Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

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arturaz
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Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

Hello.

I've been spending quite some time lately reading on investing and one question that still remains is taxation. I think I have it figured out, but just wanted to clarify - perhaps I've missed something.

So as a Lithuanian, I have to pay 15% income tax on dividend or capital gains. Lithuania has tax treaties with USA and Ireland, both of which state that:
  • Max tax rate for dividend is 15%.
  • Double taxation is prevented - so if USA/IRL takes their taxes I don't have to pay them in LTU.
I can only use services of Interactive Brokers, Drivewealth and Saxobank (which rates are terrible compared to IB & DW. $100 inactivity fee?!).

Tried calling Charles Shwab, TD Ameritrade and some other popular US brokers. None of them support Lithuania.

Even that I have tax treaty with US, I've read https://www.bogleheads.org/wiki/Nonresi ... Irish_ETFs, which suggests Ireland domiciled ETFs as an alternative to US ones, due to tax reasons.

I personally prefer US domiciled ones, because:
  • Total yearly expense rations are lower
  • To buy ETFs on non-US exchanges I'd have to use Interactive Brokers - they have $10/month minimum commissions, which I wouldn't reach as my plan is to buy securities every 3 or 6 months.
  • I prefer companies that pay dividends.
  • Most of my income is in USD.
US estate tax doesn't bother me - that happens after I die, so it doesn't really impact me. Or am I missing something?

Also estate tax could be offset by having life insurance in my home country. According to my calculations insurance is always cheaper at 2% dividend and I would be getting additional money in case a regular accident happens.

Given the rates, the article gives:
Vanguard S&P 500 ETF (VOO):

L1TW = 0%, as it is US-domiciled, holding US securities
L2TW = 30%, no-tax-treaty NRA rate

Vanguard S&P 500 UCITS ETF (VUSA):

L1TW = 15%, as it is Ireland-domiciled, holding US securities
L2TW = 0%, no Irish tax withholding on UCITS funds
But for me, it looks like:
Vanguard S&P 500 ETF (VOO):

L1TW = 0%, as it is US-domiciled, holding US securities
L2TW = 15%, tax-treaty NRA rate

Vanguard S&P 500 UCITS ETF (VUSA):

L1TW = 15%, as it is Ireland-domiciled, holding US securities
L2TW = 15%, no Irish tax withholding on UCITS funds, but because I paid no tax in IRL, I have to pay income tax in LTU
So given that my country has tax treaty with USA, it seems that it is way more beneficial for me to have my ETFs domiciled in USA?

Any thoughts?
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BeBH65
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by BeBH65 »

I'll bump this to see if anyone can comment on it.

Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
Caduceus
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by Caduceus »

I'm not sure if you're presenting the facts correctly. The tax that you owe to Lithuania will be the same regardless of whether you buy VOO or VUSA, no?

So, independent of your tax liability to Lithuania, the cumulative tax burden to a non-Lithuanian source will be 15% for VOO (U.S.-Lithuanian treaty rate) and also 15% for VUSA (Irish-U.S. treaty rate)
Topic Author
arturaz
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

Caduceus wrote:I'm not sure if you're presenting the facts correctly. The tax that you owe to Lithuania will be the same regardless of whether you buy VOO or VUSA, no?

So, independent of your tax liability to Lithuania, the cumulative tax burden to a non-Lithuanian source will be 15% for VOO (U.S.-Lithuanian treaty rate) and also 15% for VUSA (Irish-U.S. treaty rate)
As I understand it, if I buy VOO, tax treaty applies and I don't have to pay 15% income tax in my home country because that would be double taxation.

With irish version the 15% tax is between USA companies paying dividends and irish company holding the ETF. Then no Irish taxes apply when that company passes dividends to me, but my home country wants their 15% income tax and has every right to take it, because even though LT-IRL treaty preventing double taxation exists - I haven't paid a cent of Irish tax. So LTU takes their 15%.

As for the fact that 15% was already paid in transit from usa to irl, ltu is oblivious because i'm not a part of that transaction.
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BeBH65
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by BeBH65 »

Hello Arturaz,
arturaz wrote:... for me, it looks like:
Vanguard S&P 500 ETF (VOO):

L1TW = 0%, as it is US-domiciled, holding US securities
L2TW = 15%, tax-treaty NRA rateAssuming the tax treaty mentions it. USA has indeed levies a 15% witholding tax. Does the tax-treaty also mention how double taxation is avoided? Wouldn't you have to pay 15% LTU tax as well? Are you able to reclaim that?

Vanguard S&P 500 UCITS ETF (VUSA):

L1TW = 15%, as it is Ireland-domiciled, holding US securities
L2TW = 15%, no Irish tax withholding on UCITS funds, but because I paid no tax in IRL, I have to pay income tax in LTU
Ireland does not have any witholding tax, does LTU tax dividends from other european countries at 15%?
So given that my country has tax treaty with USA, it seems that it is way more beneficial for me to have my ETFs domiciled in USA?

Any thoughts?
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
Engineer250
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by Engineer250 »

arturaz wrote: US estate tax doesn't bother me - that happens after I die, so it doesn't really impact me. Or am I missing something?

Also estate tax could be offset by having life insurance in my home country. According to my calculations insurance is always cheaper at 2% dividend and I would be getting additional money in case a regular accident happens.
Correct, estate tax is after you die.

