Portfolio advice. Jordan/Int'l resident (no US tax treaty)

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banoffeeape86
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Portfolio advice. Jordan/Int'l resident (no US tax treaty)

Post by banoffeeape86 »

Emergency funds: Got 1 year of expenses set aside
Debt: None
Tax Filing Status: International gains/dividends/interest is non taxable for Jordan-residents
Tax Rate: 0%
State of Residence: Jordanian residing in Jordan (no tax treaty with the US)
Age: 28 / Single
Desired Asset allocation: 70% stocks / 30% bonds
Desired International allocation: 50% of stocks, 50% US
Income and savings in USD.

I've been discussing non-resident alien (NRA in IRS terms) with fellow Bogleheads. I also consulted a tax attorney. US-domiciled ETFs are not NRA friendly. Estate tax can be as high as 50%. Tax withholding might need filing for tax returns even if I'm not a US citizen or resident. The recommendation was Ireland-domiciled ETFs.

Currently, I am thinking about the following portfolio structure:
  • 30% in iShares US Aggregate Bond UCITS ETF (IUAG) | USD | Distributing | 0.25% expense ratio
  • 60% in iShares Core MSCI World UCITS ETF (IWDA) | USD | Acc | 0.20% expense ratio
  • 10% in iShares Core MSCI Emerging Markets IMI UCITS ETF (EIMI) | USD | Acc | 0.25% expense ratio
I chose IWDA + EIMI to match the emerging markets portion of Vanguard FTSE All-World UCITS ETF (VWRD), while having it accumulating instead of distributing. I am not looking to use this portfolio for income for the foreseeable future.

I had to accept the 0.25% expense ratios and the tax withholding leakage given that I am a NRA with no tax-treaty.

Questions:
  • For a USD based portfolio constructed with Ireland-domiciled ETFs, are there better alternatives than the ones listed? Lower expense ratio / lower tax withholding leakage alternatives?
  • Is VWRD better than IWDA + EIMI? If so, why?
Thank you in advance for your advice.

Link to previous discussion:
viewtopic.php?f=1&t=159867
Last edited by banoffeeape86 on Wed Mar 04, 2015 9:14 pm, edited 1 time in total.
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galeno
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Re: Portfolio advice. Jordan resident (no US tax treaty)

Post by galeno »

You are 99% there. Whatever I say here is mostly mental masturbation. Understand that.

I like VWRD better than your slice and dice with two ETFs because I prefer to let the FTSE all world index choose our USA / non-USA / EM equities instead of deciding myself.

E.g. for USA domiciled equities:
100% VT (ER = 0.18%)
50% VTI + 50% VXUS (ER = 0.10)
50% SCHB + 40% SCHF + 10% SCHE (ER = 0.07%)

As you can see, the more you slice and dice VT, the cheaper the ER gets.

Your bond ETF choice is great. Think about brokered FDIC insured CDs at USA banks (no withholding tax) and DIRECT USA Treasuries (no withholding tax) as cheaper and better yielding alternatives.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

Thanks for the advice.

I am thinking to also add 9% small cap US equity (iShares CUSS). Any thoughts?
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galeno
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

You can "slice and dice" your fixed income or equity allocations. My advice is to keep it simple and cheap so I'd say it's not worth the bother.

Again, we are now at the level of "do you like one or two teaspoons of sugar with your tea?"

For a USA-NRA without a tax treaty, it's difficult to beat the 2 ETF port of X% VWRD + Y%IUAG (Ireland-UK domiciled).

For a USA-NRA with a tax treaty or for a USA person, it's difficult to beat the 2 ETF port of X% VT + Y% BND (USA domiciled).
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by Micks »

Some added thoughts to your questions and info in this thread and what has already been said in the previous thread.

I agree with galeno on the value of simplicity. It remains unfortunate that there is not yet a good one stop shop solution for international investors. Missing out on for instance small cap is indeed lowering your diversification, but a widely diversified large cap portfolio is good enough to achieve somewhat average equity returns. You are holding about 85% of the investable market cap in developed markets and 99% in emerging markets. Adding developed small and mid cap will improve your diversification, but to what extent?

Will a 9% equity allocation to US small-cap really enhance or lower your returns? There is a chance that you would be equally happy with the end result in say 30 years whether or not you added small cap. Besides, I would be bothered by the higher TER, volatility (also because of the optimised replication of CUSS) and extra transaction costs (now, at rebalancing and at retirement when you might sell). I believe only a third of small cap companies are in the US, so if you are convinced to add small cap, also consider SPDR's WDSC, which also uses optimised replication but is international but then again has about the same number of holdings as CUSS. So, CUSS is closer to full replication (guaranteeing you close to index returns) but lacks international. Unfortunately, I do not think a good cheap option is available to gain exposure to all-cap when going for (full) replication funds.

In your case, I would be indifferent between choosing IWDA+EIMI or VWRD. The first option has less cash drag for you because it accumulates (assuming you will not be reinvesting dividends directly when you receive them due to transaction costs) but the second option is simpler because you only have to buy one fund. The two choices differ marginally in terms of holdings.

