EU investor: any way to avoid punitive US estate tax on death?

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DJN
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EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Mon Feb 11, 2019 3:49 am

Hi,
I will soon relinquish expat status and have to suffer EU taxes on my investments. In my case one alternative is to buy US funds while I remain outside the EU and then retain when in the EU. The principle drawback to this is the Estate Tax conundrum: Countries with no US tax treaty or a bad one (my current and future position) experience punitive taxes on all US domiciled investments valued above $60,000 at death. I believe that this can be addressed by setting up my investment account as a Joint Tenancy Account with my spouse as the joint tenant of the account (Interactive Brokers have this facility). In this case as I understand the position, on the death of one of the two joint tenancy account holders the assets in the account transfer to the other joint account holder without any need for probate and therefore avoids the dreaded US estate tax.
I assume also therefore that the surviving tenant (now sole account holder) should ASAP transfer the US funds to a UCITS (or a non regulated UK Investment Trust) to avoid US probate when they in turn die so as to avoid the punitive US estate taxes.
I would appreciate any insights and comments please.
For simplicity I would look to invest in a two fund folio of:
- VT (Vanguard total world stock including EM)
- BNDW (Vanguard total world investment grade bonds)
thanks,
DJN
Last edited by DJN on Fri Feb 15, 2019 1:22 am, edited 3 times in total.
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Re: EU investor: any way to avoid US estate tax when you die?

Post by DJN » Mon Feb 11, 2019 8:37 am

Help needed! Someone out there must have faced this issue? The implication of $60,000 low threshold on the amount that avoids US estate tax is miniscule!
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Re: EU investor: any way to avoid US estate tax on death?

Post by BeBH65 » Mon Feb 11, 2019 8:42 am

I think the standard answer to avoid current and future tax liabilities to the US is : avoid direct investing in US-domiciled assets; always ensure there is a non-US domiciled layer in-between.
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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Re: EU investor: any way to avoid US estate tax on death?

Post by DJN » Mon Feb 11, 2019 8:51 am

Many thanks BeBH6,
for me in my next tax environment, the lower costs of US funds + the lower tax rates on dividends and capital gains is such that direct investment in US funds is very attractive. The co tenancy option with IB I believe allows an EU investor to avoid the US estate tax trap at least for one spouse. I would like to hear it from the horses mouth of someone who has actually done it (and by that I don't mean the dying bit).
DJN
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Re: EU investor: any way to avoid US estate tax on death?

Post by gd » Mon Feb 11, 2019 9:21 am

If I'm reading the post timestamps correctly, you appear to be getting worried that no one is responding to your posts between 3 am and 8 am EST, midnight and 5 am PST. Might I assume you are currently in the EU? :D

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Re: EU investor: any way to avoid US estate tax on death?

Post by DJN » Mon Feb 11, 2019 9:28 am

Thanks,
not worried, but I have tried different approaches in the past to getting some attention here for NON US stuff and it is tricky to say the least. I just want informed answers not an impressive number of replies! And you are sort of right. I was aiming at European waking hours but I am currently wandering about in the desert in the ME.
:happy DJN
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Re: EU investor: any way to avoid US estate tax on death?

Post by TedSwippet » Mon Feb 11, 2019 10:58 am

DJN wrote:
Mon Feb 11, 2019 3:49 am
I believe that this can be addressed by setting up my investment account as a Joint Tenancy Account with my spouse as the joint tenant of the account (Interactive Brokers have this facility). In this case as I understand the position, on the death of one of the two joint tenancy account holders the assets in the account transfer to the other joint account holder without any need for probate and therefore avoids the dreaded US estate tax.
Unfortunately, on my reading of this paper from the reliable folk at JPM Financial, it seems that using joint tenancy will not allow you an easy escape from confiscatory US estate taxes:
Jointly held property. Code Sec. 2056(d)(1)(B) states that Code Sec. 2040(b) (which provides that property owned jointly with a right of survivorship between spouses will be included at one-half its value in the estate of the first spouse to die) does not apply if the surviving spouse of the decedent is not a U.S. citizen. Instead, 100% of such property is includable in the first decedent’s estate except to the extent the executor can substantiate the contributions of the noncitizen surviving spouse to the acquisition of the property. Thus, jointly owned U.S. situs property will be fully included in the gross estate of a nonresident alien who provided the funds to acquire such property.

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Re: EU investor: any way to avoid US estate tax on death?

Post by DJN » Mon Feb 11, 2019 10:32 pm

Unfortunately, on my reading of this paper from the reliable folk at JPM Financial, it seems that using joint tenancy will not allow you an easy escape from confiscatory US estate taxes:
Hi Ted,
thanks for your insights, very helpful as ever. [OT comments removed by admin LadyGeek]

I wonder do you know how the QDOT fund approach works? This is mentioned in some papers that I have read but without any useful explanation.
thanks again
DJN
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Re: EU investor: any way to avoid US estate tax on death?