I don't think having insurance has any effect on it (that I am aware of) see:
https://www.irs.gov/individuals/interna ... ax-returns

I would trust US IRS pages more than third party trying to sell you insurance. However, per the IRS page, you should check your particular country's treaty. In the US, there's an exemption on the estate tax that's in the millions. Looks like countries without a treaty that exemption is only $60k. I don't know if it's specified in the treaty with Lithuania or not.
https://www.irs.gov/businesses/internat ... -documents
Where the tides of fortune take us, no man can know.
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arturaz
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

Assuming the tax treaty mentions it. USA has indeed levies a 15% witholding tax. Does the tax-treaty also mention how double taxation is avoided? Wouldn't you have to pay 15% LTU tax as well? Are you able to reclaim that?

Yes, tax treaty specificaly has a section on double taxation and there's a commentary on the treaty from our tax agency explaining this. I'm 98% sure.

Ireland does not have any witholding tax, does LTU tax dividends from other european countries at 15%?

There are various treaties, but in general yes - dividends are taxed at 15%. It's the same amount as income tax as we don't generally distinguish sources of income (unless you're working, then you pay social security and health insurance on top of that).
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arturaz
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

Engineer250 wrote:
arturaz wrote: US estate tax doesn't bother me - that happens after I die, so it doesn't really impact me. Or am I missing something?

Also estate tax could be offset by having life insurance in my home country. According to my calculations insurance is always cheaper at 2% dividend and I would be getting additional money in case a regular accident happens.
Correct, estate tax is after you die.

I don't think having insurance has any effect on it (that I am aware of) see:
https://www.irs.gov/individuals/interna ... ax-returns

I would trust US IRS pages more than third party trying to sell you insurance. However, per the IRS page, you should check your particular country's treaty. In the US, there's an exemption on the estate tax that's in the millions. Looks like countries without a treaty that exemption is only $60k. I don't know if it's specified in the treaty with Lithuania or not.
https://www.irs.gov/businesses/internat ... -documents
Insurance doesn't affect us estate tax directly, but being insured for the amount that us estate tax would take is still cheaper than having ireland domiciled etfs due to the taxation and higher ter.
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BeBH65
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by BeBH65 »

Hello Arturaz,

The situation of LTU seems similar to the one of the netherlands. On the wiki page Investing_from_the_Netherlands#Domicile_of_funds there is a reflection which kind of funds should be be US domiciled, and which ones not.

Maybe some of this also applies to you.

Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
TedSwippet
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by TedSwippet »

Engineer250 wrote:Looks like countries without a treaty that exemption is only $60k. I don't know if it's specified in the treaty with Lithuania or not.
There are ordinary tax treaties and there are estate tax treaties. The two are separate. The US has a reasonable number of ordinary tax treaties, but only a tiny handful of estate tax treaties.

The US has no estate tax treaty with Lithuania, so Lithuanians only get the minimal $60k US estate tax exemption.
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galeno
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by galeno »

I agree with Ted. USA domiciled VT's ER = 0.14%. You will pay taxes on top of taxes for the non-USA and EM stocks in the index. Ireland domiciled VWRD's ER = 0.25%. You will NOT pay double taxation.

Go with the Ireland domiciled ETFs. It's a "no-brainer".
KISS & STC.
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by TedSwippet »

galeno wrote:Go with the Ireland domiciled ETFs. It's a "no-brainer".
It might actually not be that clear-cut, at least from the dividend tax leakage angle.

From earlier postings it seems that Lithuanian tax on dividends is (a flat?) 15%. So if the OP holds US domiciled ETFs they pay 15% treaty rate to the US in dividend tax, and if Lithuania gives a credit for the full 15% then there is no more to pay. In this case there is a win for dividends from any US stocks in an ETF, and (probably) a wash on dividends from non-US stocks. Remember that the OP won't get a Lithuanian tax credit against taxes paid internally by the Ireland-domiciled ETFs, but will have to pay the Lithanian 15% on what remains after the ETF has paid taxes internally (probably, based on extrapolation of other countries' treatments here; no real idea on actual Lithuanian tax specifics!).

The US estate tax is of course the remaining man-eater. Whether that is a bother depends on how much the OP dislikes the thought of their heirs and relations sitting at a funeral and cursing the memory of their dear-departed for having made an incredibly expensive yet easily avoided mistake.
Caduceus
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by Caduceus »

Interesting conversation.

I still don't understand why the Lithuanian tax treatment of an Irish-domiciled fund would be different from a U.S. domiciled one. I understand the tax is paid at the fund level for an Ireland-domiciled ETF, but is the tax reporting completely opaque in that regard? So here's a question for Galeno or others who may have experience investing in Irish-domiciled funds. What kind of tax document do you get with Irish-domiciled ETFs and does it show 0% tax paid? The U.S. 1099 shows a 15% tax withheld at source; is there no equivalent with the Irish case? Or is Ted Swippet saying that even if the fund breaks down and declares the tax paid at the fund level, OP still cannot claim it as a credit or deduction against Lithuanian taxation because it was paid by the "fund" and not by the investor? So, in the U.S. case, the broker provides a tax document and keeps records at the point of dividend distribution, but the broker in the Irish case can't provide a tax document because this is all fund-level accounting?

The 15% tax went somewhere, so it seems odd that OP cannot claim a credit against either Ireland or the U.S.

We have had quite a few threads on Ireland-domiciled funds and this is the first time I recall anyone bringing up the possibility that the cumulative dividend tax leakage from the Irish fund would be greater than the U.S. equivalent. If the above is true, it seems a significant drawback to Irish-domiciled funds for any investor who comes from a country that taxes dividends.