To be a little more precise to your first question, db x-trackers has a 0.19% TER MSCI world accumulating alternative (XDWD) to iShares' IWDA. You might pay higher bid-ask spreads with this one though, but those stay really difficult to estimate accurately so that is just an assumption. I feel both are fine choices, TER differs just marginally.
Kind regards, Mick
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

40% VWRD + 20% WDSC + 20% IUAG + 15% CORP + 5% CASH looks sexy to me. Is it worth betraying simplicity just to be sexy?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

I think it's as you said, the remaining is whatever looker sexier to me. I know the following: Ireland-domiciled ETFs. I want my age-in-bonds. With no taxation as a Jordan resident on distributing vs accumulating, I guess they are both fine. I do like that accumulating will reinvest my money automatically. I like the larger fund size and trading volume of IWDA. I like that VWRD includes Emerging Markets and still similar bid-ask-spread and premium levels as IWDA.

I checked out WDSC, it's a tiny fund ($11M USD), while CUSS is at $360M. I do like the 40% world small cap in WDSC though.

I did not think much about CORP frankly. I did read that after the crisis in 2008/9, corporate bonds, especially in developed countries should be safe for the foreseeable future with all the extra strict regulations in place since. So, it's something to think about.

Why not LQDE? It seems more popular with ~$3B in holdings? I noticed the higher USA allocation at ~79%, but for a USD ETF, doesn't that lower the currency risk?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by Micks »

galeno wrote:40% VWRD + 20% WDSC + 20% IUAG + 15% CORP + 5% CASH looks sexy to me. Is it worth betraying simplicity just to be sexy?
I do not think so, I would personally prefer the simplicity, lower costs over the added diversification of small cap stocks and am not really convinced that the small value premium will persist on the long run. You would also be increasing risk and I think that the amount of risk in developed equities is enough and well compensated. I would not have CORP in my portfolio, with bonds I would rather go for safety, which is something I do not expect to increase when adding international corporate bonds. Unless you really appreciate feeling sexy though, then go for it :P
amerk86 wrote:I checked out WDSC, it's a tiny fund ($11M USD), while CUSS is at $360M. I do like the 40% world small cap in WDSC though.

I did not think much about CORP frankly. I did read that after the crisis in 2008/9, corporate bonds, especially in developed countries should be safe for the foreseeable future with all the extra strict regulations in place since. So, it's something to think about.

Why not LQDE? It seems more popular with ~$3B in holdings? I noticed the higher USA allocation at ~79%, but for a USD ETF, doesn't that lower the currency risk?
Owning IUAG is already a position in corporate bonds, and a range of other bond types in the US. So that would limit your currency risk for a great part. iShares' website mentions that LQDE invests in USD denominated bonds, so I would not estimate currency risk high there. I also dislike the maturity of 12 years and would prefer a shorter maturity as IUAG has with 7 years.

On WDSC versus CUSS: they both are small and have low trading volume, so I would expect significant spreads with both offerings (especially since small cap stocks have lower liquidity in general). Investors stepping out of WDSC might have an impact on the survival of the fund. So indeed a good point, I guess I have no further suggestions for adding worldwide small cap firms.
Kind regards, Mick
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

Great advice!

I might stick to my simpler 30% IUAG, 61% IWDA, 9% EIMI for now, and add it to my rebalancing checklist to check if CUSS/WDSC are more popular or not and decide accordingly.

I like that IWDA+EIMI are accumulating, but both are optimized sampling. VRWD is full replication. Does that make a big difference? I can live with distributing if it's safer or significantly better.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by nun »

Have you researched how Ireland taxes Irish sourced income owned by non-residents.....and how Jordan taxes foreign investments owned by it's residents? Are there provisions in domestic law for foreign tax credits or any restrictions to owning foreign investment funds?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

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amerk86 wrote:I like that IWDA+EIMI are accumulating, but both are optimized sampling. VRWD is full replication. Does that make a big difference? I can live with distributing if it's safer or significantly better.
For the developed markets part (IWDA) I do not think there is much of a difference anymore, since it currently holds about 50 stocks less than the benchmark. I do not believe that adding 50 stocks this close to full replication would reduce tracking error by a noticable amount. You can check out the tracking difference per year on iShares' website (keep in mind that iShares has been adding a lot more stocks in the last years to reduce tracking difference).You would want the fund to trail its index by its costs. I by the way agree that the past tracking difference looks quite unpredictable. As a side-note, I compared tracking error over a five year period for IWDA vs a full replication MSCI world fund with about the same expenses including tax leakage and on this period the difference was only +6bp for IWDA. So, would it matter on the long term that IWDA lacks +-50 stocks? Even though the tracking difference looks quite unpredictable over the past years, I do not think this pattern will appear this unpredictable over coming years.

EIMI however holds about 1700 stocks according to iShares, while the index it tracks, holds about 2600 stocks. I think you should decide for yourself whether the difference is big enough to go for full replication (VWRD). EIMI was introduced less than a year ago, so I do not think you can already say anything reliable about the tracking difference. My personal opinion is that 1700 stocks in emerging markets is sufficient; risk does not get reduced much after about 50 diverse stocks and I feel the number of shares in EIMI is high enough to reduce tracking error and benefit from lower transaction costs (the tracked index is very large and holds a lot of small illiquid stocks).

