EU / NRA investment with tax treaties in place - Best ETF options?

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Brnd
Posts: 2
Joined: Sat Aug 19, 2017 8:05 am

EU / NRA investment with tax treaties in place - Best ETF options?

Post by Brnd » Sat Aug 19, 2017 9:22 am

Hi Everyone

First post from a long-time reader from Europe. I learned a lot from the discussions here on investing already.

I decided to build a diversified ETF portfolio for my retirement savings. I´m 27 so the time horizon is >30 years. The one-time investment is 200K and then I want to invest 3000 on a monthly basis.
For the equity portion (80% of total investment) I have set my mind on a regional allocation (40% North America, 25% Europe, 13% Asia-Pacific, 22% Emerging markets) and am now looking for the best options.

Besides availability of products, that includes a low TER, minimized tax leakage and to a much lesser degree transaction cost.

Various discussions in the forum and the Wiki here and here suggest for non-resident aliens to avoid US-based funds due to US taxation and Estate tax.

That´s the part I don´t understand for my country:
- For US Estate tax, the limit is some 5 Million. Conclusion: not relevant for me
- For dividends US withholding tax is reduced to 15%. I can reclaim the 15% when filing my personal income tax. That´s similar for other countries

On the other, an ETF on US equity like the S&P 500 based in Ireland cannot. In that case, wouldn´t buying an US-based product would even be tax advantage?
For international stock like Emerging markets there could be a difference in the dividends depending on the tax treaties US and Ireland have.

If that´s correct, my current selection would be
- 36.5% ITOT – iShares Core S&P Total US Stock Market (TER 0.03%) – US based
- 3.5% VNC – Vanguard FTSE Canada Index TER(0.05%) – Canada based
- 25% EXSA – iShares Stoxx 600 UCITS ETF (DE) (TER 0.2%) – Germany based
- 8.5% 1475 – iShares Core Topix ETF (0.06%) – Japan based
- 4.5% CPXJ – iShares Core MSCI Pacific ex-Japan UCITS ETF (0.2%) – Ireland based
- 12% EIMI - iShares Core MSCI Pacific ex-Japan UCITS ETF or (TER 0.25%) – Ireland based or
- 22% IEMG - iShares Core MSCI Emerging Markets ETF (TER 0.14%) – US based

The average TER between 0.11 and 0.13%, and assumed
- home-market funds for major markets (US, CA, JP) have no withholding tax and generally lowest TER
- US-based funds add more variety (for example if I want to blend in small later later on), have lower TER and higher liquidity. For international stock, they might have disadvantage due to tax treaties. Here I need to do more research.

I´m looking very much forward for your feedback and thoughts on how to chose the best products when not limited (at least I think so) by tax treaties or taxes.

TedSwippet
Posts: 1423
Joined: Mon Jun 04, 2007 4:19 pm

Re: EU / NRA investment with tax treaties in place - Best ETF options?

Post by TedSwippet » Sat Aug 19, 2017 12:09 pm

Brnd wrote:
Sat Aug 19, 2017 9:22 am
For US Estate tax, the limit is some 5 Million. Conclusion: not relevant for me
If your country is one that has a US estate tax treaty then yes, your limit is around $5mm. Otherwise the limit is just $60k -- that is, just over 1/100th of the limit allowed for US citizens and people domiciled in an estate tax treaty country.

Several major European countries lack US estate tax treaties. Portugal, Sweden, and Spain, to list three.
Brnd wrote:
Sat Aug 19, 2017 9:22 am
For dividends US withholding tax is reduced to 15%. I can reclaim the 15% when filing my personal income tax. That´s similar for other countries.
That rate is the general one for countries with a US income tax treaty. A few countries do better even than 15%. For non-treaty countries the general rate is 30%.
Brnd wrote:
Sat Aug 19, 2017 9:22 am
On the other, an ETF on US equity like the S&P 500 based in Ireland cannot. In that case, wouldn´t buying an US-based product would even be tax advantage?
It can be. Much depends on the way your country of residence treats the 15% US dividend tax paid.

Buying a US domiciled fund that hold non-US stocks is generally not a winner, though. Here the ETF would internally pay any withholding tax to the countries that issue the stocks they hold, and you would then face a second completely unnecessary 15% US dividend tax on top.

Brnd
Posts: 2
Joined: Sat Aug 19, 2017 8:05 am

Re: EU / NRA investment with tax treaties in place - Best ETF options?

Post by Brnd » Sun Aug 20, 2017 6:38 am

Thank you for the good summary.

