Avoid the dividend tax on foreign investors [Hong Kong]

[swj05652]

This is my first post. I knew this forum a few months ago. And I learned a lot in a recent time of period by reading the Wiki and the book "The Bogleheads Guide to Investing". Great forum and great book! Without these I will not have such a deep understanding on personal investing. Now I think I get prepared to implement the principles that I've learned. In general, I decide to build a portfolio with ETF provided by Vanguard: VTI, VWO & BND.

But as a foreign investor, I have some special concerns about the tax. I am at Hong Kong, and have no green card. So there is no capital gain tax on me, but there is dividend tax, with rate 30%. I wonder whether can I avoid dividend by selling the ETF before the ex-dividend date to reduce the tax cost. I use HSBC as my broker. Their brokerage fee is $18 for the first 1000 shares, plus $0.015 per additional share. We can buy US stocks in HK, but cannot buy US mutual funds. So ETF seems the only option for me.

Take VWO as an example. The latest dividend is on 12/20/2012 (https://personal.vanguard.com/us/funds/snapshot?FundId=0964&FundIntExt=INT#tab=4). If I take no action and just hold this ETF, I need to pay $0.45*30% = $0.135 for each share. That's approximately 0.3% cost on total asset value.

Since I have the advantage of zero capital gain tax, I can sell all the shares on Dec 20. And buy them back a few days later (as soon as possible, depending on the transaction process, which I am not sure how many days). Let's assume that the emerging market makes no change during these gap days. (The fluctuation is not predictable and may be large. But according to the random walk theory, the expectation of the change in value during several days is close to 0, thus negligible.) If I sell 2000 share and buy them later, the transaction fee is $66. And I have to take the bid/ask spread, which is $0.01 per share for VWO. So the total cost is $106. That's 0.12% cost on total. VWO or VTI may pay dividend quarterly, so actually I can save a lot of money by this way.

I do not know if my idea is correct. Please help me figure this out, can I really avoid tax and save money in this way?

In addition, any advice for foreign investors are welcome! I am near 30, living at HK, and I plan to hold 20% of VWO, 60% of VTI and 20% of BND in the future. Thanks!

[hlfo718]

I don't believe there is a way to avoid. In the US we get an offsetting tax credit or deduction for the withholding if held in taxable account. If held in tax deferred account, we are all in the same boat of paying the tax.

You can sell before the div but don't forget besides commission you are also paying the bid/ask spread on the ETF as well as missing out on any potential gain if you sit it out.

By the way, don't you want to diversify your international holdings by buying VXUS instead of just VWO?

[sscritic]

There are several posters from Hong Kong. Just give them time. They might be asleep now; it is 12:16 am.

[swj05652]

I don't believe there is a way to avoid. In the US we get an offsetting tax credit or deduction for the withholding if held in taxable account. If held in tax deferred account, we are all in the same boat of paying the tax.

You can sell before the div but don't forget besides commission you are also paying the bid/ask spread on the ETF as well as missing out on any potential gain if you sit it out.

By the way, don't you want to diversify your international holdings by buying VXUS instead of just VWO?

For US investor, there is no way to avoid, because there is a tax on capital gain. But as a Hong Kong investor, I only need to pay tax on dividends. That is the difference.

As for the bid ask spread, that is exactly the reason I choose VWO. Its spread is always very low. Almost always 1 cent. I have include this factor in my calculation: For 2000 shares, commission fee is $33, spread is $20. So buy and sell once costs me $106. While the tax on div will be about $300. Is my calculation correct?

[swj05652]

I don't believe there is a way to avoid. In the US we get an offsetting tax credit or deduction for the withholding if held in taxable account. If held in tax deferred account, we are all in the same boat of paying the tax.

You can sell before the div but don't forget besides commission you are also paying the bid/ask spread on the ETF as well as missing out on any potential gain if you sit it out.

By the way, don't you want to diversify your international holdings by buying VXUS instead of just VWO?