The fact remains that VWRD probably gets you returns closer to its index than IWDA and EIMI will. Basing on Morningstar, at your weights IWDA+EIMI is pretty close to VWRD, except for having more holdings and not being fully replicating. Whether one is better over the other is arbitrary, I personally would prefer the combination just because of the ease of accumulation.
Kind regards, Mick
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by TedSwippet »

nun wrote:Have you researched how Ireland taxes Irish sourced income owned by non-residents.....
http://www.fund-academy.com/fa_admin/pu ... igence.pdf

"Withholding tax at fund level
The country of domicile of the ETF may impose a withholding tax on any distributions made to investors on the basis of holdings and the residence of the investor. The withholding tax at fund level for various fund domiciles operates as follows:
1. Ireland does not impose any withholding taxes when Irish funds distribute income or gains to overseas investors.
2. Germany imposes 26.375% withholding tax ...
3. The US generally imposes 30% withholding taxes when a US-domiciled fund makes a distribution to investors...
"
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

nun wrote:Have you researched how Ireland taxes Irish sourced income owned by non-residents.....and how Jordan taxes foreign investments owned by it's residents? Are there provisions in domestic law for foreign tax credits or any restrictions to owning foreign investment funds?
That's a good question. According to BlackRock (iShares):
WITHHOLDING TAX: Distributions from the Dublin domiciled iShares range are exempt from Irish withholding tax by virtue of the shares issued being settled via a recognised clearing system (CREST). This applies to all iShares ETFs listed on the London Stock Exchange.
STAMP DUTY: iShares ETFs are not subject to UK stamp duty when purchased on-exchange.

Source: http://www.blackrock.com/mobile-feeds/e ... o-etfs.pdf

What else should I check for? I read online that the Irish revenue department would need a certification of non-tax residency issued by another country's revenue department. Any advice about that?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

Regarding IUAG's yield. How much of that is lost in Ireland-UK tax withholding leakage? 15%?
Most recent yields: 1.43% (distribution yield) and 2.09% (YTM).
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

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galeno wrote:Regarding IUAG's yield. How much of that is lost in Ireland-UK tax withholding leakage? 15%?
Most recent yields: 1.43% (distribution yield) and 2.09% (YTM).
Most of the assets are US, so 15% will be paid by the fund to the U.S. Why would there be a leakage to the UK?

So far, I believe that the 1.43% will not have more deductions as tax withholding as mentioned by my previous post and Ted's. Am I missing something?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

I'm hoping that's correct. That 100% of the stated yield of IUAG flows to us.

FYI, our new private Panamanian bank is offering a 5 yr USD CD with a yield = 4.13%. I'm so tempted to use them.

Our new broker, IB, has brokered 5yr CDs in FDIC insured USA banks with a yield = 2.00%.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

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galeno wrote:I'm hoping that's correct. That 100% of the stated yield of IUAG flows to us.
I assume that tax leakage between IE and UK was a typo :wink: .

It should indeed be correct that you will receive the complete US sourced bond interest. The US government does not impose withholding taxes on interest income, only on dividend income. See for instance this 2012 KPMG link on Luxemburgian investment funds that cannot profit from a tax treaty with the US. This iShares document for Dutch investors mentions under 1.1 that "interest received on fixed income investments may not suffer any withholding tax at all if the treaty so provides". The prospectus of IUAG (link) mentions on p.35 that the expected tracking error is 0.25%, which equals the TER.

I found it quite difficult to even get a clue on tax leakage for bond etfs domiciled in Ireland, so if someone has more compelling evidence or proof I am wrong I am of course more than glad to hear it.
Kind regards, Mick
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

We held SCHZ (Schwab's TBM ETF) from Jan 2006-Dec 2012. 30% of interest income was withheld by the USA government every quarter like clockwork.

I hated it. I began calculating the TR (tax ratio) on any fund or ETF available to us using an international corporate account at Schwab. The USA-NRA tax turned me into a portfolio cost fanatic.

I learned here on Bogleheads only 2 years ago that the USA government withholds 15% of IUAG's interest income due to the tax treaty that Ireland has with the USA. Correct me if I'm wrong.

AGG (ER=0.08%) = IUAG (ER=0.25%). Both have identical average YTM = 2.07%.

E.g. 1. If we hold AGG we get 0.7% of the YTM = 1.45%.

E.g. 2. If we hold IUAG we get 0.85% of the YTM = 1.76%. Subtract 0.17% for the difference in ERs and the YTM = 1.59%.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

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I emailed the Irish revenue department - let's hope we hear back.

I bought some IUAG shares a few days ago, dividends payable 7th of May, so I will have my broker's statement to support a yes/no answer in a couple of months.

A quick thought, if that's the case, then finding an accumulating bond fund would be more efficient. Is there an IUAG equivalent?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

For you and us (USA-NRAs with no tax treaty) there is no tax difference whether we use accumulating or distributing bond funds / ETFs.

Take the SEC Rate of AGG; multiply by 0.85; then subtract 0.17 to get your expected net nominal CAGR of IUAG. If no SEC Rate then use YTM. It's that simple.
amerk86 wrote:I emailed the Irish revenue department - let's hope we hear back.

I bought some IUAG shares a few days ago, dividends payable 7th of May, so I will have my broker's statement to support a yes/no answer in a couple of months.

A quick thought, if that's the case, then finding an accumulating bond fund would be more efficient. Is there an IUAG equivalent?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

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galeno wrote:For you and us (USA-NRAs with no tax treaty) there is no tax difference whether we use accumulating or distributing bond funds / ETFs.

