Last time I wrote about Nestle, many readers reached out to me asking about the consequences of owning the Switzerland-based stock in an IRA. The straightforward answer: You have to pay taxes to the Swiss government which cannot be avoided by investing in a retirement. The rules of tax treaties only offer protection to those invested in taxable accounts—your taxable rate gets lowered from the foreign country’s sticker rate to your domestic rate.
To use as an example the company on my mind today, French oil giant Total SA, the tax implications work like this: The French government has a sticker tax of 25% on dividends to American investors. If you are an American investor contemplating a stock in Total SA (or any French company paying dividends), the cost-benefit analysis works out like this: Buy Total SA in a regular, taxable brokerage account and your rate gets reduced to 0%, 15%, 20%, or 23.8% based upon your annual income and whether you’re single or married (and choose to file your taxes jointly).
When you file your taxes, the treaty acts as a reverse corporate inversion (let’s call it a personal eversion?) that benefits you based upon your wealth. The wealthiest Americans buying Total SA only save 1.2 percentage points—the rest take five to ten percentage points off the French tax rate, and the Americans buying Total SA that are single making less than $37,450 per year or married and making less than $74,900 per year get a full elimination of the French dividend so that you get to collect your Total SA dividends free and clear in the same way that an American investor over the age of 59.5 gets to collect dividends from a Roth IRA: free and clear, with no tax encumbrances on the dividend payments (note: for whatever reason, this is an area of tax practice where many professionals are lazy and ignorant, and it is common for investors to just pay 25% on all French dividends because they are having their assets managed by someone who doesn’t know or want to put in the time to take care of the proper paperwork).
If you do your taxes yourself, here’s a head start: Click here on “Topic 856-Foreign Tax Credit” to get rolling.
Now, the equally interesting question is this: What if you want to put shares of Total SA or any French stock in a retirement account like a Roth IRA or a Traditional IRA? Here, the answer is simple but also unsatisfying: You pay the full 25% tax on your dividend income regardless of your personal tax bracket. Rich or poor, there’s no progressivity nor the typical preferred status for the retirement income: You only get 75% of your dividend.
That’s mean when you perform your analysis of the stock you don’t just look at the $3.13 dividend payment in 2013, the $3.21 payment in 2014, or the expected $3.25 payment in 2015. You have to multiply that number by 0.75 to figure out your true retirement income with this stock: $2.35 in 2013, $2.41 in 2014, and $2.44 this year. So when you run a stock screen for Total SA, your real dividend yield right now with the stock at $54 per share is 4.51%, not the 6.01% rate you might see in a stock screener.
That is why it is difficult for Total SA to be the premier oil stock opportunity for American investors. Conoco investors get 4.3%, and they get to keep it all in an IRA without shipping anything off to the government (and plus it grows faster than Total SA). Total SA has growth rates in line with BP and Royal Dutch Shell, but BP gives you 5.8% and the Royal Dutch Shell B Shares give you 5.4% without any tax encumbrances. America’s dividend tax treaty with Britain is much more favorable than the one with France—you get to keep all of your British income in an IRA as if the stock were domiciled in America itself, whereas French stocks require their 25% shipment to the Paris Treasury. It is those after tax returns that matter, and unfortunately, even though Total SA is a great asset and would perform nicely in the accounts of American investors, it is hard for Total SA to reach a point where it becomes more compelling than the available alternatives because of the existing French tax hurdle.
Originally posted 2015-02-05 16:42:23.