The Tax Implications of Foreign Investments

Written By Jason Williams

Updated May 15, 2024

Dear Reader,

Most of the time, I focus on domestic markets when making recommendations and when making my own investments. The simple fact of the matter is that it’s far less complicated to buy stocks on your home exchanges. And a big part of that has to do with the tax implications of foreign investments.

tax implications of foreign investments

You see, when you own stocks in a foreign country, the profits and distributions you get from those investments are subject to taxes both here in the U.S. AND in the company’s home country. So, when you’re buying a stock on a foreign exchange, understanding the tax implications is incredibly important.

Because, if you’re not aware of the tax implications of foreign investments, you’re not maximizing your true earning potential from those investments…

Double Taxation on Foreign Investments

Double taxation is a term that describes paying taxes on the same money twice. Inheritance taxes in the U.S. are a form of double taxation. The income was taxed when it was made and then the money is taxed again when it’s passed from one generation to the next.

tax implications of foreign investments double taxation

And when it comes to the tax implications of foreign investments, double taxation is one some investors might be looking at. But if you’re a U.S.-based investor, there’s a glimmer of hope…

You see, in order to lower the tax implications of foreign investments, the U.S. tax code offers something called a “foreign tax credit.” And this credit allows you to use those foreign taxes you’ve already paid to reduce the amount you owe to the IRS come April 15.

So let’s get a little more specific and use a real-world example to explain what I’m talking about…

Diversification Isn’t Just a Buzzword

Recently, I was researching an interesting sector in the automotive industry that’s all but guaranteed to grow bigger and bigger as time wears on. I’m talking about the EV changing network the world will need to accommodate the new electric vehicles hitting the roads all around the globe.

You see, there are companies that make the chargers. And there are companies that install them. There are also companies that repair them when they break. But betting on any of those companies means betting that that individual company will rule the market.

And I prefer to invest in companies that will win as long as the market continues to grow. Many people call these “pick and shovel investments,” because they support industries the way the sellers of picks and shovels supported gold mining during the rush days.

Well, in case you hadn’t noticed, EV adoption has been growing in Europe both longer and faster than it has here in the United States. So, while there are several very compelling investments here at home, there are even more headquartered in Europe.

tax implications of foreign investments european chargers

And that means that investing in those stocks will come with all the tax implications of foreign investments. But because of the profit potential packed into these stocks and the industry they’re supporting, those taxes are worth the hassle to collect those massive profits.

Tax Implications of Foreign Investments in France

Several of them trade on the Paris exchange. And in France, your tax rate on dividends is 25%. Your tax rate on capital gains is 36.2% (that’s 19% capital gains tax plus 17.2% “social charges”). So anyone who took my advice and invested in those stocks is going to have some claims to make come tax time.

tax implications of foreign investments france

You see, at the end of the year, those investors are going to get 1099-DIV and 1099-INT forms from their brokers that detail how much they paid in foreign taxes on those investments. And the amount they’ll owe the U.S. government is based on how much they’d have been taxed on those investments were they domestic.

Here in the States, our qualified dividends are taxed on a sliding rate scale depending on your taxable income and filing status. The three levels are 0%, 15%, and 20%. All of those are lower than the French bill of 25% on those payouts. So, in this case, every American investor can completely avoid double taxation on those investments.

And when it comes to capital gains, our scale remains the same: 0%, 15%, and 20% (again, mainly depending on your tax bracket and filing status). So, again, in this case, every American investor can avoid double taxation on capital gains too. You’ve already paid more to the French than Uncle Sam would have asked for, so you’re off the hook when it comes to U.S. taxes.

The Bottom Line on Foreign Investment Taxes

The bottom line here is that in most cases, Americans can avoid the tax implications of foreign investments thanks to the foreign tax credit offered by our tax code. Now, not every country has the same tax rates as France, so sometimes you won’t be able to offset everything you owe to Uncle Sam.

And some countries either don’t charge income and capital gains taxes at all or waive them for foreign investors. So as your target country changes, you’re going to want to check out those rates and make sure you understand the tax implications of your foreign investments.

Finally, of course, when in doubt about what you owe or don’t owe, it’s always a good idea to consult a qualified tax expert like a CPA or an enrolled agent (EA). Just don’t expect the H&R Block representative at Walmart to be that expert.

And now that you’ve got a better grasp on the tax implications of foreign investments, why not check out that research I mentioned earlier and pick up some of those shares trading on the Paris exchange today?

I and the rest of the team will be back soon with more ways to maximize your earnings potential and minimize your tax burden.

To your wealth,

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Jason Williams

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After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter; the founder of Future Giants, a nano cap investing service; and authors The Wealth Advisory income stock newsletter. He is also the managing editor of Wealth Daily. To learn more about Jason, click here.

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