Take the SEC Rate of AGG; multiply by 0.85; then subtract 0.17 to get your expected net nominal CAGR of IUAG. If no SEC Rate then use YTM. It's that simple
Galeno, if you don't mind me asking, do you own distributing Irish-based ETFs? Just to help me confirm that no Irish tax withholding is imposed for dividends distributed to non Ireland-X tax treaty owners of Irish domiciled ETFs. X being the country of residence of that owner. As the link shows, neither Jordan nor Costa Rica are.

That would be a definitive answer to my question.
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I just got a reply from revenue.ie:
My understanding is that there have been negotiations on a proposed Double Taxation Agreement between Ireland and Jordan but these have not concluded. In the absence of such an agreement Dividend Withholding Tax would be deducted and it is not possible to obtain a refund or put in place an exemption.

Dividend Withholding Tax is deducted at a rate of 20%.

If a profit is made from a disposal of shares then Capital Gains Tax will apply. There should be further information on our website, revenue.ie, to explain how Capital Gains Tax would apply.
I checked the Irish Guide to Capital Gains Tax, and it mentions:
A person who is neither resident nor ordinarily resident in the State is liable to tax only in respect of gains on disposals
of the following categories of assets:
shares, other than shares quoted on a Stock Exchange, deriving their value or the greater part of their value directly or indirectly from assets in (a) [land], (b) [minerals] or (c) [exploration or exploitation rights]
Seems that capital gain tax does not apply. But for a non-treaty country resident it seems to be 20% dividend withholding.

So, accumulating funds might be the solution here. Not sure about IUAG any more.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

I just heard back from revenue.ie about Capital Gains for ETFs:
I am not that familiar with CGT provisions but based on the information provided it appears that you are correct in your interpretation and you would not be liable to CGT.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

We need to definitely find out the tax withholding rate on IUAG. 15%? Or 20%. We need to nail this down. Maybe one of our more knowledgeable colleagues on this board can help us out????

I know for a fact that there is no CG withholding taxes on investments held by USA-NRAs without tax treaties because I've been doing this for 10 years. I'm very sure that even USA-NRA's with tax treaties only worry about CGT in their home countries.

Assume 20% withholding taxes. YTM for AGG = 2.07%. Multiply by 0.8 and subtract 0.17% and the net nominal expected yield on IUAG = 1.49%. If you use the (Gringo) AGG you'd get 1.45% net nominal yield.

Can you buy brokered 5yr CDs at FDIC USA banks via your broker? Net nominal yield = 2.00%. Can you buy 5yr USA T-notes DIRECT (not via an ETF or mutual fund) via your broker? Net nominal yield = 1.61%. These "bonds" have no withholding taxes. They also happen to be the safest "bonds" you can buy on this planet.

Use IUAG at first. Then every year put 1/5th of your bond allocation into one of the above until you have a nice 5 yr bond ladder of either 5yr CDs a/o T-notes.

This is our first foray into using non-USA domiciled funds and ETFs. At Schwab International we use 60% VT + 35% QPGCQ + 5% CASH.

QPGCQ = Schwab Ireland-UK version of USA's PIGIX which is PIMCO's corporate bond fund. Only USA-NRA's are allowed access to Schwab's limited menu of offshore funds. The ER = 0.49%. The SEC Yield = 2.93%. At 15% I thought I was getting 85% of the interest income. You think I may be getting only 20%. I hope you're wrong.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

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galeno wrote:We need to definitely find out the tax withholding rate on IUAG. 15%? Or 20%. We need to nail this down. Maybe one of our more knowledgeable colleagues on this board can help us out????

I know for a fact that there is no CG withholding taxes on investments held by USA-NRAs without tax treaties because I've been doing this for 10 years. I'm very sure that even USA-NRA's with tax treaties only worry about CGT in their home countries.

Assume 20% withholding taxes. YTM for AGG = 2.07%. Multiply by 0.8 and subtract 0.17% and the net nominal expected yield on IUAG = 1.49%. If you use the (Gringo) AGG you'd get 1.45% net nominal yield.

Can you buy brokered 5yr CDs at FDIC USA banks via your broker? Net nominal yield = 2.00%. Can you buy 5yr USA T-notes DIRECT (not via an ETF or mutual fund) via your broker? Net nominal yield = 1.61%. These "bonds" have no withholding taxes. They also happen to be the safest "bonds" you can buy on this planet.

Use IUAG at first. Then every year put 1/5th of your bond allocation into one of the above until you have a nice 5 yr bond ladder of either 5yr CDs a/o T-notes.

This is our first foray into using non-USA domiciled funds and ETFs. At Schwab International we use 60% VT + 35% QPGCQ + 5% CASH.

QPGCQ = Schwab Ireland-UK version of USA's PIGIX which is PIMCO's corporate bond fund. Only USA-NRA's are allowed access to Schwab's limited menu of offshore funds. The ER = 0.49%. The SEC Yield = 2.93%. At 15% I thought I was getting 85% of the interest income. You think I may be getting only 20%. I hope you're wrong.
The 15% is withheld on US dividends by the USA's IRS. The 20% is on top of that withheld by the Irish Revenue department for dividends distributed to non-tax treaty countries like Jordan and Costa Rica.

I am confirming with iShares - waiting for a reply.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

I so hope you are wrong. This means using USA domiciled ETFs would be cheaper for us vs the Irland-UK ETFs. For us, the USA will withhold 30% of dividend and interest income.

