If I am a US citizen and want to invest in a US fund (e.g. a mutual fund or an index fund), which also invest in a number of US stocks, what happens when the fund I invest in receives dividends? Is the fund paying any tax on these dividends? What if the stocks are from another country?
Mutual funds don't pay taxes themselves, they distribute any dividends or capital gains to the shareholders. Thus, if you hold a mutual fund in a tax-advantaged account like a 401k or IRA then the distribution isn't a taxable event while in a regular taxable account you would have to pay taxes on the distributions.
- Funds are pass-throughs. If they profit from capital gains, interest or dividends, they are compelled to pass those profits through to you as distributions. You must pay tax on the distributions. You owe the same tax whether you do or don’t reinvest in more fund shares.
There can be foreign companies on US stock exchanges that would still work the same way. Unilever for example is an Anglo-Dutch multinational listed on the NYSE as "UN."