Avoid the dividend tax on foreign investors [Hong Kong]

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swj05652
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Avoid the dividend tax on foreign investors [Hong Kong]

Post by swj05652 »

[Note: restarted thread. Check post dates before responding. - admin alex]

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

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

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

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

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

In addition, any advice for foreign investors are welcome! I am near 30, living at HK, and I plan to hold 20% of VWO, 60% of VTI and 20% of BND in the future. Thanks!
hlfo718
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by hlfo718 »

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

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

By the way, don't you want to diversify your international holdings by buying VXUS instead of just VWO?
sscritic
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by sscritic »

There are several posters from Hong Kong. Just give them time. They might be asleep now; it is 12:16 am.
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swj05652
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by swj05652 »

hlfo718 wrote:I don't believe there is a way to avoid. In the US we get an offsetting tax credit or deduction for the withholding if held in taxable account. If held in tax deferred account, we are all in the same boat of paying the tax.

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

By the way, don't you want to diversify your international holdings by buying VXUS instead of just VWO?
For US investor, there is no way to avoid, because there is a tax on capital gain. But as a Hong Kong investor, I only need to pay tax on dividends. That is the difference.

As for the bid ask spread, that is exactly the reason I choose VWO. Its spread is always very low. Almost always 1 cent. I have include this factor in my calculation: For 2000 shares, commission fee is $33, spread is $20. So buy and sell once costs me $106. While the tax on div will be about $300. Is my calculation correct?
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swj05652
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by swj05652 »

hlfo718 wrote:I don't believe there is a way to avoid. In the US we get an offsetting tax credit or deduction for the withholding if held in taxable account. If held in tax deferred account, we are all in the same boat of paying the tax.

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

By the way, don't you want to diversify your international holdings by buying VXUS instead of just VWO?
Sorry I accidentally click "Submit". I haven't finished my reply yet. Here is the remaining:

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

About the potential gain during that several transaction days. You are correct. There is a risk. I believe this will increase my risk while remain the expectation of revenue unchanged (according to the Random Walk Hypothesis). Basically, I will not lose money, but the fluctuation will be larger. One good thing is, VWO, as an index fund, will not go up and down as much as an individual stock in one day. So I think it is a good trade-off, take the risk for a few days, and save 0.2~0.3% money on each dividend.
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swj05652
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by swj05652 »

sscritic wrote:There are several posters from Hong Kong. Just give them time. They might be asleep now; it is 12:16 am.
I find many posters from Hong Kong haven't been active since 2009. Really hope that they will show up. I believe there must be someone who come up with similar idea before. May be this approach is feasible. Or they found some problem in this approach.

Actually, any non-US investor can come and discuss this, not just Hong Kong.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by hlfo718 »

How about sell VWO a day before ex and buy EEM for placeholder. But you have to make sure the two ex dates don't fall on the same date. You can then sell the EEM position, buy back VWO, and repeat the process next year. The bid/ask for both should be tight. iShares has another emerging markets etf with lower exp ratio but is not as liquid, IEMG.
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swj05652
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by swj05652 »

hlfo718 wrote:How about sell VWO a day before ex and buy EEM for placeholder. But you have to make sure the two ex dates don't fall on the same date. You can then sell the EEM position, buy back VWO, and repeat the process next year. The bid/ask for both should be tight. iShares has another emerging markets etf with lower exp ratio but is not as liquid, IEMG.
Thank you! If the ex date of EEM is before VWO then this can work. Better idea than mine.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by TedSwippet »

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

Vanguard UK has a small but usable selection of Irish domiciled ETFs that you might be able to use. Otherwise maybe Blackrock iShares? Probably others if you dig deeper.
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swj05652
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by swj05652 »

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

Vanguard UK has a small but usable selection of Irish domiciled ETFs that you might be able to use. Otherwise maybe Blackrock iShares? Probably others if you dig deeper.
I have searched for ETFs domiciled in other countries. As an investor in HK, I can not buy funds in Vanguard UK. Blackrock & iShares offer index funds and ETFs in HK. But sadly, their ER are extremely high (more than 1%). Even I take the 30% dividend tax, I will be better off than buying these funds. Moreover, these funds have much lower volume, higher bid/ask spread, etc.