Sorry I accidentally click "Submit". I haven't finished my reply yet. Here is the remaining:

Another point is: I only invest 20% percent on VWO (or any other international index fund). And I also have other investments like housing property in HK. So international fund is a only a small portion for me. So it is not so important for me, using VWO or VXUS. I think I just need to control the stock/bond ratio, which is the most important point. I decide to use a 80/20 ratio, and put a large part in VTI, as is recommended in that book. And considering the high trading volume and low spread, I come up with the 60% VTI / 20% VWO / 20% BND allocation.

About the potential gain during that several transaction days. You are correct. There is a risk. I believe this will increase my risk while remain the expectation of revenue unchanged (according to the Random Walk Hypothesis). Basically, I will not lose money, but the fluctuation will be larger. One good thing is, VWO, as an index fund, will not go up and down as much as an individual stock in one day. So I think it is a good trade-off, take the risk for a few days, and save 0.2~0.3% money on each dividend.

[swj05652]

There are several posters from Hong Kong. Just give them time. They might be asleep now; it is 12:16 am.

I find many posters from Hong Kong haven't been active since 2009. Really hope that they will show up. I believe there must be someone who come up with similar idea before. May be this approach is feasible. Or they found some problem in this approach.

Actually, any non-US investor can come and discuss this, not just Hong Kong.

[hlfo718]

How about sell VWO a day before ex and buy EEM for placeholder. But you have to make sure the two ex dates don't fall on the same date. You can then sell the EEM position, buy back VWO, and repeat the process next year. The bid/ask for both should be tight. iShares has another emerging markets etf with lower exp ratio but is not as liquid, IEMG.

[swj05652]

How about sell VWO a day before ex and buy EEM for placeholder. But you have to make sure the two ex dates don't fall on the same date. You can then sell the EEM position, buy back VWO, and repeat the process next year. The bid/ask for both should be tight. iShares has another emerging markets etf with lower exp ratio but is not as liquid, IEMG.

Thank you! If the ex date of EEM is before VWO then this can work. Better idea than mine.

[TedSwippet]

How about avoiding US domiciled ETFs entirely, and instead buying ETFs domiciled in either Ireland or Luxembourg? These come with neither US nor other foreign (to you) tax entanglements. One particular tax trap to watch out for is US estate tax on your US holdings -- that alone might persuade you to avoid US ETFs.

Vanguard UK has a small but usable selection of Irish domiciled ETFs that you might be able to use. Otherwise maybe Blackrock iShares? Probably others if you dig deeper.

[swj05652]

How about avoiding US domiciled ETFs entirely, and instead buying ETFs domiciled in either Ireland or Luxembourg? These come with neither US nor other foreign (to you) tax entanglements. One particular tax trap to watch out for is US estate tax on your US holdings -- that alone might persuade you to avoid US ETFs.

Vanguard UK has a small but usable selection of Irish domiciled ETFs that you might be able to use. Otherwise maybe Blackrock iShares? Probably others if you dig deeper.

I have searched for ETFs domiciled in other countries. As an investor in HK, I can not buy funds in Vanguard UK. Blackrock & iShares offer index funds and ETFs in HK. But sadly, their ER are extremely high (more than 1%). Even I take the 30% dividend tax, I will be better off than buying these funds. Moreover, these funds have much lower volume, higher bid/ask spread, etc.

About the estate tax, I know this clearly. But I am under 30! So I really feel this has nothing to do with me. I can redeem my total portfolio when I retire, and buy some HK government bond. Anyway, that's 30 or 40 years in the future. I don't have to worry about that now.

[TedSwippet]

As an investor in HK, I can not buy funds in Vanguard UK.

Sure, but can you not buy ETFs listed on EU exchanges? I'd have though so, if you can buy ones on US exchanges.

There's a list of Vanguard UK ETFs here. A TER of 0.09% on the S&P 500 fund and no hassles with US taxes seems like a good deal to me. The emerging markets and possibly all-world may also be worth a look. Less so the UK gilts fund, since you're not in the UK.