If you're correct, the Ireland-UK rate = 32%? And they have the nerve to charge extremely high ERs vs USA domiciled ETFs.

You may have turned my world upside down. Help!

[quote="amerk86]The 15% is withheld on US dividends by the USA's IRS. The 20% is on top of that withheld by the Irish Revenue department for dividends distributed to non-tax treaty countries like Jordan and Costa Rica.

I am confirming with iShares - waiting for a reply.[/quote]
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by TedSwippet »

I'm in the EU so my iShares holdings would (if necessary) be covered by the UK/Ireland tax treaty, UCITS, and other EU fund 'passporting'. However, nothing I have read points to any Irish tax on dividends from ETFs domiciled in Ireland, and everything points the other way. Ireland goes out of its way to provide a hospitable domicile for ETFs.

For example:
http://www.irishfunds.ie/fs/doc/publica ... ebsite.pdf
Ireland offers a highly efficient, clear and certain tax environment for investment funds. Irish investment funds are exempt from Irish tax on their income and gains, irrespective of where their investors are resident. No withholding taxes apply on income distributions and redemption payments made by an Irish fund to non-Irish resident investors.
Also (and compare with the US, which applies both income and inheritance taxes to US domiciled ETFs):
http://www2.deloitte.com/content/dam/De ... inal_2.pdf
Ireland’s provides a highly efficient, clear and certain tax environment for investment funds. Irish investment funds are not subject to tax while the Irish tax system is simple for international investors
– no Irish tax if you are non-resident.
Key features
- No fund or annual subscription tax
- No Irish taxes on income or gains made by non-Irish resident/ordinarily resident investors on their investment fund holdings
- No wealth tax for funds or their investors
- No gift or inheritance tax applicable to fund units gifted/inherited where non-Irish parties are involved
- No stamp duty on fund units
The iShares prospectus for IUAG backs this up:
http://www.ishares.com/uk/individual/en ... pectus.pdf
However, tax can arise on the happening of a "chargeable event" in the Company. A chargeable event includes any distribution payments to Shareholders or any encashment, redemption, cancellation or transfer of Shares or appropriation or cancellation of Shares of a Shareholder by the Company for the purposes of meeting the amount of tax payable on a gain arising on a transfer. It also includes the ending of a Relevant Period.

No tax will arise on the Company in respect of chargeable events in respect of a Shareholder who is neither Irish Resident nor Irish Ordinary Resident at the time of the chargeable event provided that a Relevant Declaration is in place and the Company is not in possession of any information which would reasonably suggest that the information contained therein is no longer materially correct.

It is no longer necessary to obtain a Relevant Declaration from Shareholders who are neither Irish Resident nor Irish Ordinary Resident where the investment undertaking is not actively marketed to Irish investors and the Irish Revenue Commissioners have given the investment undertaking the appropriate approval.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

Thank you Ted! This is my understanding too.

So IUAG's net YTM is 77% of AGG's YTM. The USA gov't withholds 15% and I-shares Ireland-UK gets 8% in additional ER.

But.... no CGT! And that's a beautiful thing.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by james99 »

What about VWRD? What is VWRD's withholding tax at the fund level, before I get the dividends in my account?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

galeno wrote:Thank you Ted! This is my understanding too.

So IUAG's net YTM is 77% of AGG's YTM. The USA gov't withholds 15% and I-shares Ireland-UK gets 8% in additional ER.

But.... no CGT! And that's a beautiful thing.
I really hope the two of you are the ones who are right. I did provide revenue.ie reference and their email reply. I hope this document simply fails to mention that ETFs are always exempt for non-residents.

I did email iShares and Saxo Bank with the same question about ETF dividend withholding. I also bought some IUAG shares, dividend distribution is due in April.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

james99 wrote:What about VWRD? What is VWRD's withholding tax at the fund level, before I get the dividends in my account?
It depends on your nationality and tax-residency. In my case I am from Jordan, resident in Jordan. So, no tax treaty with the USA or Ireland.

According to this post, tax leakage from Ireland-domiciled funds following the MSCI World Index is about 22%.

Image

The part we are trying to confirm is for non-treaty residents and Ireland-domiciled funds, do we pay 20% Irish DWT Dividend Tax Withholding as mentioned in my previous posts.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

First I'm going to calculate the withholding tax for USA Vanguard's VT. This is an ETF I've been in love with since its inception in 2009. I'm certain about this one and know it intimately. This ETF covers 98% of all investable public companies in the world. It holds 6841 stocks. Ave weighted market cap = $29.7 B.

12 mo yield = 2.34%. (2.34/2)x0.7 + (2.34/2)x0.94x0.7 = 1.59% which is 68% of dividends.

Now for VWRD. This ETF covers 90% of all investable public companies in the world. It holds 2802 stocks. Ave weighted market cap = $42.0 B.

12 mo yield = 2.19%. (2.19/2)x0.85 + (2.19/2)x0.94x1.00 = 1.96% which is 89% of dividends.

I believe the 22% withholding tax quoted by link in the above post is a maximum possible withholding tax. You get this by multiplying 1.96 by 0.85 instead of by 1.00.

In 2014 the withholding tax for the non-USA equity part of VT = 6%. For the USA portion it's 15%. I'm assuming that is the same for VWRD.