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

Post by TedSwippet »

swj05652 wrote:As an investor in HK, I can not buy funds in Vanguard UK.
Sure, but can you not buy ETFs listed on EU exchanges? I'd have though so, if you can buy ones on US exchanges.

There's a list of Vanguard UK ETFs here. A TER of 0.09% on the S&P 500 fund and no hassles with US taxes seems like a good deal to me. The emerging markets and possibly all-world may also be worth a look. Less so the UK gilts fund, since you're not in the UK.
swj05652 wrote:About the estate tax, I know this clearly. But I am under 30! So I really feel this has nothing to do with me ... I don't have to worry about that now.
Not everyone dies of old age.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by LadyGeek »

swj05652 wrote:Sorry I accidentally click "Submit". I haven't finished my reply yet.
Welcome! In this forum, you are permitted to edit your posts. Just click on the "Edit" button in the top right corner of each post.

Also, I PM'd someone who may be able to help you.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by swj05652 »

TedSwippet wrote:
swj05652 wrote:As an investor in HK, I can not buy funds in Vanguard UK.
Sure, but can you not buy ETFs listed on EU exchanges? I'd have though so, if you can buy ones on US exchanges.

There's a list of Vanguard UK ETFs here. A TER of 0.09% on the S&P 500 fund and no hassles with US taxes seems like a good deal to me. The emerging markets and possibly all-world may also be worth a look. Less so the UK gilts fund, since you're not in the UK.
swj05652 wrote:About the estate tax, I know this clearly. But I am under 30! So I really feel this has nothing to do with me ... I don't have to worry about that now.
Not everyone dies of old age.
Thank you for these information! Although HSBC doesn't offer British/EU stock service, I found that Bank of China and InteractiveBrokers offer this service. I will study them.

What about the tax policy in Britain on foreign investors? Do you have any idea on this topic? Thanks.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by swj05652 »

LadyGeek wrote:
swj05652 wrote:Sorry I accidentally click "Submit". I haven't finished my reply yet.
Welcome! In this forum, you are permitted to edit your posts. Just click on the "Edit" button in the top right corner of each post.

Also, I PM'd someone who may be able to help you.
Thank you! :D So surprising.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by LadyGeek »

You are welcome. BTW, I'm the one who retitled your thread (note the "Site Admin" under my avatar) to attract attention of the members with experience to help you.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by HongKonger »

Hi there swj

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

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

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




As you know about life in Hong Kong - you can't have it all, everything is a trade off.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by tramble »

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

Post by swj05652 »

tramble wrote:Hint, buy the Schwab ETFs for your international exposure (SCHE / SCHF) as these pay the dividends yearly (fewer transactions and lower fees - though higher spread)
Also, it's not worth doing it with BND because they pay the "dividend" monthly - I'd rather buy US Gov bonds directly and there will be no withholding (at the price of some diversification). Otherwise just hold on to em.
I am only familiar about Vangurad's ETFs now. (As a beginner.) I will see ETFs provided by other companies. By the way, Vanguard's website is really well designed, which makes me very easy to find the information I need. In contrast, Schwab/ iShare's websites are not that clear.

You are correct about BND. Furthermore, the annual return of bond ETFs is mainly achieved in the form of dividends. So I'm considering give up bond ETFs. May be try some other index bond fund. Or just totally give up the bond part, since I'm highly risk-tolerating.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by swj05652 »

HongKonger wrote:Hi there swj

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

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

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




As you know about life in Hong Kong - you can't have it all, everything is a trade off.
Happy to meet someone in the same city and using the same broker! :D

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

I am a little bit curious about what kind of US ETFs do you hold, and what's their "small enough" dividend. Because for VTI, http://www.nasdaq.com/symbol/vti/divide ... Q1TD6V2xq1, it pays dividends 4 times in 2012. The total amount is $1.563. (And in 2011, total dividend is $1.233). (Just suppose you own 1000 shares of VTI.) Then you need to pay tax: 30%*1.563*1000= $468.9, in year 2012. What if you buy and sell 4 times? The fee is only 4*2*18 = $144. That's approximately 0.4% difference annually. I believe the dividend per time should be less than $0.05 per share to make this kind of selling and buying not profitable. I don't know if your holding ETFs have such a small dividend?