BTW, OP, it seems that you may need to consult a tax expert locally that's versed in Lithuanian tax law.
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by TedSwippet »

Caduceus wrote:So, in the U.S. case, the broker provides a tax document and keeps records at the point of dividend distribution, but the broker in the Irish case can't provide a tax document because this is all fund-level accounting?
This. The broker creates a tax document showing what dividends they (the broker) paid and what tax they (the broker) withheld to the IRS. For US person investors they send a 1099 form, for NRAs they send a 1042-S. Any fund level tax withholding is internal to the fund, and not something the broker will concern themselves with.
Caduceus wrote:The 15% tax went somewhere, so it seems odd that OP cannot claim a credit against either Ireland or the U.S.
Credit for these in their home country? Vanguard supplies foreign tax credit information for its US funds and ETFs, usable by US investors, but I've never found the same information for non-US funds.
Caduceus wrote:We have had quite a few threads on Ireland-domiciled funds and this is the first time I recall anyone bringing up the possibility that the cumulative dividend tax leakage from the Irish fund would be greater than the U.S. equivalent. If the above is true, it seems a significant drawback to Irish-domiciled funds for any investor who comes from a country that taxes dividends.
It is not that clear cut.

Suppose a country taxes dividends at 15% but has no US tax treaty. Holding the US domiciled ETF means losing 30% of dividends to the US. Holding the Irish domiciled one means losing 15% maximum in internal ETF tax, and then 15% of the remainder in local tax, for a total 27.75%. A slim advantage, but still an advantage, and the lower the local tax rate, the bigger the advantage. And this is worst case, on ETFs that hold US stocks. Where an ETF contains no US stocks one would still face 30% US tax on dividends on the US domiciled ETF, but potentially 0% in internal ETF tax on the Irish domiciled one. That's an even bigger advantage here for Irish domiciled ETFs.

For non-tax treaty countries then, Irish domiciled ETFs are usually the better bet. Local tax rates and regulations can change that calculus, but most non-treaty countries probably have tax rates that are lower than US rate (often this would be why they don't have tax treaties; they just don't need them as much).

For tax treaty countries, the situation is more nuanced, and here you have to look more closely at the precise local tax rates, rules regarding foreign tax credits, and so on. For example, it is actually better for UK investors who want exposure to the S&P 500 in their retirement savings to hold US rather than Irish ETFs. The US/UK tax treaty specifies 15% US dividend tax in general, but 0% specifically for pensions. Holding the Irish ETF on the LSE here means losing 15% of dividends in internal ETF tax to the US, not reclaimable. In practice most UK investors don't bother with this, because the cost of accessing foreign markets in a pension can negate the advantage -- higher charges, forex fees, and so on.
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BeBH65
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by BeBH65 »

Hello Cadecues and all,
Caduceus wrote:Interesting conversation.
in supplement to the info provided by ted Swippet. Let me add info on my situation: Belgian Investor, investing via Belgian Broker
Other countries, other situations will be different.


I still don't understand why the Lithuanian tax treatment of an Irish-domiciled fund would be different from a U.S. domiciled one.
I understand the tax is paid at the fund level for an Ireland-domiciled ETF, but is the tax reporting completely opaque in that regard? Yes fully opaque, I have no clue how much taxes my Irish Domiciled funds pay to the US, the UK, Japan, Australia and all other countries of the world. The yearly fund report possibly mentions it but I do not have the courage to look into that.So here's a question for Galeno or others who may have experience investing in Irish-domiciled funds. What kind of tax document do you get with Irish-domiciled ETFs and does it show 0% tax paid? I do not get any document from iShares or VanguardThe U.S. 1099 shows a 15% tax withheld at source; is there no equivalent with the Irish case? Or is Ted Swippet saying that even if the fund breaks down and declares the tax paid at the fund level, OP still cannot claim it as a credit or deduction against Lithuanian taxation because it was paid by the "fund" and not by the investor? So, in the U.S. case, the broker provides a tax document and keeps records at the point of dividend distribution, but the broker in the Irish case can't provide a tax document because this is all fund-level accounting? My broker calculates my Belgian taxes for me on every transaction and withholds them as needed; transaction tax, dividend tax, and capital gains tax (for fixed income funds). - this makes abstraction of any internal taxes the fund paid, one of the reason I hold accumulating:capitalising version for my equity funds.

The 15% tax went somewhere, so it seems odd that OP cannot claim a credit against either Ireland or the U.S.

We have had quite a few threads on Ireland-domiciled funds and this is the first time I recall anyone bringing up the possibility that the cumulative dividend tax leakage from the Irish fund would be greater than the U.S. equivalent. If the above is true, it seems a significant drawback to Irish-domiciled funds for any investor who comes from a country that taxes dividends.
Please have a look a the descriptions and calculations that are described on the "investing from Netherlands" page

BTW, OP, it seems that you may need to consult a tax expert locally that's versed in Lithuanian tax law.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
Topic Author
arturaz
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

TedSwippet wrote:
galeno wrote:Go with the Ireland domiciled ETFs. It's a "no-brainer".
It might actually not be that clear-cut, at least from the dividend tax leakage angle.

From earlier postings it seems that Lithuanian tax on dividends is (a flat?) 15%. So if the OP holds US domiciled ETFs they pay 15% treaty rate to the US in dividend tax, and if Lithuania gives a credit for the full 15% then there is no more to pay. In this case there is a win for dividends from any US stocks in an ETF, and (probably) a wash on dividends from non-US stocks. Remember that the OP won't get a Lithuanian tax credit against taxes paid internally by the Ireland-domiciled ETFs, but will have to pay the Lithanian 15% on what remains after the ETF has paid taxes internally (probably, based on extrapolation of other countries' treatments here; no real idea on actual Lithuanian tax specifics!).

