Do you own stocks of foreign companies that pay dividends? If so, you may be able to lower your tax bill by taking advantage of the U.S. income tax treaties with certain countries. These treaties can reduce the tax rate on your foreign dividends, depending on your income level. In this article, we will explain what U.S. income tax treaties are, how they affect your foreign dividends, and which countries have treaties that qualify for this benefit. We will also answer some frequently asked questions (FAQs) about this topic.

What are U.S. income tax treaties?

U.S. income tax treaties are agreements between the United States and other countries that aim to prevent double taxation and promote cooperation on tax matters. Double taxation occurs when the same income is taxed by both countries, which can result in an excessive tax burden for taxpayers. U.S. income tax treaties generally provide rules to determine which country has the right to tax certain types of income, and how much tax can be imposed by each country. U.S. income tax treaties also provide for the exchange of information between tax authorities, the resolution of tax disputes, and the protection of taxpayer rights.

How do U.S. income tax treaties affect your foreign dividends?

Under section 1(h)(11) of the Internal Revenue Code, a dividend paid by a foreign corporation to a U.S. individual shareholder may qualify for a lower tax rate (15% or 20%, depending on the shareholder’s income level) if the foreign corporation is a “qualified foreign corporation”. A qualified foreign corporation is one that meets one of the following criteria:

• It is incorporated in a U.S. possession, such as Puerto Rico or Guam.
• It is eligible for benefits of a comprehensive income tax treaty with the United States that the Secretary of the Treasury determines is satisfactory for this purpose and that includes an exchange of information program.
• It is traded on an established securities market in the United States, such as the New York Stock Exchange or NASDAQ.

A qualified foreign corporation does not include any foreign corporation that is a passive foreign investment company (PFIC), which is a foreign corporation that has either passive income or passive assets above a certain threshold.

To claim the lower tax rate on dividends from a qualified foreign corporation, the shareholder must also meet certain requirements, such as holding the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date (the date on which the dividend is declared).

Which countries have U.S. income tax treaties that qualify for the lower tax rate on dividends?

The IRS periodically updates the list of U.S. income tax treaties that meet the requirements of section 1(h)(11)(C)(i)(II). The most recent update was Notice 2024-11, which added Chile to the list and removed Hungary and Russia. The current list of countries that have U.S. income tax treaties that qualify for the lower tax rate on dividends is as follows:

• Australia
• Austria
• Bangladesh
• Barbados
• Belgium
• Bulgaria
• Canada
• Chile
• China
• Cyprus
• Czech Republic
• Denmark
• Egypt
• Estonia
• Finland
• France
• Germany
• Greece
• Iceland
• India
• Indonesia
• Ireland
• Israel
• Italy
• Jamaica
• Japan
• Kazakhstan
• Korea
• Latvia
• Lithuania
• Luxembourg
• Malta
• Mexico
• Morocco
• Netherlands
• New Zealand
• Norway
• Pakistan
• Philippines
• Poland
• Portugal
• Romania
• Slovak Republic
• Slovenia
• South Africa
• Spain
• Sri Lanka
• Sweden
• Switzerland
• Thailand
• Trinidad and Tobago
• Tunisia
• Turkey
• Ukraine
• United Kingdom
• Venezuela

Note that this list is subject to change, and that the effective date of each treaty may vary. You should always check the latest IRS guidance and the text of the relevant treaty before claiming the lower tax rate on dividends from a foreign corporation.

FAQs

Q: How do I know if a foreign corporation is eligible for benefits of a U.S. income tax treaty?

A: The eligibility for benefits of a U.S. income tax treaty depends on the specific provisions of each treaty, which may vary depending on the type of income and the type of entity involved. Generally, a foreign corporation must have a sufficient nexus with the treaty country, such as being a resident, having a permanent establishment, or meeting certain ownership or activity tests. Some treaties also have limitation on benefits clauses, which are designed to prevent treaty shopping by entities that are not intended to benefit from the treaty. You should consult the text of the relevant treaty and the IRS guidance to determine if a foreign corporation is eligible for benefits of a U.S. income tax treaty.

Q: How do I claim the lower tax rate on dividends from a qualified foreign corporation?

A: If you received qualified dividend income taxed at capital gains rates, you report it directly on your Form 1040 or 1040-SR and check the box on line 3a that indicates that the dividends qualify for the lower tax rate. If you have other capital gain income, it goes on Schedule D. You must also meet the holding period and other requirements of section 1(h)(11).

Q: How do I claim a foreign tax credit or a deduction for the foreign withholding tax paid on dividends from a foreign corporation?

A: To claim a foreign tax credit or a deduction for the foreign withholding tax paid on dividends from a foreign corporation, you must file Form 1116, Foreign Tax Credit, or Form 1118, Foreign Tax Credit – Corporations, depending on your filing status. You must also meet the various limitations and conditions that apply to the foreign tax credit or deduction, such as the source and character of the income, the foreign tax credit baskets, and the foreign tax credit limitation. You should consult the instructions for Form 1116 or Form 1118 and the IRS guidance for more details on how to claim a foreign tax credit or a deduction for the foreign withholding tax paid on dividends from a foreign corporation.

Conclusion

U.S. income tax treaties can provide significant tax savings for U.S. individual shareholders who receive dividends from foreign corporations. By qualifying for the lower tax rate on dividends from a qualified foreign corporation, you can reduce your tax to 15% or 20%, depending on your income level. However, you must also meet certain requirements and follow certain procedures to claim this benefit. You should always check the latest IRS guidance and the text of the relevant treaty before claiming the lower tax rate on dividends from a foreign corporation.

We hope this article has helped you understand how U.S. income tax treaties can save you taxes on your foreign dividends. However, if you still have any questions or concerns, you can always contact the IRS at the phone number or address listed on the notice. You can also visit the IRS website at www.irs.gov for more information and resources.

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