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

Finally, what's the HK$30 corporate action fee? Here is the U.S. Stock Trading Charges: http://www.hsbc.com.hk/1/2/hk/investmen ... ils#charge. It clearly says: Collection of dividend and other corporate actions is FREE.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by HongKonger »

tramble wrote:Hint, buy the Schwab ETFs for your international exposure (SCHE / SCHF) as these pay the dividends yearly (fewer transactions and lower fees - though higher spread)
Also, it's not worth doing it with BND because they pay the "dividend" monthly - I'd rather buy US Gov bonds directly and there will be no withholding (at the price of some diversification). Otherwise just hold on to em.
If you're not a US person, you can't use Schwab or buy US bonds directly.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by HongKonger »

swj05652 wrote: I am a little bit curious about what kind of US ETFs do you hold, and what's their "small enough" dividend. Because for VTI, http://www.nasdaq.com/symbol/vti/divide ... Q1TD6V2xq1, it pays dividends 4 times in 2012. The total amount is $1.563. (And in 2011, total dividend is $1.233). (Just suppose you own 1000 shares of VTI.) Then you need to pay tax: 30%*1.563*100= $468.9, in year 2012. What if you buy and sell 4 times? The fee is only 4*2*18 = $144. That's approximately 0.4% difference annually. I believe the dividend per time should be less than $0.05 per share to make this kind of selling and buying not profitable. I don't know if your holding ETFs have such a small dividend?
I would need to have a portfolio of more than 4m for my AA to call for 1,000 shares of VTI, and I don't. :(

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

Post by winguy »

Don't you have a broker to buy ETFs on the London Stock Exchange? No dividend withholding tax and a much higher estate tax-free limit. Search for UK nil rate band.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by HongKonger »

winguy wrote:Don't you have a broker to buy ETFs on the London Stock Exchange? No dividend withholding tax and a much higher estate tax-free limit. Search for UK nil rate band.
No - HSBC in HK only allows purchasing on HK and US exchanges, plus as we are pegged to the USD, the currency issue would come into play.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by boglety »

How about Singapore? There are Etfs on their stock exchange that trade in USD
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by HongKonger »

boglety wrote:How about Singapore? There are Etfs on their stock exchange that trade in USD
Aside from the synthetic DBX ETFs and those from Lyxor (who recently quit business in Hong Kong), I see an iShares S&P500 ETF and SPY - both are domiciled in the US. Same same. No escaping the withholding tax.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by grabiner »

HongKonger wrote:
winguy wrote:Don't you have a broker to buy ETFs on the London Stock Exchange? No dividend withholding tax and a much higher estate tax-free limit. Search for UK nil rate band.
No - HSBC in HK only allows purchasing on HK and US exchanges, plus as we are pegged to the USD, the currency issue would come into play.
The currency in which an ETF is denominated is irrelevant; the currency risk is determined by the currency in which the stocks actually trade. A pound-denominated ETF holding US stocks has the same dollar value as a dollar-denominated ETF holding the same US stocks, and a change in the value of the pound will affect the price in pounds but not the dollar equivalent.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by HongKonger »

grabiner wrote:
HongKonger wrote:
winguy wrote:Don't you have a broker to buy ETFs on the London Stock Exchange? No dividend withholding tax and a much higher estate tax-free limit. Search for UK nil rate band.
No - HSBC in HK only allows purchasing on HK and US exchanges, plus as we are pegged to the USD, the currency issue would come into play.
The currency in which an ETF is denominated is irrelevant; the currency risk is determined by the currency in which the stocks actually trade. A pound-denominated ETF holding US stocks has the same dollar value as a dollar-denominated ETF holding the same US stocks, and a change in the value of the pound will affect the price in pounds but not the dollar equivalent.
Yes, but with the Hongkie pegged to the US dollar, then converting Hongkies into pounds and back can make for quite a loss as we can see with the recent movement causing quite sizeable losses for anyone wishing to convert Sterling back into Hongkie dollars.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by boglety »