About the estate tax, I know this clearly. But I am under 30! So I really feel this has nothing to do with me ... I don't have to worry about that now.

Not everyone dies of old age.

[LadyGeek]

Sorry I accidentally click "Submit". I haven't finished my reply yet.

Welcome! In this forum, you are permitted to edit your posts. Just click on the "Edit" button in the top right corner of each post.

Also, I PM'd someone who may be able to help you.

[swj05652]

As an investor in HK, I can not buy funds in Vanguard UK.

Sure, but can you not buy ETFs listed on EU exchanges? I'd have though so, if you can buy ones on US exchanges.

There's a list of Vanguard UK ETFs here. A TER of 0.09% on the S&P 500 fund and no hassles with US taxes seems like a good deal to me. The emerging markets and possibly all-world may also be worth a look. Less so the UK gilts fund, since you're not in the UK.

About the estate tax, I know this clearly. But I am under 30! So I really feel this has nothing to do with me ... I don't have to worry about that now.

Not everyone dies of old age.

Thank you for these information! Although HSBC doesn't offer British/EU stock service, I found that Bank of China and InteractiveBrokers offer this service. I will study them.

What about the tax policy in Britain on foreign investors? Do you have any idea on this topic? Thanks.

[swj05652]

Sorry I accidentally click "Submit". I haven't finished my reply yet.

Welcome! In this forum, you are permitted to edit your posts. Just click on the "Edit" button in the top right corner of each post.

Also, I PM'd someone who may be able to help you.

Thank you! So surprising.

[LadyGeek]

You are welcome. BTW, I'm the one who retitled your thread (note the "Site Admin" under my avatar) to attract attention of the members with experience to help you.

[HongKonger]

Hi there swj

I am the same as you here in HK, non-US person and investing through HSBC using all ETFs - both local and US.

Before I decided to use HSBC, I did a thorough check on all online brokers available here to see which offers the best combo of exchanges you can buy, versus costs, versus how to transfer money in and out of a trading account etc etc. Whilst HSBC is not the cheapest and of course only offers US and HK, I just couldn't escape the ease of the account being linked to my actual bank account and the ease of their online interface so I sucked it up. ...the one I actually thought was best was very local and as I don't speak or read Canto I knew their customer service and website was going to be troublesome for me if I had any issues. I also didn't want to split my holdings and have some here and some there etc etc.

Anyway, as to your question of withholding tax, then I can honestly say that I haven't especially considered the whole selling and then rebuying because frankly, my dividends are small enough that that the 30% I lose in tax (plus the HK$30 corporate action fee from HSBC) normally works out less than the transaction fees. Especially as you need to weigh the effect of the very low ERs on the US ETFs versus those locally (iShares is usually 0.59%).. so whilst you might lose 0.3% in tax, you gain in the low ER. The kind people on here set me straight on calculations re a US bond ETF I was holding which actually gave me no better returns than a local one when factoring in the ER & withholding tax.




As you know about life in Hong Kong - you can't have it all, everything is a trade off.

[tramble]

Hint, buy the Schwab ETFs for your international exposure (SCHE / SCHF) as these pay the dividends yearly (fewer transactions and lower fees - though higher spread)
Also, it's not worth doing it with BND because they pay the "dividend" monthly - I'd rather buy US Gov bonds directly and there will be no withholding (at the price of some diversification). Otherwise just hold on to em.

[swj05652]

Hint, buy the Schwab ETFs for your international exposure (SCHE / SCHF) as these pay the dividends yearly (fewer transactions and lower fees - though higher spread)
Also, it's not worth doing it with BND because they pay the "dividend" monthly - I'd rather buy US Gov bonds directly and there will be no withholding (at the price of some diversification). Otherwise just hold on to em.

I am only familiar about Vangurad's ETFs now. (As a beginner.) I will see ETFs provided by other companies. By the way, Vanguard's website is really well designed, which makes me very easy to find the information I need. In contrast, Schwab/ iShare's websites are not that clear.

