It is generally not advisable to hold foreign dividend-paying American Depositary Receipts (ADR's) in IRAs and other non-taxable accounts since you cannot recover the taxes paid to a foreign country.
However, there are two notable exceptions. First, Germany charges a 26.4 percent tax on dividends on stocks held in taxable accounts. But due to the tax-treaty between U.S. and Germany, Germany does not deduct any taxes on dividends paid by German firms to U.S. investors who hold the stock in their IRA and other qualified pension accounts. Second, Canada charges a 15 percent tax on dividends held in non-taxable accounts. But due to a policy change in 2009, dividends and interest income are exempt from this 15 percent tax if the investments are held in IRA or 401(K) accounts. So U.S. investors can hold stocks in say Canadian banks such as Royal Bank of Canada or other Canadian dividend-paying stocks in your IRA’s for the long-term without worrying about taxes on dividends.
The Netherlands has a statutory tax rate of 25 percent. But due to the special tax treaty with the United States, American investors in Dutch companies are charged only 15 percent. The following countries have tax-treaties with the U.S. which also allow for favorable treatment of dividends earned by US investors investing in those countries:
Australia, Austria, Belgium, China, Denmark, Finland, France, India, Ireland, Israel, Italy, Japan, Korea, Mexico, Netherlands, New Zealand, and the United Kingdom. This is a partial listing highlighting countries with the biggest and most developed economies.
While foreign stocks (or funds) deserve a place in a diversified portfolio, as always, consult with your investment advisor before taking investment action.
CBlakely CFP, CTFA 10/2011
Source: IRS.gov
