Tax Treaties and the Foreign Tax Credit

When a U.S. company pays a dividend, the U.S. originally withholds 30% from foreign shareholders. But for Korean investors it deducts only 15%. Why half?

It's thanks to the "Korea–U.S. tax treaty." It's an agreement the two countries made to "not tax the same income excessively against each other," and under this treaty (Article 12) the dividend withholding is limited to 15%.

In return, there's a condition. You must submit a document (W-8BEN) proving you are a "Korean resident" to receive the 15% benefit. These days brokerages mostly handle it automatically at account opening, so there's little to worry about, but without this document you could be deducted 30%.

There's a confusing point here. The domestic dividend income tax base rate is 14% (local tax separate), but the U.S. already deducted 15%.

The rule is this. If the rate deducted locally is higher than the domestic rate (14%), Korea does not deduct additionally. Since the U.S. already exceeded 14% with 15%, there is no additional domestic withholding.

However, it also doesn't refund the amount over (1%). It's not "you paid more, so a refund," but "you paid a lot, so no addition." That's why U.S. dividends feel like you usually pay only 15% and it's done (when financial income is 20 million won or less).

Not every country is like the U.S. If a country's rate is lower than the domestic one, Korea deducts more by exactly that difference.

For example, China stock dividends deduct 10% locally. Since that falls short of the domestic standard (14%), Korea additionally withholds 4.4%—the shortfall of 4% plus 0.4% local tax. In the end, combined, it meets the domestic standard line (around the 15.4% level).

To summarize: if the local rate is "higher" than the domestic one, no additional domestic deduction (and no refund of the excess); if "lower," the difference is additionally withheld domestically. So depending on "which country's stock it is," the total dividend tax you actually pay varies slightly.

If your financial income (interest + dividends) exceeds 20 million won a year, you become subject to comprehensive taxation. In that case, there's a device that adjusts things so the 15% you already paid in the U.S. doesn't simply vanish. That's the "foreign tax credit."

When calculating comprehensive income tax, the tax already paid abroad is subtracted from your Korean tax within a certain limit. It prevents both countries from fully taxing the same income twice.

A point to watch is that this is not an "automatic refund." You must include the foreign tax paid when you file comprehensive income tax in May to receive the credit. If you miss it, you may effectively bear double taxation, so if you have a lot of foreign dividends, it's best to be sure to check at filing time or get help from a tax professional.