You are correct about BND. Furthermore, the annual return of bond ETFs is mainly achieved in the form of dividends. So I'm considering give up bond ETFs. May be try some other index bond fund. Or just totally give up the bond part, since I'm highly risk-tolerating.

[swj05652]

Hi there swj

I am the same as you here in HK, non-US person and investing through HSBC using all ETFs - both local and US.

Before I decided to use HSBC, I did a thorough check on all online brokers available here to see which offers the best combo of exchanges you can buy, versus costs, versus how to transfer money in and out of a trading account etc etc. Whilst HSBC is not the cheapest and of course only offers US and HK, I just couldn't escape the ease of the account being linked to my actual bank account and the ease of their online interface so I sucked it up. ...the one I actually thought was best was very local and as I don't speak or read Canto I knew their customer service and website was going to be troublesome for me if I had any issues. I also didn't want to split my holdings and have some here and some there etc etc.

Anyway, as to your question of withholding tax, then I can honestly say that I haven't especially considered the whole selling and then rebuying because frankly, my dividends are small enough that that the 30% I lose in tax (plus the HK$30 corporate action fee from HSBC) normally works out less than the transaction fees. Especially as you need to weigh the effect of the very low ERs on the US ETFs versus those locally (iShares is usually 0.59%).. so whilst you might lose 0.3% in tax, you gain in the low ER. The kind people on here set me straight on calculations re a US bond ETF I was holding which actually gave me no better returns than a local one when factoring in the ER & withholding tax.




As you know about life in Hong Kong - you can't have it all, everything is a trade off.

Happy to meet someone in the same city and using the same broker!

Yes, I agree with you on that even if I pay the dividend tax normally, US ETFs are much better than HK ETFs. So I will definitely not considering any local ETFs. All I am focusing on is, how to save a little bit from Uncle Sam while holding these US ETFs.

I am a little bit curious about what kind of US ETFs do you hold, and what's their "small enough" dividend. Because for VTI, http://www.nasdaq.com/symbol/vti/dividend-history#.UQ1TD6V2xq1, it pays dividends 4 times in 2012. The total amount is $1.563. (And in 2011, total dividend is $1.233). (Just suppose you own 1000 shares of VTI.) Then you need to pay tax: 30%*1.563*1000= $468.9, in year 2012. What if you buy and sell 4 times? The fee is only 4*2*18 = $144. That's approximately 0.4% difference annually. I believe the dividend per time should be less than $0.05 per share to make this kind of selling and buying not profitable. I don't know if your holding ETFs have such a small dividend?

And by your experience, any recommendation for me in bond part?

Finally, what's the HK$30 corporate action fee? Here is the U.S. Stock Trading Charges: http://www.hsbc.com.hk/1/2/hk/investments/stocks/ustrading/details#charge. It clearly says: Collection of dividend and other corporate actions is FREE.

[HongKonger]

Hint, buy the Schwab ETFs for your international exposure (SCHE / SCHF) as these pay the dividends yearly (fewer transactions and lower fees - though higher spread)
Also, it's not worth doing it with BND because they pay the "dividend" monthly - I'd rather buy US Gov bonds directly and there will be no withholding (at the price of some diversification). Otherwise just hold on to em.

If you're not a US person, you can't use Schwab or buy US bonds directly.

[HongKonger]

I am a little bit curious about what kind of US ETFs do you hold, and what's their "small enough" dividend. Because for VTI, http://www.nasdaq.com/symbol/vti/dividend-history#.UQ1TD6V2xq1, it pays dividends 4 times in 2012. The total amount is $1.563. (And in 2011, total dividend is $1.233). (Just suppose you own 1000 shares of VTI.) Then you need to pay tax: 30%*1.563*100= $468.9, in year 2012. What if you buy and sell 4 times? The fee is only 4*2*18 = $144. That's approximately 0.4% difference annually. I believe the dividend per time should be less than $0.05 per share to make this kind of selling and buying not profitable. I don't know if your holding ETFs have such a small dividend?