The US estate tax is of course the remaining man-eater. Whether that is a bother depends on how much the OP dislikes the thought of their heirs and relations sitting at a funeral and cursing the memory of their dear-departed for having made an incredibly expensive yet easily avoided mistake.
So to summarize this incredibly interesting and useful conversation:

- For funds holding only US stocks/bonds AND having a tax treaty: it's a no brainer (disregarding estate tax) to use US domiciled funds. You only pay tax treaty rate and avoid your double taxation.
- For funds holding non-US investments - there's no clear winner, as different country - US or random country - Ireland tax rates start applying. Add that with different TERs and broker fees and you have yourself a complicated relationship.

I'm thinking of investing to US only with my first run at this and having a small amount of money invested into both non-US US domiciled and non-US Ireland domiciled funds and to see what happens within a year.

I'll make sure to post an update here :)
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arturaz
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

BeBH65 wrote:Hello Arturaz,

The situation of LTU seems similar to the one of the netherlands. On the wiki page Investing_from_the_Netherlands#Domicile_of_funds there is a reflection which kind of funds should be be US domiciled, and which ones not.

Maybe some of this also applies to you.

Regards,
Thanks for the link! It surely seems that Netherlands and Lithuania situation is pretty similar.

To clarify for others - Lithuania currently has:
TedSwippet
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by TedSwippet »

arturaz wrote:- For funds holding only US stocks/bonds AND having a tax treaty: it's a no brainer (disregarding estate tax) to use US domiciled funds. You only pay tax treaty rate and avoid your double taxation.
Too simplistic. It might be better to use US domiciled funds (although I would not dismiss the confiscatory US estate tax even half as readily as you seem to). But it might not even still.

For example, the treaty rate on US dividends for the Philippines is 25%, so here the Irish domiciled fund is still a win. There are several countries with tax treaties with the US where the treaty rate above the 15% of the US/Ireland treaty rate.

Or take the UK, where returns (outside of a pension or other tax shelter) from 'offshore' funds can be taxed by the UK much more heavily than those from 'onshore' and EU funds. This differential treatment in local tax can turn the US domiciled version into a loser.

And not all countries allow full foreign tax credits for US taxes withheld and paid. And those that do may 'expire' the foreign tax credit if not used within a certain period. And so on.
arturaz wrote:- For funds holding non-US investments - there's no clear winner, as different country - US or random country - Ireland tax rates start applying. Add that with different TERs and broker fees and you have yourself a complicated relationship.
No, there is often a clear winner, and it is Ireland ETFs. Ireland does not tax dividends paid to non-Irish investors, so Ireland tax rates do not apply.

Imagine an ETF that holds only Singaporean stocks, and imagine that Singapore does not tax payments of dividends from Singaporean stocks (no idea if any such thing exists -- I'm just making this up for illustrative purposes), so that an ETF holding Singaporean stocks does not pay any Singaporean withholding tax internally on dividends. Now imagine that there are two versions of this ETF, one domiciled in the US, the other in Ireland. If you hold the US domiciled one you lose 15% (typical treaty rate) or 30% (non-treaty rate) of dividends to US tax, purely because the fund is located in the US. If you hold the Ireland domiciled one you lose nothing to tax.

So in the case of non-US investments, the Ireland domiciled fund is almost always the win. If it has a slightly higher TER the much lower tax drag generally more than compensates. And again, no entanglements with US estate tax, an issue that NRAs underestimate at their peril.
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arturaz
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

TedSwippet wrote:
arturaz wrote:- For funds holding only US stocks/bonds AND having a tax treaty: it's a no brainer (disregarding estate tax) to use US domiciled funds. You only pay tax treaty rate and avoid your double taxation.
Too simplistic. It might be better to use US domiciled funds (although I would not dismiss the confiscatory US estate tax even half as readily as you seem to). But it might not even still.

For example, the treaty rate on US dividends for the Philippines is 25%, so here the Irish domiciled fund is still a win. There are several countries with tax treaties with the US where the treaty rate above the 15% of the US/Ireland treaty rate.

Or take the UK, where returns (outside of a pension or other tax shelter) from 'offshore' funds can be taxed by the UK much more heavily than those from 'onshore' and EU funds. This differential treatment in local tax can turn the US domiciled version into a loser.

And not all countries allow full foreign tax credits for US taxes withheld and paid. And those that do may 'expire' the foreign tax credit if not used within a certain period. And so on.
Fair enough. It's a no brainer for Lithuanians in this case.
TedSwippet wrote:No, there is often a clear winner, and it is Ireland ETFs. Ireland does not tax dividends paid to non-Irish investors, so Ireland tax rates do not apply.

Imagine an ETF that holds only Singaporean stocks, and imagine that Singapore does not tax payments of dividends from Singaporean stocks (no idea if any such thing exists -- I'm just making this up for illustrative purposes), so that an ETF holding Singaporean stocks does not pay any Singaporean withholding tax internally on dividends. Now imagine that there are two versions of this ETF, one domiciled in the US, the other in Ireland. If you hold the US domiciled one you lose 15% (typical treaty rate) or 30% (non-treaty rate) of dividends to US tax, purely because the fund is located in the US. If you hold the Ireland domiciled one you lose nothing to tax.
Except that is not true, at least in my case.

