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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?

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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.

From Forbes:

  1. 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."

  • Thank you JB King! So mutual funds (as entities) don't pay ANY kind of taxes (i.e. no dividend tax, no capital gains)? How about other kind of funds? (e.g. ETFs, index funds, hedge funds, etc) – Escachator Nov 8 '14 at 18:18
  • Funds pay taxes on their own income (commissions and fees), not on yours. Your income (in your account) is your problem. And yes, that means that a good year or a large sale, combined with low cash-on-hand. could force you to sell some more to have the cash to pay taxes with. – keshlam Nov 8 '14 at 18:40
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    @Escachator ETF,s, index fund, hedge funds are all mutual funds. What they invest in varies but regarding the distribution of dividends they are essentially the same. – mhoran_psprep Nov 8 '14 at 18:47
  • Thanks mhoran for the clarification. keshlam, when you mean funds I guess you are referring to the company which owns the fund, notthe fund itself where I am invested in. Is that correct? – Escachator Nov 9 '14 at 18:42

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