I am thinking you want to avoid synthetic etfs and you would still pay withholding tax if you hold Singapore etfs denominated in dollars? Just trying to figure out your concern with Singapore etfs denominated in dollars
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by lemming »

HongKonger wrote:If you're not a US person, you can't use Schwab or buy US bonds directly.
According to this post and others in the same thread you can use Schwab as a non-resident. TD Ameritrade also seem to allow it.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by grabiner »

HongKonger wrote:
grabiner wrote:The currency in which an ETF is denominated is irrelevant; the currency risk is determined by the currency in which the stocks actually trade. A pound-denominated ETF holding US stocks has the same dollar value as a dollar-denominated ETF holding the same US stocks, and a change in the value of the pound will affect the price in pounds but not the dollar equivalent.
Yes, but with the Hongkie pegged to the US dollar, then converting Hongkies into pounds and back can make for quite a loss as we can see with the recent movement causing quite sizeable losses for anyone wishing to convert Sterling back into Hongkie dollars.
However, gains and losses from currency movement are canceled out by the currency returns of the fund. Suppose that the pound is worth $2.50, and you buy 100 shares of a UK-based ETF holding US stocks for 40 pounds per share; the US stocks are thus worth $10,000. Now, suppose that the US stock market doesn't move, but the pound falls to $2. Since US stocks are still worth $10,000, and $10,000 is now 5000 pounds, the pound price of the ETF will rise to 50, and you'll get the same $10,000 if you sell the ETF and convert the pounds back to dollars.

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

Post by boglety »

I noticed almost half of Etfs traded in UK were denominated in dollars. You can google LSE and etf to see Providers in UK.
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by HK_Melissa »

swj05652 wrote:
HongKonger wrote:Hi there swj

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

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

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




As you know about life in Hong Kong - you can't have it all, everything is a trade off.
Happy to meet someone in the same city and using the same broker! :D

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

I am a little bit curious about what kind of US ETFs do you hold, and what's their "small enough" dividend. Because for VTI, http://www.nasdaq.com/symbol/vti/divide ... Q1TD6V2xq1, it pays dividends 4 times in 2012. The total amount is $1.563. (And in 2011, total dividend is $1.233). (Just suppose you own 1000 shares of VTI.) Then you need to pay tax: 30%*1.563*1000= $468.9, in year 2012. What if you buy and sell 4 times? The fee is only 4*2*18 = $144. That's approximately 0.4% difference annually. I believe the dividend per time should be less than $0.05 per share to make this kind of selling and buying not profitable. I don't know if your holding ETFs have such a small dividend?

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

Finally, what's the HK$30 corporate action fee? Here is the U.S. Stock Trading Charges: http://www.hsbc.com.hk/1/2/hk/investmen ... ils#charge. It clearly says: Collection of dividend and other corporate actions is FREE.
Hello swj05602,

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

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

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

Melissa
ggeorge
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by ggeorge »

Has anyone thought about short selling Put options to avoid withholding tax situation?. In general, dividends are factored into the put option, therefore you can short sell the same number of puts with expiration up to 1 year.(this is synthetically equivalent to a covered call). Brokerage fees for option selling is typically higher, however you can find some good brokerage firms who offer 10-15 cents/contract. So it's not that significant when compared to the 30% withholding tax. Any thoughts??
YellowJoe
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by YellowJoe »

I believe the answer here is to invest in UK, Swiss, or another non-USA and reputable countries stock market that has vanguard or ishares low-fee ETF's. And it is not domicile in USA.

Interactive brokers HK can allow HK investors to do this and its costs are very low.

I believe you will avoid taxes this way as a Hong Kong Investor.

just avoid USA stock market and ETF's that are based/domicile in USA..