In US version you lose 15%, but don't pay that at home. In IRL version you lose 0% in IRL, but pay 15% at home. At the end it's the same 15%, but IRL version has higher TER. To choose you need to answer - how much is (internal fund withholding of incoming funds * TER)? That is the deciding factor, not 2nd level taxes.
TedSwippet wrote:So in the case of non-US investments, the Ireland domiciled fund is almost always the win. If it has a slightly higher TER the much lower tax drag generally more than compensates. And again, no entanglements with US estate tax, an issue that NRAs underestimate at their peril.
If you don't have life insurance currently, my logic is that estate tax shouldn't worry you. Even if you worry about estate tax, sometimes (at least in my case, I'm 29), it's still CHEAPER to have life insurance to cover estate tax than to have IRL domiciled fund and pay taxes at home.
TedSwippet
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by TedSwippet »

arturaz wrote:In US version you lose 15%, but don't pay that at home. In IRL version you lose 0% in IRL, but pay 15% at home. At the end it's the same 15%, but IRL version has higher TER. To choose you need to answer - how much is (internal fund withholding of incoming funds * TER)? That is the deciding factor, not 2nd level taxes.
Yes, apparently for you. But only because the Lithuanian rate is 15%. You cannot extrapolate your situation to every other country.

Also worth noting that Ireland domiciled ETFs do not always have the higher TER. For example, VGK and VEUR have identical 0.12% TERs. But the latter comes with none of the appalling US estate tax baggage that is embedded in the former.
arturaz wrote:Even if you worry about estate tax, sometimes (at least in my case, I'm 29), it's still CHEAPER to have life insurance to cover estate tax than to have IRL domiciled fund and pay taxes at home.
Perhaps (though not all deaths are from old age!). Personally I have a philosophical and visceral dislike of the US's application of its estate taxes to folk who may have never even visited the US, have only the most tangential connection to US investments (such as a US domiciled ETF holding non-US stocks), and who certainly will not receive any benefits for the US tax they will be strong-armed into paying. Maybe that's just me...
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arturaz
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

TedSwippet wrote:Yes, apparently for you. But only because the Lithuanian rate is 15%. You cannot extrapolate your situation to every other country.
It was not my intention.
TedSwippet wrote:Also worth noting that Ireland domiciled ETFs do not always have the higher TER. For example, VGK and VEUR have identical 0.12% TERs. But the latter comes with none of the appalling US estate tax baggage that is embedded in the former.
That's an interesting fact. I had this idea that Irish ETFs were always more expensive. Will take a closer look at them then!
TedSwippet wrote:Perhaps (though not all deaths are from old age!). Personally I have a philosophical and visceral dislike of the US's application of its estate taxes to folk who may have never even visited the US, have only the most tangential connection to US investments (such as a US domiciled ETF holding non-US stocks), and who certainly will not receive any benefits for the US tax they will be strong-armed into paying. Maybe that's just me...
I think no one has warm feelings for taxes (especially in foreign countries), but at the end in the case that Irish ETFs are more expensive for you, you are paying life insurance one way or another - either by having your ETFs in IRL instead of USA, or having a regular health insurance in your home country. Or you can ignore your heirs (or think that the chance of your death is so low it's worth the risk) and have no insurance and ETFs in US :)

Thank you for your deep input in this thread!

Do you mind me asking from what country you are? Perhaps one day I will be traveling and I could buy you a beer or some tea and have a lovely chat :)
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in_reality
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by in_reality »

arturaz wrote:
In US version you lose 15%, but don't pay that at home. In IRL version you lose 0% in IRL, but pay 15% at home. At the end it's the same 15%, but IRL version has higher TER. To choose you need to answer - how much is (internal fund withholding of incoming funds * TER)? That is the deciding factor, not 2nd level taxes.

If you don't have life insurance currently, my logic is that estate tax shouldn't worry you. Even if you worry about estate tax, sometimes (at least in my case, I'm 29), it's still CHEAPER to have life insurance to cover estate tax than to have IRL domiciled fund and pay taxes at home.
OK to summarize then for you in Lithuania, because your home rate is 15% and you have a tax treaty of 15%, the US funds look a little more attractive because you'll be paying 15% either way [if you pay to the US for US funds, or pay your home] but the US funds often have a lower ER and issue statements with how much foreign taxes were paid so you can try to reclaim them. Is that what you are saying?

And you think the difference in ER and saved taxes will more than pay for life insurance which can cover the US estate tax.

Three questions:

1) Is the tax rate for IRL on your original spreadsheet wrong? Why was the IRL tax rate 27.75%.

2) What about life insurer risk? There is some. It's mind boggling to try to estimate but with insurers facing super low returns on safe investments, how are they going to adjust? [of course it can't be predicted and neither can future tax rates but ...]

3) How do you know how much insurance you need? Are you going to take out an amount that will cover 40% of half your expected portfolio value in 35-40 years (point at which your portfolio will be highest)? How did you arrive at those figures in the spreadsheet? Are you calculating premiums to get the max value $376,000, but then just adding up how much you've paid until the point you've died.

Do you really think an insurance company can invest your premiums in safe assets and get returns sufficient to cover an amount that you've arrived at by investing in higher paying stocks?

I'd view it as actually as increasing my fixed income %. Isn't that what the life insurance company will use? They will have to price their premiums to reflect that.
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arturaz
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

in_reality wrote:OK to summarize then for you in Lithuania, because your home rate is 15% and you have a tax treaty of 15%, the US funds look a little more attractive because you'll be paying 15% either way [if you pay to the US for US funds, or pay your home] but the US funds often have a lower ER and issue statements with how much foreign taxes were paid so you can try to reclaim them. Is that what you are saying?
Exactly.
in_reality wrote:1) Is the tax rate for IRL on your original spreadsheet wrong? Why was the IRL tax rate 27.75%.
It is based on https://www.bogleheads.org/wiki/Nonresi ... P_500_ETFs.

