Foreign Tax Credit: Reclaiming the US 10% on Dividends

The short answer: what comes back is capped by the credit limit

Source: National Tax Agency, Tax Answer No.1240 "Foreign tax credit for residents"[NTA]

These are estimates with the dividends filed under separate taxation by filing, social insurance premiums at 15%, the basic deduction (the income-banded amounts that apply from the 2025 tax year onwards) and no dependants. It is in the nature of this system that the larger your income tax bill (a higher salary, a higher rate), the wider the limit and the more likely the whole amount comes back, while the lower your income, the more of it is left behind.

Following the calculation for a 5 million yen salary and 1 million yen of dividends

1. Work out the income tax. Salary income 3.56 million yen − social insurance premiums 750,000 yen − basic deduction 680,000 yen = taxable income 2.13 million yen → income tax 115,500 yen. The 1 million yen of dividends is filed under separate taxation: 1 million yen × 15% = 150,000 yen. Total 265,500 yen.
2. Total income and foreign income. Total income = salary income 3.56 million yen + dividends 1 million yen = 4.56 million yen. Foreign income = 1 million yen.
3. The income tax limit. 265,500 yen × 100 ÷ 456 = about 58,200 yen.
4. The reconstruction income tax limit. 265,500 yen × 2.1% × 100 ÷ 456 = about 1,200 yen.
5. The residence tax limit. 58,200 yen × 30% = about 17,500 yen.
6. Total: about 77,000 yen. The gap to the 100,000 yen of US tax, about 23,000 yen, is an excess over the credit limit and is carried forward for the following three years; it can be used in a later year in which the limit has headroom left over.

Separate taxation by filing or aggregate taxation: separate filing is the default for foreign shares

With domestic shares there is a salary band where aggregate taxation plus the dividend deduction comes out ahead, but dividends from foreign shares carry no dividend deduction, so the only people with a reason to choose aggregate taxation are low earners in the 5% bracket. Choosing aggregate taxation also changes your income tax bill, which feeds back into the limit calculation. For how the dividend deduction on domestic shares works, see tax on dividends and the dividend deduction.

If you receive your dividends in a specified account with withholding, the Japanese tax has already been taken, but the foreign tax credit is only available through a tax return. Anyone who does not file simply pays the US 10% for nothing. Filing adds the dividends to your income, so people whose National Health Insurance premiums or dependency status would be affected (the self-employed, pensioners, a spouse within the dependency limits) should compare the refund with the increase in premiums. Company employees in a health insurance society or the Japan Health Insurance Association are not affected.

What falls outside the credit

• Dividends in a NISA account. The US 10% is still withheld, but because Japan does not tax them there is no double taxation, so they fall outside the foreign tax credit. Anyone holding US high-dividend stocks in a NISA has to accept that 10% as a cost that cannot be recovered.
• Tax withheld inside a US ETF. Tax withheld on dividends from other countries' shares held by a US-domiciled ETF is not the investor's own foreign income tax, so it falls outside the credit.
• Japanese investment trusts that hold foreign shares. Since 2020 the foreign tax on distributions from investment trusts has been adjusted automatically through the domestic withholding at the time of distribution, so it is not something an investor claims as a foreign tax credit on a return.
• Anything above the treaty-reduced rate. The treaty rate for the United States is 10%, but unless you have filed a "W-8BEN" (the residence certification form) with your broker, 30% is withheld. The 20 points above the treaty cap of 10% are outside the foreign tax credit, and the only route is a refund claim on the US side.

The procedure: copy the "foreign income tax" from your annual transaction report onto the statement

1. Get your broker's "annual transaction report for a specified account". It shows the dividends, the income tax and residence tax withheld in Japan, and the "amount of foreign income tax". Add them together if you use several brokers.
2. Enter the dividends under separate taxation by filing in the NTA's online return preparation service. Importing the data from the specified account report fills it in automatically.
3. Prepare the "Statement concerning the foreign tax credit (for residents)". In the preparation service choose the foreign tax credit under tax credits and enter the country (the United States), the type of income (dividends), the payment date and the amount of foreign income tax. The limit is calculated for you.
4. If you have an amount carried forward, keep the previous year's statement. The excess over the limit and the headroom left over need three years of records, and the carry-forward lapses unless you keep filing every year.

The attachments are the annual transaction report (which can be omitted with e-Tax) and the statement. Because it is a refund claim you can file from January of the following year, and you can go back five years. US tax from years you never filed for can still be recovered as long as the annual transaction reports are still to hand.

Frequently asked questions

Summary

• Dividends from U.S. stocks are taxed 10% in the U.S. and 20.315% in Japan. The foreign tax credit on your tax return lets you deduct the U.S. portion from Japanese income tax and resident tax.
• The refund is capped at the deduction limit. For a ¥5 million annual income with ¥1 million in dividends, only about ¥77,000 of the ¥100,000 U.S. tax comes back in that year.
• Any unused portion carries forward for 3 years. The carryforward lapses if you don't keep filing every year.
• Even with a specified account (with withholding), nothing comes back unless you file a return. Dividends in an NISA account and domestic mutual fund distributions are not eligible.
• Separate self-assessment taxation is the standard choice for foreign stocks. If it affects your national health insurance premium or dependent status, weigh the refund against the rise in premiums.

Reference links (sources)

This article is based on the materials below. Because the limit changes with the make-up of your income, please confirm the actual figure with the calculation in the preparation service.

• National Tax Agency, Tax Answer No.1240 Foreign tax credit for residents (the formula for the credit limit, the carry-forward, the documents required)
• National Tax Agency, Tax Answer No.1330 When you receive a dividend (dividend income) (separate taxation by filing and aggregate taxation)
• National Tax Agency, Tax Answer No.1250 When you have dividend income (the dividend deduction) (dividends from foreign corporations do not qualify for the dividend deduction)

This article is general information. The amounts in the examples are estimates and change with your income and deductions. For your own situation, please check with the tax office.