Please correct me if I'm wrong for VWRD.


james99 wrote:What about VWRD? What is VWRD's withholding tax at the fund level, before I get the dividends in my account?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by Micks »

james99 wrote:What about VWRD? What is VWRD's withholding tax at the fund level, before I get the dividends in my account?
galeno wrote:Please correct me if I'm wrong for VWRD.
I think you are correct in your calculations, galeno. The (fiscal year) 2014 annual reports of VWRD and VT back them up:

VT annual report: dividends of 132,534,000, which are net of foreign withholding taxes of 4,315,000. So the foreign withholding taxes with VT are (4315/(132534+4315))*100%=3.15%. Assuming a 50/50 split between US and ex-US, the ex-US portion then levied 6.3% withholding taxes on dividends.

If VWRD can access the same treaties as VT, it would come at 0.063*0.5+0.15*0.5=0.1065 or 10.65% withholding taxes that are leaked by the fund internally, so before distributing. The annual report of VWRD mentions dividends received of 7,496,554 and withholding tax paid of 734,078. Leaked withholding taxes are then (734,078/7,496,554)*100%=9,79%. Seems about right since the US vs ex-US split was not exactly 50/50.

After VWRD and VT have received the net dividends, you can be taxed on those net dividends on investor level, so for instance by your own country or that of the fund's domicile. The US does this at a 30% rate for non-treaty countries, while Ireland does not tax it as TedSwippet showed above.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

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Micks wrote:VT annual report: dividends of 132,534,000, which are net of foreign withholding taxes of 4,315,000. So the foreign withholding taxes with VT are (4315/(132534+4315))*100%=3.15%. Assuming a 50/50 split between US and ex-US, the ex-US portion then levied 6.3% withholding taxes on dividends.

If VWRD can access the same treaties as VT, it would come at 0.063*0.5+0.15*0.5=0.1065 or 10.65% withholding taxes that are leaked by the fund internally, so before distributing. The annual report of VWRD mentions dividends received of 7,496,554 and withholding tax paid of 734,078. Leaked withholding taxes are then (734,078/7,496,554)*100%=9,79%. Seems about right since the US vs ex-US split was not exactly 50/50.
I really hope the reply from revenue.ie was incomplete and no Irish DWT are withheld for non-treaty country residents.

Micks, for MSCI World, the article you shared previously quoted "22% tax leakage" average. Am I misunderstanding something? I know that MSCI World has about 60% US allocation, but that does not seem to account for the 2X difference.
Micks wrote:Leaked withholding taxes are then (734,078/7,496,554)*100%=9,79%...
Also, where did you get the numbers you referred to?

Thanks :beer
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by Micks »

amerk86 wrote:I really hope the reply from revenue.ie was incomplete and no Irish DWT are withheld for non-treaty country residents.

Micks, for MSCI World, the article you shared previously quoted "22% tax leakage" average. Am I misunderstanding something? I know that MSCI World has about 60% US allocation, but that does not seem to account for the 2X difference.

Also, where did you get the numbers you referred to?

Thanks :beer
Might be that revenue.ie was talking about individual stocks instead of collective investment vehicles.

As galeno says correctly, the europe.etf.com source assumes that the fund cannot access double taxation treaties. As is also described in-text with the US example and at the third reference, where show how they calculated the tax leakage. The net indexes usually assume no tax treaties and the gross return indexes are without any tax withholding on dividends. So the 22% leakage is not correct if a fund can for instance access the IE-US double tax treaty, lowering the US withholding tax to 15%. I have done this calculation before in the previous discussion (specifically this post, assuming a fund can only access the double tax treaty with the US).

The numbers I referred to come out of the 2014 annual reports on the Vanguard website (just go to the Vanguard.com website for the VT annual report and to an international one for VWRD).
Kind regards, Mick
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

I think revenue.ie were talking about Irish Stocks - not ETFs clearing through CREST system. I sent a bunch of emails, I'll post the replies as I get them.

The annual reports is a great tip. I used annual reports to calculate tax withholding leakage. Please note the percentages are lower as I used the total fund income (dividends, securities lending and interest):

Code: Select all

Ticker / Year    2014    2013
VWRD              9.8%   10.7%
IWDA             11.6%   11.8%
URTH             14.3%   14.3%
IUAG              0.0%    0.0%
VT US             3.1% (not sure, used withholding total / withholding + net income)
MSCI World US     4.1% (not sure, used withholding total / withholding + net income)
Calculated using Annual Reports of funds: (Non-reclaimable withholding tax) / (Operating income).

Do these numbers look correct?
Last edited by banoffeeape86 on Wed Mar 18, 2015 12:54 am, edited 1 time in total.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

In your calculations of withholding taxes you should only use interest income (for bonds) and dividend income (for equities).

I also include the extra ER cost to get a more accurate picture of what I like to call TER which is ER + WTR (withholding tax ratio).

I like to compare our TER to the TER that USAmerican Boglehead pay as our goal over the last 10 years.

We pay more in ER but less in taxes so we actually come out ahead of our USAmerican peers.

I like to use the term USAmericans because Canadians, Mexicans, and people from Central and South America are also Americans. Like many non-USAmericans, I have a love / hate bipolar relationship with the USA.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

UPDATE: Regarding non-resident + non-tax treaty countries when it comes to Ireland-domiciled ETFs and Irish tax withholding (DWT), I did hear back from a financial adviser I've been emailing, referencing "Ireland: Taxation Of Collective Investment Funds And Availability Of Treaty Benefits":
There are many confusing comments made about whether or not a non-resident owner of a UCITS would be subject to withholding tax in Ireland. From what I have read, I would say no.

