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How are foreign dividends taxed?

Tax | Income Tax Helpful? 6

Asked by montresor, submitted 28 January 2012.

Open Quote A most confusing subject with no certain answer.It concerns ETFs that pay Gross dividend and no foreign witholding tax.Is tax payable on this gross dividend or a tax credit is included in the gross dividend and therefore no further liability for basic rate taxpayers?

My understanding from Ishares and HSBC Etf is that tax credit is included and the effective rate is zero,just like other UK companies dividends where 10% tax have already been deducted.

I would appreciate your understanding of any tax implication for a basic rate taxpayer.
If a tax credit is included why do brokers call is Gross and do not provide any explanation on their tax certificate?
End Quote

Answered by Justin on 06 September 2012

Foreign dividends received in the UK are deemed to have a 10% tax credit attached, regardless of whether any foreign withholding tax has been applied (provided your holding is less than 10% of the company's issued share capital) .

Given basic rate taxpayers have a 10% income tax rate on gross dividends then there's no further tax to pay, just like UK dividends.

Logically, this makes sense. Just because a foreign dividend hasn't had withholding tax deducted, it doesn't mean the company concerned didn't pay some form of corporation tax on the profits from which the dividend was paid (just like the UK).

Higher rate taxpayers must pay 32.5% tax on the gross dividend which, after the 10% tax credit is applied, effectively means 25% tax on the dividend received.

When withholding tax is deducted and the UK has a double taxation agreement with the country concerned, you're usually allowed to offset around up to 15% of foreign withholding tax against any UK liability - note: this really only applies to higher/top rate taxpayers as basic rate taxpayers don't have a tax liability.


Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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Readers' Comments (1) - To post a comment please register or login .


Comment by mickz at 4:34pm on 24 Jun 2014:

Thanks, that first paragraph was helpful to the tune of £350. Just filling in my tax return and trying to understand a bit about foreign dividends... Cheers!