FATCA is getting very strict starting this year 2014 and HK is not 100% settled with FATCA yet which means there is still risk of 30% taxed GROSS on all your holdings as a HK investor in a USA stock exchange for investments in ETF's.
Vistas2011
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by Vistas2011 »

If you buy IShares or Vanguard ETFs domiciled in Ireland then the 30% USA withholding on dividends is reduced to 15% because Ireland has a treaty with the US. The dividends are then paid to you with no more deduction. Effectively receiving 85%of the dividend.
MC2017
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by MC2017 »

Follow-up question on this comment: If you buy IShares or Vanguard ETFs domiciled in Ireland then the 30% USA withholding on dividends is reduced to 15% because Ireland has a treaty with the US. The dividends are then paid to you with no more deduction. Effectively receiving 85%of the dividend.

Is it true that if incomes is taxed at source in the US, then buying ETFs domiciled in Ireland holding US stocks will result in double taxation as Ireland also has a 15% tax charged on dividend income?
TedSwippet
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by TedSwippet »

MC2017 wrote: Wed Aug 23, 2017 10:53 pmIs it true that if incomes is taxed at source in the US, then buying ETFs domiciled in Ireland holding US stocks will result in double taxation as Ireland also has a 15% tax charged on dividend income?
No. Ireland domiciled ETFs are specifically exempt from Irish dividend withholding tax. So a resident of a country that has no US tax treaty can access the benefits of the US/Ireland treaty by holding Ireland domiciled US index ETFs.

For example, VOO is Vanguard's US domiciled S&P500 tracker ETF, and VUSD is its Ireland domiciled equivalent. If you live in Hong Kong, say, and purchase VOO, this ETF receives all its dividends from the shares it holds gross, but then when VOO pays out its dividend to you the US will take 30% of that via broker withholding. In contrast, if you held VUSD, that ETF pays 15% internally on dividends paid by the US shares it holds, but there is no further tax loss to you at all when VUSD pays out its dividend; no additional US or Irish withholding. The result is that you get 85% of the underlying stocks' dividends with VUSD, but only 70% with VOO.

VUSD's TER is currently somewhat higher than VOO's, but this is more than compensated by the much lower dividend tax loss.
Always passive
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by Always passive »

TedSwippet wrote: Fri Aug 25, 2017 2:48 pm
MC2017 wrote: Wed Aug 23, 2017 10:53 pmIs it true that if incomes is taxed at source in the US, then buying ETFs domiciled in Ireland holding US stocks will result in double taxation as Ireland also has a 15% tax charged on dividend income?
No. Ireland domiciled ETFs are specifically exempt from Irish dividend withholding tax. So a resident of a country that has no US tax treaty can access the benefits of the US/Ireland treaty by holding Ireland domiciled US index ETFs.

For example, VOO is Vanguard's US domiciled S&P500 tracker ETF, and VUSD is its Ireland domiciled equivalent. If you live in Hong Kong, say, and purchase VOO, this ETF receives all its dividends from the shares it holds gross, but then when VOO pays out its dividend to you the US will take 30% of that via broker withholding. In contrast, if you held VUSD, that ETF pays 15% internally on dividends paid by the US shares it holds, but there is no further tax loss to you at all when VUSD pays out its dividend; no additional US or Irish withholding. The result is that you get 85% of the underlying stocks' dividends with VUSD, but only 70% with VOO.

VUSD's TER is currently somewhat higher than VOO's, but this is more than compensated by the much lower dividend tax loss.
I noticed that you mentioned "So a resident of a country that has no US tax treaty can access the benefits of the US/Ireland treaty by holding Ireland domiciled US index ETFs."
What happens then to the dividends of a citizen of a country with a US tax treaty that purchases an Irish ETF?
TedSwippet
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by TedSwippet »

Always passive wrote: Fri Aug 25, 2017 2:55 pmWhat happens then to the dividends of a citizen of a country with a US tax treaty that purchases an Irish ETF?
They get a lesser or no real dividend tax benefit, depending on the tax rate specified by the relevant US income tax treaty. (And depending on local tax laws, sometimes holding US domiciled ETFs can be the slightly cheaper option.)