At the bottom of the copied portion of this summary is a statement about Irish taxation of non-resident investors which suggests no tax on non-resident investors.

Similar comment is noted (referencing BlackRock that distributions from Dublin domiciled iShares are exempt from Irish withholding tax by virtue of the shares being settled via a recognized clearing system (CREST) and that this applies to all iShares ETFs listed on the London Stock Exchange.

No guarantee that this information is still valid, but I think that chances are good that that is the case.
Furthermore, a 2009 paper mentioned, and I quote:
Taxation of Investors from the perspective of the Investment Funds
Non-Residents:
No Taxes – As outlined above Irish investment funds are not subject to any taxes on their income (profits) or gains arising on their underlying investments. In addition, there are no Irish withholding taxes in respect of a distribution of payments by investment funds to investors or in relation to any encashment, redemption, cancellation or transfer of units/shares in respect of investors who are neither Irish resident nor ordinarily resident in Ireland and who have provided the fund with the appropriate relevant declaration of non-Iris residence.

Units held in a recognised clearing system
Any payments to an investor or any encashment, redemption, cancellation or transfer of units/shares held in a Recognised Clearing System (as defined in Irish tax legislation) will not give rise to a chargeable event in the fund. Thus the fund will not have to deduct any Irish taxes on such payments regardless of whether they are held by investors who are Irish Residents or Ordinarily Resident in Ireland, or whether a non-resident investor has made an appropriate relevant declaration. Nevertheless, investors who are Irish Resident or Ordinarily Resident in Ireland or who are not Irish Resident or Ordinarily Resident in Ireland but whose units/shares are attributable to a branch or agency in Ireland may still have a liability to account for Irish tax on a distribution or encashment, redemption or transfer of their units/shares.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

So..... in 2014 the dividends on the USA part of VWRD was taxed at 15%. These were withheld by the USA tax authorities before they got passed to Vanguard Ireland because of the tax treaty between Ireland and the USA. Vanguard Ireland then passes these (85%) to us without tax consequences.

From what I've read, the dividend withholding taxes on the non-USA part was a weighted 6% by the different non-USA governments.

If the USA / non-USA split = 50/50, the dividend withholding tax on VWRD = (15+6)/2 = 11%.

I'm certain about the USA part. I'm fairly confident about the non-USA part. I'd like to be certain. Correct me if I'm wrong please.
amerk86 wrote:UPDATE: Regarding non-resident + non-tax treaty countries when it comes to Ireland-domiciled ETFs and Irish tax withholding (DWT), I did hear back from a financial adviser I've been emailing.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

UPDATE #2: According to SPDR's annual report note 2 page 410:
No tax will arise on the Company in respect of chargeable events relating to:
i) A shareholder who is neither Irish resident nor ordinarily resident in Ireland for tax purposes, at the time of the chargeable event, provided appropriate valid declarations in accordance with the provisions of the Taxes Consolidation Act, 1997, as amended, are
held by the Company;
ii) Certain exempted Irish tax resident shareholders who have provided the Company with the necessary signed statutory declarations; or
iii) Any transaction (which might otherwise be a chargeable event) in relation to shares held in a recognised clearing system as designated by order of the Irish Revenue Commissioners (such as CREST).
That backs up the reply I got.

Bottom line: Irish-domiciled funds are the best for non-resident non-treaty (US and Ireland) aliens when it comes to dividend tax withholding and utilizing the US-Ireland tax treaty to lower the withholding on US dividends to 15%, while bond ETFs pay 100% of interest paid out by US bonds as it's not subject to tax withholding.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

galeno wrote:So..... in 2014 the dividends on the USA part of VWRD was taxed at 15%. These were withheld by the USA tax authorities before they got passed to Vanguard Ireland because of the tax treaty between Ireland and the USA. Vanguard Ireland then passes these (85%) to us without tax consequences.

From what I've read, the dividend withholding taxes on the non-USA part was a weighted 6% by the different non-USA governments.

If the USA / non-USA split = 50/50, the dividend withholding tax on VWRD = (15+6)/2 = 11%.

I'm certain about the USA part. I'm fairly confident about the non-USA part. I'd like to be certain. Correct me if I'm wrong please.
According to my calculations, based on annual reports, you are correct. For the international portion, tax withholding leakage is about 6.0% to 7.0%. I am using 12% for MSCI World.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

Delete.
Last edited by galeno on Sun Mar 22, 2015 1:38 pm, edited 1 time in total.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

Before I start jumping up and down, again, are you saying that we will get 100% of the interest income from IUAG (YTM = 1.99%) and not 85% (net YTM = 1.69%) of it?

So, we get taxed 11% on our VWRD dividends and 0% on our IUAG interest income?

That would decrease our portfolio costs from 0.58% to 0.38%. I love it!
amerk86 wrote:Bottom line: Irish-domiciled funds are the best for non-resident non-treaty (US and Ireland) aliens when it comes to dividend tax withholding and utilizing the US-Ireland tax treaty to lower the withholding on US dividends to 15%, while bond ETFs pay 100% of interest paid out by US bonds as it's not subject to tax withholding.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

galeno wrote:Before I start jumping up and down, again, are you saying that we will get 100% of the interest income from IUAG (YTM = 1.99%) and not 85% (net YTM = 1.69%) of it?