I would need to have a portfolio of more than 4m for my AA to call for 1,000 shares of VTI, and I don't.

Sadly, you just can't get the exposure any other way - unless you want to pay 2% plus in your MPF and not receive any dividend. Also, whilst you pay 30% in tax, you are still gaining the other 70% whilst paying a tiny ER compared to other ETFs.

[winguy]

Don't you have a broker to buy ETFs on the London Stock Exchange? No dividend withholding tax and a much higher estate tax-free limit. Search for UK nil rate band.

[HongKonger]

Don't you have a broker to buy ETFs on the London Stock Exchange? No dividend withholding tax and a much higher estate tax-free limit. Search for UK nil rate band.

No - HSBC in HK only allows purchasing on HK and US exchanges, plus as we are pegged to the USD, the currency issue would come into play.

[boglety]

How about Singapore? There are Etfs on their stock exchange that trade in USD

[HongKonger]

How about Singapore? There are Etfs on their stock exchange that trade in USD

Aside from the synthetic DBX ETFs and those from Lyxor (who recently quit business in Hong Kong), I see an iShares S&P500 ETF and SPY - both are domiciled in the US. Same same. No escaping the withholding tax.

[grabiner]

Don't you have a broker to buy ETFs on the London Stock Exchange? No dividend withholding tax and a much higher estate tax-free limit. Search for UK nil rate band.

No - HSBC in HK only allows purchasing on HK and US exchanges, plus as we are pegged to the USD, the currency issue would come into play.

The currency in which an ETF is denominated is irrelevant; the currency risk is determined by the currency in which the stocks actually trade. A pound-denominated ETF holding US stocks has the same dollar value as a dollar-denominated ETF holding the same US stocks, and a change in the value of the pound will affect the price in pounds but not the dollar equivalent.

[HongKonger]

Don't you have a broker to buy ETFs on the London Stock Exchange? No dividend withholding tax and a much higher estate tax-free limit. Search for UK nil rate band.

No - HSBC in HK only allows purchasing on HK and US exchanges, plus as we are pegged to the USD, the currency issue would come into play.

The currency in which an ETF is denominated is irrelevant; the currency risk is determined by the currency in which the stocks actually trade. A pound-denominated ETF holding US stocks has the same dollar value as a dollar-denominated ETF holding the same US stocks, and a change in the value of the pound will affect the price in pounds but not the dollar equivalent.

Yes, but with the Hongkie pegged to the US dollar, then converting Hongkies into pounds and back can make for quite a loss as we can see with the recent movement causing quite sizeable losses for anyone wishing to convert Sterling back into Hongkie dollars.

[boglety]

I am thinking you want to avoid synthetic etfs and you would still pay withholding tax if you hold Singapore etfs denominated in dollars? Just trying to figure out your concern with Singapore etfs denominated in dollars

[lemming]

If you're not a US person, you can't use Schwab or buy US bonds directly.

According to this post and others in the same thread you can use Schwab as a non-resident. TD Ameritrade also seem to allow it.

[grabiner]

The currency in which an ETF is denominated is irrelevant; the currency risk is determined by the currency in which the stocks actually trade. A pound-denominated ETF holding US stocks has the same dollar value as a dollar-denominated ETF holding the same US stocks, and a change in the value of the pound will affect the price in pounds but not the dollar equivalent.

Yes, but with the Hongkie pegged to the US dollar, then converting Hongkies into pounds and back can make for quite a loss as we can see with the recent movement causing quite sizeable losses for anyone wishing to convert Sterling back into Hongkie dollars.

However, gains and losses from currency movement are canceled out by the currency returns of the fund. Suppose that the pound is worth $2.50, and you buy 100 shares of a UK-based ETF holding US stocks for 40 pounds per share; the US stocks are thus worth $10,000. Now, suppose that the US stock market doesn't move, but the pound falls to $2. Since US stocks are still worth $10,000, and $10,000 is now 5000 pounds, the pound price of the ETF will rise to 50, and you'll get the same $10,000 if you sell the ETF and convert the pounds back to dollars.