Vanguard S&P 500 UCITS ETF (VUSA):

L1TW = 15%, as it is Ireland-domiciled, holding US securities
L2TW = 0%, no Irish tax withholding on UCITS funds
L3TW = 15%, Lithuanian income tax, because no Irish tax was paid

(100% - 15%) - 15% = 72.25%, which equates to 27.75% tax rate. It's a rough estimation, but if you add this to TWR formula, you get TWRs of:

For S&P 500 USA:
us with treaty = twr(0.02, 0, 0.15, 0.05/100) = 0.29%
irl single tax = twr(0.02, 0.15, 0.15, 0.07/100) = 0.54%

0.54/0.29 = 1,86206896551724137931 which is almost double TWR.
in_reality wrote:2) What about life insurer risk? There is some. It's mind boggling to try to estimate but with insurers facing super low returns on safe investments, how are they going to adjust? [of course it can't be predicted and neither can future tax rates but ...]
Risk always exists. In my opinion - life insurance is a pretty easy way to make money. My bet is that insurance companies rake in more money from premiums than they pay out due deaths. On the other hand, I'm not really considering insurance seriously.
in_reality wrote:3) How do you know how much insurance you need? Are you going to take out an amount that will cover 40% of half your expected portfolio value in 35-40 years (point at which your portfolio will be highest)? How did you arrive at those figures in the spreadsheet? Are you calculating premiums to get the max value $376,000, but then just adding up how much you've paid until the point you've died.
Insurance amount is 40% of your US-domiciled funds/cash that go over $60,000. You just need to find a provider that will let you adjust that on the go. I think adjusting every 3 months would be sufficient.
in_reality wrote:Do you really think an insurance company can invest your premiums in safe assets and get returns sufficient to cover an amount that you've arrived at by investing in higher paying stocks?
I don't think they make their money from investing. In fact I find that most insurance companies offering investing insurance are full of shit.
in_reality wrote:I'd view it as actually as increasing my fixed income %. Isn't that what the life insurance company will use? They will have to price their premiums to reflect that.
Sorry, I didn't understand that.
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in_reality
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by in_reality »

arturaz wrote:
in_reality wrote:OK to summarize then for you in Lithuania, because your home rate is 15% and you have a tax treaty of 15%, the US funds look a little more attractive because you'll be paying 15% either way [if you pay to the US for US funds, or pay your home] but the US funds often have a lower ER and issue statements with how much foreign taxes were paid so you can try to reclaim them. Is that what you are saying?
Exactly.
in_reality wrote:1) Is the tax rate for IRL on your original spreadsheet wrong? Why was the IRL tax rate 27.75%.
It is based on https://www.bogleheads.org/wiki/Nonresi ... P_500_ETFs.

Vanguard S&P 500 UCITS ETF (VUSA):

L1TW = 15%, as it is Ireland-domiciled, holding US securities
L2TW = 0%, no Irish tax withholding on UCITS funds
L3TW = 15%, Lithuanian income tax, because no Irish tax was paid

(100% - 15%) - 15% = 72.25%, which equates to 27.75% tax rate. It's a rough estimation, but if you add this to TWR formula, you get TWRs of:

For S&P 500 USA:
us with treaty = twr(0.02, 0, 0.15, 0.05/100) = 0.29%
irl single tax = twr(0.02, 0.15, 0.15, 0.07/100) = 0.54%

0.54/0.29 = 1,86206896551724137931 which is almost double TWR.
I see a contradiction here ... between the items in bold.

If you can claim foreign taxes paid as a credit on your Lithuanian taxes, why can't you claim the L1TW withholdings? It's taxes paid to the US gov isn't it? Or does it go to Ireland? It's a foreign tax in any case isn't it?

Sorry if I don't understand this. I am trying ...
in_reality wrote:2) What about life insurer risk? There is some. It's mind boggling to try to estimate but with insurers facing super low returns on safe investments, how are they going to adjust? [of course it can't be predicted and neither can future tax rates but ...]
arturaz wrote:Risk always exists. In my opinion - life insurance is a pretty easy way to make money. My bet is that insurance companies rake in more money from premiums than they pay out due deaths. On the other hand, I'm not really considering insurance seriously.
I can tell you aren't considering insurance.

You are thinking about term insurance. People insure up to age 65 for instance, to protect families against loss of income if the breadwinner dies. Only 1/1000 (or whatever) die though. That is not the type of policy you'd need. It's cheaper but wouldn't do the job.

You'd need whole life insurance that pays a guaranteed value at death. So they have to make sure that your premiums, your own premiums, work out to be more than that value. They will likely be investing your premiums in low return safe fixed income.
arturaz wrote: Insurance amount is 40% of your US-domiciled funds/cash that go over $60,000. You just need to find a provider that will let you adjust that on the go. I think adjusting every 3 months would be sufficient.
Sure but your premiums are going to spike. If you are age 60 and your $1m portfolio jumped 10% this year, you have to have insurance for $40,000 more (40% of the increase). They don't know when you will die and how long you will be paying premiums them so they'd want to be sure to get that $40k before you are likely to go. This means if you go soon, your estate gets a good deal and if you go late, they do. But if you stop paying, the policy is over and all your premiums are gone. And some insurers recently have been raising the rates after years of payment or reducing the benefit because the companies are struggling in the current rate environment (and paid handsome dividends to stockholders too).

I have real doubts about using life insurance to cover the 40%. If it were feasible, why wouldn't people just choose a life insurance policy in the first place and not invest? They wouldn't have to worry about market fluctuations ....