For you -- assuming you are an Israeli resident and not also either a US citizen or a green card holder -- under the US/Israel tax treaty US dividends are taxed by the the US for Israeli residents at 25%. So slightly less than the standard non-US treaty 30% rate, but still considerably more than the 15% that would be paid internally by an Ireland domiciled ETF.

As well as US dividend withholding tax, US NRAs also have to worry about the potential for US estate taxes on any holdings above $60k in US domiciled ETFs. Here the normal US income tax treaties offer no protection, and a special and separate estate tax treaty is needed. The US has a small handful of estate tax treaties that mostly alleviate this worry for people domiciled in those select few countries, but a lot of the world's countries are missing from this list.

So by holding Ireland domiciled ETFs, people domiciled in non-US estate tax treaties can not only perhaps reduce US taxes on dividends, but can also escape the threat of rapacious US estate taxes. In direct contrast to the US, Ireland does not attempt to apply its inheritance tax to non-Irish residents holding Ireland domiciled ETFs. So there is no parallel threat here from Ireland.

Note that Israel does not have a US estate tax treaty.
Always passive
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by Always passive »

Thank you TedSwippet, very educational.
I suppose that your comments of the 25% tax apply also to Irish domiciled bond ETFs. I ask because the Ireland US tax treaty stipulate no taxes on dividends of bond ETFs. In other words, if I understand well your point, one has to follow the US Israel tax treaty and not the Ireland US tax treaty when figuring out the dividend taxes. Am I correct?
TedSwippet
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by TedSwippet »

Always passive wrote: Fri Aug 25, 2017 11:20 pmIn other words, if I understand well your point, one has to follow the US Israel tax treaty and not the Ireland US tax treaty when figuring out the dividend taxes. Am I correct?
To be completely clear, we need to be very careful about specifics and terminology here.

When figuring out your losses to dividend taxes on whatever you hold in underlying 'US situs assets', that is, the US-related stuff inside the fund or ETF: For US domiciled funds, follow the US/Israel tax treaty; for Ireland domiciled funds, follow the US/Ireland treaty. You can ignore the Ireland/Israel treaty because Ireland does not tax holdings of Ireland domiciled ETFs for non-Irish residents in any way (not income, not estate, not inheritance, not capital gains).

Another way to think of it is to separate in your mind what you hold for asset allocation purposes and what you hold for tax purposes. If you buy VOO you own S&P500 assets, and for tax purposes you own a US stock with all the accompanying US tax downsides. If you buy VUSD you also own S&P500 assets, but for tax purposes you now own an Ireland stock, which being an ETF, is specifically exempt from any potential Irish tax but which will internally pay US dividend tax where required under the US/Ireland treaty.

Following this logic, you can see how bad a deal a US NRA might get when selecting an inappropriate non-US markets index fund, for example a Europe stocks tracker. VGK is Vanguard's US domiciled Europe stocks index ETF. VEUR is its Ireland domiciled equivalent. If you buy VGK you pay US tax of 30% or treaty rate (so 25% in Israel) on dividends paid out by the ETF, yet none of that dividend stream derives from underlying US equity. If you buy VEUR you pay nothing to Ireland (and of course, nothing to the US). In this case the US tax can be -- depending on local tax treatments -- a pure deadweight loss, nothing but a heavy cost of simply picking a US domiciled rather than an Ireland domiciled ETF.

For global/world funds, such as VT and VWRL, the tax picture is more difficult to see. Here, half of the fund's holdings will be US equities, but the other half not. In practice, most NRAs get better results from VWRL than from VT, because the tax outcomes fall somewhere between the VOO/VUSD and VGK/VEUR extremes outlined above.