In contrast, if you had bought 100 shares of a US based ETF holding UK stocks for $100 per share, and then the UK stock market didn't move, the UK stocks would still be worth 4000 pounds after the rates changed, and you would only get $8000. Thus, even though you had a dollar-denominated fund, you would lose on the currency fluctuations.

[boglety]

I noticed almost half of Etfs traded in UK were denominated in dollars. You can google LSE and etf to see Providers in UK.

[HK_Melissa]

Hi there swj

I am the same as you here in HK, non-US person and investing through HSBC using all ETFs - both local and US.

Before I decided to use HSBC, I did a thorough check on all online brokers available here to see which offers the best combo of exchanges you can buy, versus costs, versus how to transfer money in and out of a trading account etc etc. Whilst HSBC is not the cheapest and of course only offers US and HK, I just couldn't escape the ease of the account being linked to my actual bank account and the ease of their online interface so I sucked it up. ...the one I actually thought was best was very local and as I don't speak or read Canto I knew their customer service and website was going to be troublesome for me if I had any issues. I also didn't want to split my holdings and have some here and some there etc etc.

Anyway, as to your question of withholding tax, then I can honestly say that I haven't especially considered the whole selling and then rebuying because frankly, my dividends are small enough that that the 30% I lose in tax (plus the HK$30 corporate action fee from HSBC) normally works out less than the transaction fees. Especially as you need to weigh the effect of the very low ERs on the US ETFs versus those locally (iShares is usually 0.59%).. so whilst you might lose 0.3% in tax, you gain in the low ER. The kind people on here set me straight on calculations re a US bond ETF I was holding which actually gave me no better returns than a local one when factoring in the ER & withholding tax.




As you know about life in Hong Kong - you can't have it all, everything is a trade off.

Happy to meet someone in the same city and using the same broker!

Yes, I agree with you on that even if I pay the dividend tax normally, US ETFs are much better than HK ETFs. So I will definitely not considering any local ETFs. All I am focusing on is, how to save a little bit from Uncle Sam while holding these US ETFs.

I am a little bit curious about what kind of US ETFs do you hold, and what's their "small enough" dividend. Because for VTI, http://www.nasdaq.com/symbol/vti/dividend-history#.UQ1TD6V2xq1, it pays dividends 4 times in 2012. The total amount is $1.563. (And in 2011, total dividend is $1.233). (Just suppose you own 1000 shares of VTI.) Then you need to pay tax: 30%*1.563*1000= $468.9, in year 2012. What if you buy and sell 4 times? The fee is only 4*2*18 = $144. That's approximately 0.4% difference annually. I believe the dividend per time should be less than $0.05 per share to make this kind of selling and buying not profitable. I don't know if your holding ETFs have such a small dividend?

And by your experience, any recommendation for me in bond part?

Finally, what's the HK$30 corporate action fee? Here is the U.S. Stock Trading Charges: http://www.hsbc.com.hk/1/2/hk/investments/stocks/ustrading/details#charge. It clearly says: Collection of dividend and other corporate actions is FREE.

Hello swj05602,

I am from HK and also a newbie in the forum. Happened to bump into your posts. So did you by any luck open an account with HSBC and start buying?

I also read 2 investment books recently and both pointed to Index Fund/ETF investment. I did some research and was contemplating with buying via online brokers but I am cautious about the custodian of my ETFs as I would be most likely 'buy and hold'. I check HSBC just today and find fees are quite reasonable. And I can sleep well at night with my ETFs kept at HSBC.

So have you checked the admin fees for dividend collection via HSBC? I also read the same from HSBC website (no fees), but they have a small print to charge "out of pocket" expense. Not sure if this is the $30 mentioned by other poster earlier.

Melissa