Ireland and Louxemburg advantages [Brazil]

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chd1985
Posts: 12
Joined: Sat Feb 29, 2020 10:40 am

Ireland and Louxemburg advantages [Brazil]

Post by chd1985 »

Hello everyone, my 1st message here.

I already have some Accumulating ETFs from Ireland and Luxembourg.

I live in Brazil and government charges 27,5% on dividends and only 15% on capital gains, so it's obvious for me accumulating ETF is my best choice.

I read in another topic over here another user saying "I use ireland ETFs because of 15% taxes on dividends". So I wondered if there is something I don't know about these ETFs.

1) Is there any difference on tax treatment between Ireland and Luxembourg Accumulating ETFs? Is one of them better than the other?

2) Accumulating ETFs pays dividend tax to the government when they receive it (and before they reinvest it) ?

3) Is there something else about tax treatment I have to pay attention when deciding which ETF do I choose ? (anything)

Thanks a Lot.
CHD
Boglehead Brazil.
TedSwippet
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Location: UK

Re: Ireland and Louxemburg advantages [Brazil]

Post by TedSwippet »

Welcome.
chd1985 wrote: Sat Feb 29, 2020 10:56 am 1) Is there any difference on tax treatment between Ireland and Luxembourg Accumulating ETFs? Is one of them better than the other?
Our understanding is that while both countries have a 15% US tax treaty rate, ETFs domiciled in Luxembourg cannot use that treaty rate, but ETFs domiciled in Ireland can. This means that Ireland is the better country of ETF domicile where the ETF holds US stocks. If an ETF holds only non-US stocks, either country of domicile should be fine.
chd1985 wrote: Sat Feb 29, 2020 10:56 am 2) Accumulating ETFs pays dividend tax to the government when they receive it (and before they reinvest it) ?
Broadly speaking, yes. In the case of the US, the market operator holding US stocks on behalf of the ETF structure will deduct US tax from dividends paid by those stocks, so that only the post-tax part of the dividend reaches the ETF structure. The same probably holds for other countries.
chd1985 wrote: Sat Feb 29, 2020 10:56 am 3) Is there something else about tax treatment I have to pay attention when deciding which ETF do I choose ? (anything)
When using Ireland and any other non-US domiciled ETFs, all US (and other country) tax issues are internal to the ETF, and the ETF manager handles those for you. In neither case would you have to pay further tax to the ETF domicile country, so no Ireland or Luxembourg tax difficulties to worry about.

The other advantage of using non-US domiciled ETFs is that they insulate you completely from rapacious US estate taxes. For non-US persons in countries without US estate tax treaties (Brazil has no US tax treaties of any type), the US can apply a 26-40% estate tax on holdings above just $60,000, should the worst happen. This would include US domiciled ETFs. By avoiding US domiciled ETFs, you also avoid any risk of this outrageous tax.

You can find more details on all of this in the wiki:

Outline of Non-US domiciles - Bogleheads
Topic Author
chd1985
Posts: 12
Joined: Sat Feb 29, 2020 10:40 am

Re: Ireland and Louxemburg advantages [Brazil]

Post by chd1985 »

Awesome help.
Thanks a lot.

I still have 2 doubts:

1) I didn't understand the part when you say both countries have 15% US treaty but Luxembourg cannot use it.
Why Luxembourg cannot use this treaty?

2) Even if I buy an Ireland ETF from an US exchange, I am not charged on us estate tax?

Thanks again
CHD
Brazil
TedSwippet
Posts: 3243
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Ireland and Louxemburg advantages [Brazil]

Post by TedSwippet »

chd1985 wrote: Sat Feb 29, 2020 5:13 pm1) I didn't understand the part when you say both countries have 15% US treaty but Luxembourg cannot use it. Why Luxembourg cannot use this treaty?
I don't think it has ever been fully explained. However, this 30% rate is regularly quoted in papers and articles, for example this study from KPMG (see the entry for US tax on dividends paid to Luxembourg SICAV structures, on page 148):

https://assets.kpmg/content/dam/kpmg/lu ... y-2019.pdf

As for why this 30% rate applies, the following document is dense, but explains that the treaty does not apply to UCIs (that is, funds, ETFs, and so on) because of a 'Memorandum of Understanding' between Luxembourg and the US:

https://www.ey.com/Publication/vwLUAsse ... 20UCIs.pdf

I have not been able to uncover the precise 'Memorandum of Understanding' to which the above refers.
chd1985 wrote: Sat Feb 29, 2020 5:13 pm2) Even if I buy an Ireland ETF from an US exchange, I am not charged on us estate tax?
Right. If you hold an Ireland domiciled ETF you do not directly hold any US assets, and so the US's confiscatory estate tax cannot reach you.