For people domiciled in the many countries that lack a US estate tax treaty, the threat of US estate tax issues on top simply adds more weight to the argument for avoiding US domiciled ETFs.
Always passive
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by Always passive »

TedSwippet wrote: Sat Aug 26, 2017 3:12 am
Always passive wrote: Fri Aug 25, 2017 11:20 pmIn other words, if I understand well your point, one has to follow the US Israel tax treaty and not the Ireland US tax treaty when figuring out the dividend taxes. Am I correct?
To be completely clear, we need to be very careful about specifics and terminology here.

When figuring out your losses to dividend taxes on whatever you hold in underlying 'US situs assets', that is, the US-related stuff inside the fund or ETF: For US domiciled funds, follow the US/Israel tax treaty; for Ireland domiciled funds, follow the US/Ireland treaty. You can ignore the Ireland/Israel treaty because Ireland does not tax holdings of Ireland domiciled ETFs for non-Irish residents in any way (not income, not estate, not inheritance, not capital gains).

Another way to think of it is to separate in your mind what you hold for asset allocation purposes and what you hold for tax purposes. If you buy VOO you own S&P500 assets, and for tax purposes you own a US stock with all the accompanying US tax downsides. If you buy VUSD you also own S&P500 assets, but for tax purposes you now own an Ireland stock, which being an ETF, is specifically exempt from any potential Irish tax but which will internally pay US dividend tax where required under the US/Ireland treaty.

Following this logic, you can see how bad a deal a US NRA might get when selecting an inappropriate non-US markets index fund, for example a Europe stocks tracker. VGK is Vanguard's US domiciled Europe stocks index ETF. VEUR is its Ireland domiciled equivalent. If you buy VGK you pay US tax of 30% or treaty rate (so 25% in Israel) on dividends paid out by the ETF, yet none of that dividend stream derives from underlying US equity. If you buy VEUR you pay nothing to Ireland (and of course, nothing to the US). In this case the US tax can be -- depending on local tax treatments -- a pure deadweight loss, nothing but a heavy cost of simply picking a US domiciled rather than an Ireland domiciled ETF.

For global/world funds, such as VT and VWRL, the tax picture is more difficult to see. Here, half of the fund's holdings will be US equities, but the other half not. In practice, most NRAs get better results from VWRL than from VT, because the tax outcomes fall somewhere between the VOO/VUSD and VGK/VEUR extremes outlined above.

For people domiciled in the many countries that lack a US estate tax treaty, the threat of US estate tax issues on top simply adds more weight to the argument for avoiding US domiciled ETFs.
Thank you so much for the explanation. It is very clear. My issue is that the Israeli bank where I hold the Irish ETFs has been taking the delta between 25% and what I paid overseas. So, for example, in the case of VUSD, 15% are paid overseas and 10% in Israel. When it comes to Irish domiciled ETFs that invest exclusively in US bonds, I end up paying the full 25% in Israel because there is no overseas taxes on bonds. Do you understand the reason?
TedSwippet
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by TedSwippet »

Always passive wrote: Sat Aug 26, 2017 11:23 amMy issue is that the Israeli bank where I hold the Irish ETFs has been taking the delta between 25% and what I paid overseas. So, for example, in the case of VUSD, 15% are paid overseas and 10% in Israel. When it comes to Irish domiciled ETFs that invest exclusively in US bonds, I end up paying the full 25% in Israel because there is no overseas taxes on bonds. Do you understand the reason?
No idea, sorry. I can only suggest that you ask around, at your bank or perhaps among other similarly placed investors in your own country.

To be honest, I'm not sure I would know offhand how this would work even in my own country, the UK. I have only investigated the way US equity funds and US withholding and estate taxes interact for US NRAs.
Always passive
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Re: Avoid the dividend tax on foreign investors [Hong Kong]

Post by Always passive »

Thank you for your help.
Frankly the Israeli bank has very little experience with Irish ETFs, and I wonder if what they are doing is their interpretation, which i have my doubts if it is right. I am paying the taxes that I would be paying had a purchased a US domiciled ETF. This according to the US/ Israel tax treaty.
There is also the issue of accumulative versus distributive Irish ETFs, and the bank is treating both the same.
I am perplexed!
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