UK Tax on Foreign Dividends

Remay Villaester (May)
12.11.20
5 minute read

“How foreign dividend tax credit works” is one of the most sought after questions of people who have shares overseas. If you live in the UK, you have to pay UK tax on foreign dividends from overseas shares or UK capital gain tax on your sales proceeds. Just because you have invested in foreign assets, you can’t skip being taxed.

Although tax treatments of foreign dividends are straight forward, it may get complicated when other countries levy their own taxes on foreign income. That is why when a taxpayer receives a foreign dividend, it has had some amount of tax deducted already.

It doesn’t end here; the taxpayers then need to pay for a further round of UK tax on their income to the tax authorities. That means you have to be vigilant as you can be taxed twice on your same foreign income. This explains how the UK tax authority tax dividends and how you can protect foreign dividends with tax credits.

Let’s plunge into the details to help you find out everything you need to know about UK tax on foreign dividends.

How UK Tax Authority Tax Foreign Dividends

Typically people receive a dividend payment if they own shares in a foreign company. In fact, they can earn dividend income annually without having to pay taxes each year. However, taxpayers don’t have to pay tax on dividend income that includes in the category of personal allowance- it is an income allowance that a person earns each year without any tax. People receive dividend allowance annually and pay tax on dividend income above their dividend allowance. The dividend allowance ranges from £2,000 to £5,000, depending on the year.¹

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Foreign Dividends and UK Tax Treatment

The tax position in the UK was in favour of UK equity (shares) investments over non-UK investments. The dividend income from the UK and non-UK equity was subject to 10% or 32.5% (basic and higher rate). ¹

The UK equity investment dividends carried a tax credit of 1/9th at that time. However, there was no credit applied to foreign dividends on equity investment that made the investments less attractive.²

After 5 April 2008, the tax treatment of foreign dividends marked some significant changes. The foreign dividends on equity investment also carry 1/9th tax credit, making them way more attractive than before. Initially, this extension in the tax credit applied only if the equity investment amount is less than 10 percent of the share capital of the company.

The UK tax authority made further taxation changes from 22 April 2009. Now the tax credit applies if the percentage of issued capital share is 10 percent or greater. It is particularly true if the company is in the qualifying state (broadly, the countries with double taxation treaty with the UK and contain non-discrimination clause) such as Germany, the USA, France, and Belgium.

Moreover, the tax credits are also available on dividends and shares for the offshore fund from 22 April 2009. But it doesn’t include all offshore funds. However, when it comes to foreign withholding tax, it is common for foreign dividends to suffer from local withholding tax before their remittance to the investors.

People subject to tax in the UK on the remittance basis (taxed only when they remit to the UK) entitlement to the tax credit are applicable. However, the UK tax charges on the dividends are 20% or 40% (and not 10% or 32.5%).

Keep in mind that you can use the helpsheet 263 to work out your tax credit relief on the earnings you have paid tax for.

How Can you Protect Foreign Dividends with Tax Credits

The good news is that many countries have agreements with the UK to make this process easier. The agreements may vary by country. That is why it is important to consult a tax attorney or professional tax specialist before you make any investments.

In many cases, the UK Internal Revenue Service offers a tax credit to investors to offset the amount paid to tax entities in foreign countries. The IRS may offer a foreign tax credit or a deduction (itemized) for taxes which accrued on the people in a foreign country on their foreign source of earnings. The income or earning is also subject to UK tax.

Note that the main purpose of the tax credits is to prevent double-taxation. They can also offset taxes people pay in the United Kingdom. Some retirees who have low income to owe tax may not benefit from it.

Typically, investors who receive less than $3000 in their foreign tax credit may directly file for the credit using Form 1040. They can do it if their shares are in a conventional brokerage account, and they receive a Form 1099-DIV that lists the foreign taxes they have paid.

Last but not least, the tax credits are not applicable in all conditions. The credit can’t exceed its foreign income sources divided by total taxable income.³

Summing Up

All in all, don’t forget that tax is a complicated subject. The amount of tax you pay depends on several factors, particularly your personal circumstances. In this regard, the article provides information about UK tax in foreign dividends to improve your understanding and protect tax credits.

However, you must seek professional assistance to clear up any specific issue related to tax on foreign dividends in the UK. Only a professional can help you deal with the tax affairs and foreign assets and save you a substantial amount of time and money.

Sources

  1. gov.uk - Tax on dividends
  2. Tax Insider - Foreign dividends
  3. irs.gov - Form-1040

This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.

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