So, we get taxed 11% on our VWRD dividends and 0% on our IUAG interest income?
amerk86 wrote:Bottom line: Irish-domiciled funds are the best for non-resident non-treaty (US and Ireland) aliens when it comes to dividend tax withholding and utilizing the US-Ireland tax treaty to lower the withholding on US dividends to 15%, while bond ETFs pay 100% of interest paid out by US bonds as it's not subject to tax withholding.
I am not 100% certain of it, but yes. According to IUAG's annual report, tax withholding is 0%. I cannot yet account for the difference between the yields of AGG and IUAG though. Yet again, I cannot find the same figures available for IUAG and AGG.

IUAG's 2014 fact sheet states:
Fund yield to maturity: 2.22%

How can we confirm?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

galeno wrote:Before I start jumping up and down, again, are you saying that we will get 100% of the interest income from IUAG (YTM = 1.99%) and not 85% (net YTM = 1.69%) of it?

So, we get taxed 11% on our VWRD dividends and 0% on our IUAG interest income?

That would decrease our portfolio costs from 0.58% to 0.38%. I love it!
According to this law.cornell.edu publication:
(c) Exceptions:
(3) Bonds with extended maturity dates
The deduction and withholding in the case of interest on bonds, mortgages, or deeds of trust or other similar obligations of a corporation, within subsections (a), (b), and (c) ofsection 1451 (as in effect before its repeal by the Tax Reform Act of 1984) were it not for the fact that the maturity date of such obligations has been extended on or after January 1, 1934, and the liability assumed by the debtor exceeds 271/2 percent of the interest, shall not exceed the rate of 271/2 percent per annum.
Also, this article:
In some cases, including interest from U.S. Treasury bonds and capital gains in securities portfolios, this income would otherwise not be subject to tax.
And, this forum response by taxtopics.net:
interest paid from a US Treasury Note or Bill or Bond:
Not taxable as long as it is a U.S. source debt obligations without OID
or a US source debt obligation with OID and a term of more than 183 days.
So, I might be correct. I hope!
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

From ishares.com/uk: YTM for IUAG = 1.99%. From ishares.com/us: YTM for AGG = 1.98%. Do not compare the 12 mo yields.

We know that IUAG's ER is 0.17% higher than AGG's ER. Their durations and portfolios are too similar to worry about.

How do we explain that 0.17% difference? Do we even care?
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

galeno wrote:From ishares.com/uk: YTM for IUAG = 1.99%. From ishares.com/us: YTM for AGG = 1.98%. Do not compare the 12 mo yields.

We know that IUAG's ER is 0.17% higher than AGG's ER. Their durations and portfolios are too similar to worry about.

How do we explain that 0.17% difference? Do we even care?
I think we care about the overall. For AGG, as an NRA we will be paying 30% as ETF distribution is accounted as dividends.

What I believe is correct:
For US-AGG, it's 0.08 ER + 2%*30% = 0.68% annually. For Ireland-IUAG, it's 0.25 + 0 = 0.25% annually. That's a winner by 0.43%!
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

In our Schwab account using only USA domiciled ETFs there is a 30% withholding tax on all dividend and interest income. That means any and all bond yields held in an ETF or MF.

The only exceptions are the interest income from a FDIC USA bank (e.g. 5yr CDs) or USA treasury notes, bills, or bonds bought and held DIRECTLY.

With our guesses and calculations I believe we have determined that for us, Ireland-UK ETFs are the way to go.

With the extra layer of our Panamanian IBC and using the USA-domiciled Schwab as our broker for over 15 years, I don't worry about USA-domiciled Interactive Brokers. I also like their lower costs and transparency.

Then again, if for ONLY for 0.12% extra, I'd go with Saxobank.
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by galeno »

I concur! You've made my day. Thank you.
amerk86 wrote:What I believe is correct:
For US-AGG, it's 0.08 ER + 2%*30% = 0.68% annually. For Ireland-IUAG, it's 0.25 + 0 = 0.25% annually. That's a winner by 0.43%!
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Re: Portfolio advice. Jordan/Int'l resident (no US tax treat

Post by banoffeeape86 »

galeno wrote:In our Schwab account using only USA domiciled ETFs there is a 30% withholding tax on all dividend and interest income. That means any and all bond yields held in an ETF or MF.

The only exceptions are the interest income from a FDIC USA bank (e.g. 5yr CDs) or USA treasury notes, bills, or bonds bought and held DIRECTLY.

With our guesses and calculations I believe we have determined that for us, Ireland-UK ETFs are the way to go.

With the extra layer of our Panamanian IBC and using the USA-domiciled Schwab as our broker for over 15 years, I don't worry about USA-domiciled Interactive Brokers. I also like their lower costs and transparency.

Then again, if for ONLY for 0.12% extra, I'd go with Saxobank.
I think the exceptions you mentioned is what the IUAG ETF has. So they pay 0% tax withholding. Then for us, the shareholders of that ETF, Ireland does not withhold any taxes, so 100% of the bonds interest flows to us.

TD Direct Investing Luxembourg does not charge that custody fee, so they might be the way to go instead of Saxo Bank. Other options I'm looking into is KeyTrade Bank Luxembourg/Belgium and SwissQuote.

I need to look into legal holding structures and my puzzle will be complete. For now at least :)
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