few months early).

Been looking more into this. It *is* possible to claim this 10% US tax back via the tax return, but it's far from simple. You need to:

1. Declare the dividends as 配当所得 income and choose the method of calculation - see below.
2. Claim the foreign tax deduction. 外国税額控除等

This is a great guide (in Japanese) - although I need to spend more time to understand the residence tax implications he's talking about there.
https://www.inside-shiina.com/entry/How ... with-e-tax

Regarding the calculation method in point 1: You can choose whether you want to have the dividends lumped in with all your income (aggregate / 総合課税) or keep it separate (申告分離課税). In that blog he does it with the aggregate method, but keeping it separate is maybe the better choice, although I think it depends on each individual case. If doing e-Tax, you can switch it and see how it affects the result. Also I'm not even sure if you even need to choose between aggregate and "declared" separate taxation. It might be enough to just leave it off altogether as undeclared separate taxation, as it was already handled by the tokutei account. But from reading this article, it seems like you have to declare it as income on the tax return to be allowed to apply for the deduction. https://www.century-partners.jp/category/2084991.html

There is also an official Japanese PDF from the NTA here, which I've not read yet.
https://www.nta.go.jp/taxes/shiraberu/s ... df/040.pdf

Note to self. It looks like Tokutei kouza is doing 源泉分離課税制度. Find out if that is mutually exclusive to claiming a deduction on the tax return (probably). NTA article (Japanese) here: https://www.nta.go.jp/taxes/shiraberu/t ... u/2230.htm