Stocks have a higher return and if you think the insurance company can use lower return safe investments to outperform those stocks for less money than you put into stocks, well I say have another look at the math.
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arturaz
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by arturaz »

in_reality wrote: I see a contradiction here ... between the items in bold.

If you can claim foreign taxes paid as a credit on your Lithuanian taxes, why can't you claim the L1TW withholdings? It's taxes paid to the US gov isn't it? Or does it go to Ireland? It's a foreign tax in any case isn't it?

Sorry if I don't understand this. I am trying ...
I believe I can't take credit on L1TW withholdings, because I'm not an affiliated party there. L1 happens between the company which stock is owned and the fund. I'm not a participant in that transaction, therefore I can't get taxes back.
in_reality wrote:I can tell you aren't considering insurance.

You are thinking about term insurance. People insure up to age 65 for instance, to protect families against loss of income if the breadwinner dies. Only 1/1000 (or whatever) die though. That is not the type of policy you'd need. It's cheaper but wouldn't do the job.

You'd need whole life insurance that pays a guaranteed value at death. So they have to make sure that your premiums, your own premiums, work out to be more than that value. They will likely be investing your premiums in low return safe fixed income.
Nope, I've specificaly went to Swedbank and asked about the terms. Their page (Translated).

Also premium increases every year, as you get older. I guess that's how they mitigate the risk.
in_reality wrote:Sure but your premiums are going to spike. If you are age 60 and your $1m portfolio jumped 10% this year, you have to have insurance for $40,000 more (40% of the increase).
To be fair, at age 60 and with $1m I'd be long gone in Irish domiciled funds :) As you get older it makes more sense to move to IRL funds. I'm 29 now, I think I can pull USA funds until I'm 40.
in_reality wrote:I have real doubts about using life insurance to cover the 40%. If it were feasible, why wouldn't people just choose a life insurance policy in the first place and not invest? They wouldn't have to worry about market fluctuations ....
Because you probably want to have money while you're alive as well? :)
in_reality wrote:Stocks have a higher return and if you think the insurance company can use lower return safe investments to outperform those stocks for less money than you put into stocks, well I say have another look at the math.
Again, not sure where I said that.
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by in_reality »

Aah so you are going to use the cheaper term insurance. Ok... I thought you were going to stay in US funds until the end and so would have to pay the higher whole premiums for a guaranteed payout.
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by Caduceus »

Is it the case with the Irish-domiciled fund that all investors, regardless of their residence, see a 15% dividend withholding rate (for U.S. assets) at the fund level? So a Lithuanian, Australian, German, Chilean investor all receive the exact same nominal amount of dividends per share? So even if Chile had a tax treaty with the U.S. in which the withholding rate was 0%, it wouldn't matter, and the Chilean investor would receive his dividends less 15% if he invested in U.S. assets through the Irish fund?
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galeno
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by galeno »

All USA-NRA investors using Ireland domiciled ETFs will pay level 1 dividend taxes as follows: 15% for USA domiciled equities. 7.5% for non-USA developed equities. And 11.3% on EM equities.

Even the Chilean in your example.

USA-domiciled investors are normally not allowed to use Ireland domiciled assets.
Caduceus wrote:Is it the case with the Irish-domiciled fund that all investors, regardless of their residence, see a 15% dividend withholding rate (for U.S. assets) at the fund level? So a Lithuanian, Australian, German, Chilean investor all receive the exact same nominal amount of dividends per share? So even if Chile had a tax treaty with the U.S. in which the withholding rate was 0%, it wouldn't matter, and the Chilean investor would receive his dividends less 15% if he invested in U.S. assets through the Irish fund?
KISS & STC.
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by TedSwippet »

...and just to be geeky, the countries that have treaty rates for US dividends that are lower than the 15% rate for Ireland are: Bulgaria, China, Japan, Mexico, Romania and Russia. All at 10%. These countries clearly employ good treaty negotiators, and their residents may do better in cashflow terms to use US rather than Ireland domiciled ETFs (excepting, of course, the execrable US estate tax; of the aforementioned countries only Japan gets a pass on that too).

Chile has no tax treaties whatsoever with the US. (Apparently one has been "pending in the senate" since Feb 2010, so copious senatorial heel-dragging there by the look of things.)
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by galeno »

That would be for USA-domiciled equity ETFs. For non-USA domiciled equities, one would have to pay that 10% USA-NRA treaty dividend tax on top of the 7.5% (non-USA developed) and 11.3% (EM) L1 dividend taxes.

Using the USA Schwab ETFs. SEC yields are SCHF = 2.88% and SCHE = 2.02%. Thus the TR (tax ratio) would be 0.29% and 0.20% respectively.

Conclusion. If you're lucky enough to be in one of those 10% USA-NRAs it's slightly cheaper (0.13%) to hold USA-domiciled equities in a USA domiciled equity ETF. See VOO vs VUSA. But NOT for non-USA domiciled equities.

Bottom line conclusion. If you're not "USA person" it's better to use Ireland domiciled ETFs always. Since "KISS is bliss" the best equity ETF for USA-NRAs = VWRD or VWRL.


TedSwippet wrote:...and just to be geeky, the countries that have treaty rates for US dividends that are lower than the 15% rate for Ireland are: Bulgaria, China, Japan, Mexico, Romania and Russia. All at 10%. These countries clearly employ good treaty negotiators, and their residents may do better in cashflow terms to use US rather than Ireland domiciled ETFs (excepting, of course, the execrable US estate tax; of the aforementioned countries only Japan gets a pass on that too).