For Switzerland (I added the specific country to my first post) estate tax treaty is in place.
It can be. Much depends on the way your country of residence treats the 15% US dividend tax paid.
It gets 100% refunded. It´s an uncomplicated extra form in the annual tax return and gets refunded within weeks after filing.
Buying a US domiciled fund that hold non-US stocks is generally not a winner, though. Here the ETF would internally pay any withholding tax to the countries that issue the stocks they hold, and you would then face a second completely unnecessary 15% US dividend tax on top.
For that reason, I split also other single markets Japan and Canada into local domiciled funds.

For others like Asia-Pacific or Emerging Markets I did not find reasonabable single-country combinations to cover them, so I went with the Ireland based one - assuming they pay lower internal taxes, although they have slightly higher fees than their US equivalents.

etf_gaucho
Posts: 23
Joined: Fri Apr 07, 2017 6:52 am

Re: EU / NRA investment with tax treaties in place - Best ETF options?

Post by etf_gaucho » Wed Dec 06, 2017 6:15 pm

Brnd wrote:
Sat Aug 19, 2017 9:22 am
- 25% EXSA – iShares Stoxx 600 UCITS ETF (DE) (TER 0.2%) – Germany based
Hi,

I'm also thinking about buying EXSA because I'm about to move to the UK which has a tax treaty with Germany. Have you bought this ETF already? If so, what is the dividend tax percentage withheld at source by Germany?
My understanding is that the maximum that can be deducted by the treaty is 15%. Since Germany charges 25%, that extra 10% has to be claimed by filling a form. Since I use a US broker, I am not sure whether they do that automatically or not.

Thanks!

-Daniel

TedSwippet
Posts: 1423
Joined: Mon Jun 04, 2007 4:19 pm

Re: EU / NRA investment with tax treaties in place - Best ETF options?

Post by TedSwippet » Thu Dec 07, 2017 4:21 am

etf_gaucho wrote:
Wed Dec 06, 2017 6:15 pm
I'm also thinking about buying EXSA because I'm about to move to the UK which has a tax treaty with Germany.
If you are about to become a UK resident -- even if non-domiciled in the UK for a period -- you should probably avoid EXSA. It does not have 'UK reporting/distributing status', meaning that it is subject to unfavourable UK tax treatment if held by UK residents. If you are going to be living in the UK, you will want to hold only UK reporting status funds or ETFs. HMRC publishes a long list of them, regularly updated.

And yes, this is a rather unpleasant tax trap for anyone who immigrates into the UK while holding any non-reporting funds or ETFs.

etf_gaucho
Posts: 23
Joined: Fri Apr 07, 2017 6:52 am

Re: EU / NRA investment with tax treaties in place - Best ETF options?

Post by etf_gaucho » Thu Dec 07, 2017 6:16 am

TedSwippet wrote:
Thu Dec 07, 2017 4:21 am
If you are about to become a UK resident -- even if non-domiciled in the UK for a period -- you should probably avoid EXSA. It does not have 'UK reporting/distributing status', meaning that it is subject to unfavourable UK tax treatment if held by UK residents. If you are going to be living in the UK, you will want to hold only UK reporting status funds or ETFs. HMRC publishes a long list of them, regularly updated.
And yes, this is a rather unpleasant tax trap for anyone who immigrates into the UK while holding any non-reporting funds or ETFs.
I was aware of that but I couldn't find any better Europe STOXX 600 ETFs with physical replication and enough trading volume. For example, the ireland-domiciled Vanguard FTSE Developed Europe (VEUR) has a very low volume. Also, another advantage of EXSA is that it pays 4.8% of dividends while VEUR only 3.2%. Probably this is because the German stocks held by the ETF are not taxed when they distribute dividends.

Do you hold any european stocks or ETFs in your portfolio? I am curious of how high the dividends are taxed by other countries and how easy is to claim the extra tax not covered by the treaty.

Thanks!

TedSwippet
Posts: 1423
Joined: Mon Jun 04, 2007 4:19 pm

Re: EU / NRA investment with tax treaties in place - Best ETF options?

Post by TedSwippet » Thu Dec 07, 2017 7:41 am

etf_gaucho wrote:
Thu Dec 07, 2017 6:16 am
Do you hold any european stocks or ETFs in your portfolio? I am curious of how high the dividends are taxed by other countries and how easy is to claim the extra tax not covered by the treaty.
Sorry, no idea on anything other than reclaiming US tax (over)withholding.

Apart from my few USD in a Vanguard money market fund -- under $20/year in interest -- I hold only UK-domiciled and Ireland-domiciled funds and ETFs. Ireland-domiciled holdings are UCITS, UK reporting, and tax-neutral under Ireland's tax rules for non-Ireland residents.

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