The new U.S. dividend tax cut plan has spurred interest in dividend-paying domestic stocks. But what about funds that put money into foreign stocks paying dividends?
More than a month after the tax reduction was signed into law, many portfolio managers of U.S.-based international stock funds remain puzzled about just how much investors in their funds will gain from the dividend tax cut. Some managers think the tax cut will apply to nearly all foreign stocks bought by U.S. funds, but others assume they will apply to just a small group of foreign companies.
The tax legislation says dividends paid by foreign companies whose securities trade on U.S. stock exchanges will be taxed at a new 15% rate, down from as high as 38.6% previously. But causing confusion among experts about the new dividend treatment is a sentence in the new law reading: “Non-U.S. traded stocks may be qualified if certain treaty requirements are met.”
Since U.S. officials haven’t yet spelled out which tax treaties meet the requirements, investors need additional guidance in determining exactly which dividends will qualify for the new tax rate, says John Battaglia, tax director at Deloitte & Touche LLP.
An Internal Revenue Service spokesman said the U.S. Treasury plans to issue a list of countries with qualifying tax treaties, but he couldn’t say when the list would be available or how many countries it would include.
In cases where the lower U.S. tax rate doesn’t apply to locally traded stocks of a foreign country, portfolio managers may consider selling stocks in favor of those traded in qualifying countries. Or managers might want to move some assets into American depositary receipts, which are U.S.-listed shares that are available for some foreign companies.