When foreign dividends qualify for the lower tax rate

For a dividend investor in the 22% or 24% bracket, whether a dividend is "qualified" can matter more than the foreign withholding. A qualified dividend is taxed at 0%, 15%, or 20%; a nonqualified one is taxed as ordinary income. Most dividends from large foreign companies do qualify. Some don't, and the reasons are specific enough that you can usually predict which.

The rates at stake

Qualified dividends are taxed at the long-term capital gains rates. For 2026, per the IRS inflation adjustments:

Higher-income investors may also owe the 3.8% net investment income tax on dividends of either kind.

Test one: is the payer a qualified foreign corporation?

Dividends from a foreign company can be qualified only if the company is a qualified foreign corporation. Per the Form 1099-DIV instructions, it gets there by any of these routes:

1. It is incorporated in a U.S. possession.
2. It is eligible for benefits of a comprehensive income tax treaty with the U.S. that the IRS has found satisfactory for this purpose and that includes an exchange-of-information program.
3. Failing those, the stock on which the dividend is paid is readily tradable on an established securities market in the United States.

The treaty route

The IRS publishes the list of qualifying treaties. Notice 2024-11 is the current version. It added Chile and removed Hungary and Russia (both effective for dividends paid in 2023). Most major markets, including Canada, the UK, Japan, Germany, Switzerland, France, the Netherlands, Australia, and India, are on the list. Brazil has no income tax treaty with the U.S., so Brazilian companies need the listing route. Being in a listed country isn't quite enough on its own; the company must actually be a resident entitled to the treaty's benefits.

The U.S.-listing route

Notice 2003-71 defines "readily tradable" narrowly. Stock or an ADR qualifies if it's listed on a national securities exchange registered with the SEC, such as the NYSE, or on Nasdaq. Shares quoted only on the OTC Bulletin Board or the pink sheets did not meet the definition. The notice said Treasury was considering whether to extend it to OTC securities, but the listed-exchange standard is what it set out.

Test two: the PFIC exclusion

Even a company in a treaty country isn't a qualified foreign corporation if it was a passive foreign investment company in the year of the dividend or the year before. Foreign funds and many pre-revenue exploration companies fall here. Few exploration companies pay dividends, so this matters most for foreign funds and holding companies. The same exclusion applies to certain "surrogate" foreign corporations created by corporate inversions after December 22, 2017.

Test three: your holding period

Even if the company qualifies, your shares have to. The dividend is qualified only if you held the shares for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. For certain preferred stock dividends covering periods over 366 days, the requirement is 91 days within a 181-day window. Days on which you hedged away your risk of loss (with puts or short sales, for example) don't count.

For long-term holders this happens automatically. It matters if you buy just before the ex-date to "capture" a dividend and sell soon after. A similar but shorter 16-day test applies to the foreign tax credit, so a quick round-trip can cost you both benefits.

How it shows up on Form 1099-DIV

Box 1a reports total ordinary dividends. Box 1b reports the portion your broker believes is qualified. Foreign tax withheld is in box 7.

• Your broker determines the company-level tests. It generally can't know your hedging, so the holding period is ultimately your responsibility.
• Brokers code foreign dividends with varying care. If a dividend from an NYSE-listed ADR of a treaty-country company appears as nonqualified, it's worth asking about.
• When box 1b includes foreign qualified dividends and you file Form 1116, there may be an adjustment to foreign-source income to reflect the lower rate. Tax software handles this but it's a reason to check the result.

A quick check for any foreign holding

1. Is the company's home country on the IRS treaty list? If yes, move to step 3.
2. If not, is the stock or ADR listed on the NYSE or Nasdaq? If not, expect nonqualified dividends.
3. Has the company said it is or may be a PFIC? If so, the dividends aren't qualified.
4. Did you hold the shares more than 60 days around the ex-date?

Country-specific notes are in our country guides.

Educational content only, not investment, tax or legal advice. The Stateside Report does not recommend buying or selling any security. Tax rules depend on your situation; confirm with a qualified tax professional. Full disclosures.