If you use a US based broker, you should also be careful to avoid holding more than $60,000 in your account as cash. The US views a cash balance in a US broker as something on which it could levy its estate tax. You should have no problems if you use a non-US broker.
Topic Author
chd1985
Posts: 12
Joined: Sat Feb 29, 2020 10:40 am

Re: Ireland and Louxemburg advantages [Brazil]

Post by chd1985 »

I really appreciate your help.

Awesome informations.

Very few people in my country know these tax details, even tax specialist lawyers.

Thanks a lot.
CHD
Boglehead Brazil
international001
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Joined: Thu Feb 15, 2018 7:31 pm

Re: Ireland and Louxemburg advantages [Brazil]

Post by international001 »

Yes, thanks Ted again for your insights

Do they apply to funds as well as ETFs, I guess?

So this would mean that if you want to invest on an SP500 ETF, it's better to use one of the Vanguard ones (based in Ireland) that one of the Amundi ones (based on Luxemburg). Roughly, the performance improvement (discounting TER), would be 2% *0.15% (SP500 has about a 2% dividend yield)

For an Asia Pacific ETF, it would not matter, for a world ETF, it would be about 50% better the Vanguard one (SP500 is about 50% of the world capitalization)

Why would any fund/ETF (I see Amundi, Pictet, ishares) use Luxemburg?
TedSwippet
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Re: Ireland and Louxemburg advantages [Brazil]

Post by TedSwippet »

international001 wrote: Sun Mar 01, 2020 2:59 pm So this would mean that if you want to invest on an SP500 ETF, it's better to use one of the Vanguard ones (based in Ireland) that one of the Amundi ones (based on Luxemburg). Roughly, the performance improvement (discounting TER), would be 2% *0.15% (SP500 has about a 2% dividend yield).

For an Asia Pacific ETF, it would not matter, for a world ETF, it would be about 50% better the Vanguard one (SP500 is about 50% of the world capitalization)
Right. And right again.

Up to a point, we are assuming here that the tax drag from non-US stocks is the same for both Ireland and Luxembourg. This may or may not be true, but it is probably close. And for a global fund, where more than 50% of the holdings are US stocks, the large differential between 30% US tax on dividends in a Luxembourg domiciled ETF and 15% in an Ireland domiciled one would almost certainly overwhelm any small differences in non-US tax drag.
international001 wrote: Sun Mar 01, 2020 2:59 pm Why would any fund/ETF (I see Amundi, Pictet, ishares) use Luxemburg?
The investor's tax situation may be an important factor in choosing where to set up an ETF structure, but I suppose that it is not the only factor. Anglophone organisations would probably tend to prefer Ireland, Francophone ones Luxembourg.

Also, individual ETFs are usually sub-divisions of a much larger single corporation set up to hold most or all of a provider's ETF offerings. Suppose you are Amundi and you already have a Luxembourg corporation set up to hold the ETFs you have already issued, and you are fully familiar with the way Luxembourg operates these things. If you then decide to create a new all-world ETF, you would probably re-use that existing corporation, rather than set up a new one in Ireland, a country with which you are completely unfamiliar, and which doesn't speak your native language.
DJN
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Joined: Mon Nov 20, 2017 12:30 am

Re: Ireland and Louxemburg advantages [Brazil]

Post by DJN »

Hi,
one other consideration is that the choice of etfs / funds from Luxembourg is not as wide as for Ireland for the usual retail customer. A good deal of the Luxembourg based funds are bond funds of one sort or another and seem to be aimed at institutions.
Also check the expense ratios as these can be high for some of the bond funds.
I also notice that the French bank etfs tend to be domiciled in Luxembourg and these sometimes are not as transparent about their parent companies and their replication methods.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
international001
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Joined: Thu Feb 15, 2018 7:31 pm

Re: Ireland and Louxemburg advantages [Brazil]

Post by international001 »

Ok.. so if the retail investor is not in Ireland or Luxemburg, then I guess it's better to invest in an Ireland ETF

When I compare IE0032620787, LU0996179007 performance difference seems driven just by fees. Perhaps it will change in a few more years
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