Chile has no tax treaties whatsoever with the US. (Apparently one has been "pending in the senate" since Feb 2010, so copious senatorial heel-dragging there by the look of things.)
KISS & STC.
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by TedSwippet »

galeno wrote:That would be for USA-domiciled equity ETFs.
Indeed, and I should have added that qualification.

Thanks for the note -- it just goes to show how nuanced and subtle this entire area can be. (Excepting the US estate tax for NRAs of course; there's nothing at all subtle about that sledgehammer.)
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by silverex »

I would also add that accumulating/capitalizing Irish ETFs are a big advantage against US-domiciled funds, all of which have to be distributing.
Assuming your country only taxes distributed dividends, that’a a big plus. Not sure whether Lithuania is one of them.
Phil_1976
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by Phil_1976 »

Hi,
My tax situation is almost similar to discussed in this topic so I decided to ask questions here.

I would like to make "buy and hold" investment (of a lump sum in USD, then invest periodically) to a number of diversified Ireland (non-US) ETFs via Interactive Brokers US.

Questions:

1.Is there a list of ETFs where I can find ETFs meeting the following criteria for shares, for corporate bonds?
- Accumulating (as I would need cash not sooner than in 10 years).
- Low TER
- Physical replication
- liquid, low bid-ask spread
- USD denominated to avoid currency conversion of a lump sum.

As for shares, I would like to find accumulating equivalent of VWRD. I found only VUSD and SWDA.
Are there any accumulating Ireland (non-US) ETFs for US/EU corporate bonds?

2 Would you recommend also look at EUR denominated ETFs?
I possibly can convert USD->EUR depending on cost of FOREX via Interactive Brokers US, not tried yet.

2. Do I understand correctly that bond ETFs receive interest but pay dividends (not interest), so for bond ETF the tax is calculated at a treaty rate for dividends (not interest)?

Thanks!
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BeBH65
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by BeBH65 »

Phil_1976 wrote: Sun Jan 21, 2018 6:03 am Hi,
My tax situation is almost similar to discussed in this topic so I decided to ask questions here.

I would like to make "buy and hold" investment (of a lump sum in USD, then invest periodically) to a number of diversified Ireland (non-US) ETFs via Interactive Brokers US.

Questions:

1.Is there a list of ETFs where I can find ETFs meeting the following criteria for shares, for corporate bonds?
- Accumulating (as I would need cash not sooner than in 10 years).
- Low TER
- Physical replication
- liquid, low bid-ask spread
- USD denominated to avoid currency conversion of a lump sum.

As for shares, I would like to find accumulating equivalent of VWRD. I found only VUSD and SWDA.
Are there any accumulating Ireland (non-US) ETFs for US/EU corporate bonds?

2 Would you recommend also look at EUR denominated ETFs?
I possibly can convert USD->EUR depending on cost of FOREX via Interactive Brokers US, not tried yet.

2. Do I understand correctly that bond ETFs receive interest but pay dividends (not interest), so for bond ETF the tax is calculated at a treaty rate for dividends (not interest)?

Thanks!
1.a. Try your searches on justetf.com
1.b. Does not exist
1.c. Have a look at Ishares.com. If i remember right they added accumulating bond funds.
Please post back what you find.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
selters
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by selters »

galeno wrote: Sun Sep 04, 2016 9:54 am Bottom line conclusion. If you're not "USA person" it's better to use Ireland domiciled ETFs always. Since "KISS is bliss" the best equity ETF for USA-NRAs = VWRD or VWRL.
If you want a one fund solution, then you are probably right, but why not do VTI plus three cheap Ireland domiciled ETFs for Europe, Asia Developed and Emerging Markets?
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by Phil_1976 »

BeBH65 wrote: Sun Jan 21, 2018 8:31 am
Phil_1976 wrote: Sun Jan 21, 2018 6:03 am Hi,
My tax situation is almost similar to discussed in this topic so I decided to ask questions here.

I would like to make "buy and hold" investment (of a lump sum in USD, then invest periodically) to a number of diversified Ireland (non-US) ETFs via Interactive Brokers US.
...
1.a. Try your searches on justetf.com
1.b. Does not exist
1.c. Have a look at Ishares.com. If i remember right they added accumulating bond funds.
Please post back what you find.
So the equity part of my portfolio may be:
Ok 50% - VTI or similar for US - below 60kUSD to avoid US death tax.

Then based on what I found on justetf.com:
25% - EU, UK:
- CSX5 TER=0,10% Strategy of iShares Core EURO STOXX 50 UCITS ETF (Acc) The EURO STOXX® 50 (total return) index tracks the 50 largest companies in the Eurozone.
- CUKX TER=0,07% iShares FTSE 100 UCITS ETF (Acc) The FTSE 100 (total return) index tracks the 100 largest UK stocks.

25% - EM:
- EMIM TER=0,25% iShares Core MSCI EM IMI UCITS ETF USD (Acc) The MSCI Emerging Markets IMI index tracks stocks from emerging markets world wide. It covers over 2.650 securities across large, mid and small cap size segments.
- Or XMME (something new) TER=0,2% db x-trackers MSCI Emerging Markets UCITS ETF (DR) but justetf.com tells it is accumulating 1C The MSCI Emerging Markets index tracks stocks from emerging markets world wide (end of day).

Never heard of any of these indexes. Not sure how to buy them via Interactive Brokers US for USD.
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BeBH65
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Re: Taxation for resident of Lithuania: US domiciled vs Irish domiciled ETFs - LTU has tax treaty with both

Post by BeBH65 »

For Europe you can go for IMAE - iShares MSCI Europe UCITS ETF EUR (Acc) - 444 stocks from all countries of Europe.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles
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