Post by TedSwippet » Tue Feb 12, 2019 3:19 am

[quoted post and response removed by admin LadyGeek]
DJN wrote:
Mon Feb 11, 2019 10:32 pm
I wonder do you know how the QDOT fund approach works? This is mentioned in some papers that I have read but without any useful explanation.
I looked into QDOTs briefly, but decided not to ever be in a situation where one would be required. My reasoning is generally summed up by the following from this article:
It is important to understand that QDOTs defer US estate tax liability; they don’t eliminate or avoid it.
...
The QDOT tax is generally equal to the amount of estate tax that would have been imposed, if the amount involved had been included in the taxable estate of the first spouse to die, and had not been transferred to the QDOT.
Not so much a 'solution' as a 'band aid' for a bad situation that might perhaps be unavoidable for some, but is definitely avoidable for you.

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Re: EU investor: any way to avoid US estate tax on death?

Post by DJN » Tue Feb 12, 2019 5:48 am

viewtopic.php?t=225312
The link to another earlier BH post on the same topic which gives some more colour on the options. In one of the posts in this one, there is a mention of using a Joint Tenancy account in IB even in the case of holding Irish domiciled ETF's. "To help further in immunising against estate tax my IB account is joint with survivor rights with DW. There is always a small risk somewhere."
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Re: EU investor: any way to avoid US estate tax on death?

Post by typical.investor » Tue Feb 12, 2019 5:59 am

TedSwippet wrote:
Tue Feb 12, 2019 3:19 am
[quoted post and response removed by admin LadyGeek]
DJN wrote:
Mon Feb 11, 2019 10:32 pm
I wonder do you know how the QDOT fund approach works? This is mentioned in some papers that I have read but without any useful explanation.
I looked into QDOTs briefly, but decided not to ever be in a situation where one would be required. My reasoning is generally summed up by the following from this article:
It is important to understand that QDOTs defer US estate tax liability; they don’t eliminate or avoid it.
...
The QDOT tax is generally equal to the amount of estate tax that would have been imposed, if the amount involved had been included in the taxable estate of the first spouse to die, and had not been transferred to the QDOT.
Not so much a 'solution' as a 'band aid' for a bad situation that might perhaps be unavoidable for some, but is definitely avoidable for you.
QDOTs are for Americans with a non-citizen spouse.

An FGT might be closest to what you are looking for, but given administration costs think normal Ireland domiciled funds would probably be the route to go.


http://www.nysscpa.org/news/publication ... r-families

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by LadyGeek » Tue Feb 12, 2019 5:04 pm

Discussions of dishonest behavior or bypassing the law is totally unacceptable - for any country. I removed comments regarding an approach to hide income of a deceased person (tax evasion).
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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Tue Feb 12, 2019 11:46 pm

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by galeno » Wed Feb 13, 2019 3:00 pm

One of the benefits of using IB is that you can buy stocks and bonds from many different exchanges. You could start with USA domiciled ETFs or MFs. Then you can sell them and buy, e.g. Ireland domicled ETFs from non-USA exchanges.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Wed Feb 13, 2019 10:40 pm

Hi galeno,
yes you are right. I have bought for the moment up to my $60,000 limit US domiciled funds with IB, I am getting some more advice on the joint tenancy issues as I have received conflicting views on this subject. The main issue is that I am slowly being worn down to the point I have just to accept inefficient outcomes for an EU investor in my circumstances and opt for simplicity instead. One of the problems I have encountered is that the advice of (fee) advisers hasn't always been accurate and the implications for US tax obligations can potentially be severe whatever about the
authorities efficiency.
thanks
DJN
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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by Hyperborea » Thu Feb 14, 2019 3:16 am

DJN wrote:
Wed Feb 13, 2019 10:40 pm
Hi galeno,
yes you are right. I have bought for the moment up to my $60,000 limit US domiciled funds with IB, I am getting some more advice on the joint tenancy issues as I have received conflicting views on this subject. The main issue is that I am slowly being worn down to the point I have just to accept inefficient outcomes for an EU investor in my circumstances and opt for simplicity instead. One of the problems I have encountered is that the advice of (fee) advisers hasn't always been accurate and the implications for US tax obligations can potentially be severe whatever about the
authorities efficiency.
thanks
DJN
I'm not sure where the "inefficient outcomes" are that you are worried about. The TER for non-US funds has fallen greatly over the last 10 years or so. You can pick up funds in the region of 0.2% for the equity side and 0.1% for the bond side. Not that long ago those numbers would have been great (maybe unattainable) for a US based investor. Yes, the US based investor can get lower than that now but the implications of a 0.1% fee reduction are not that large - $100 on a $100,000 portfolio. Even on a larger portfolio where the fee difference is thousands of dollars per year the risk of US estate tax is NOT (edited to add) worth it.
Last edited by Hyperborea on Thu Feb 14, 2019 5:10 pm, edited 1 time in total.
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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Thu Feb 14, 2019 4:35 am

Hi Hyperborea,
the difference if you have a tax domicile in Ireland is the punitive local tax on UCITS at 41% on all gains, with no offset for other losses and a deemed and / or actual sale valuation after every 7 years subject to 41% tax. The option to use US stocks / funds taxed locally at your marginal tax rate is significantly more efficient with at least an 8% gain on taxation and much more when you consider tax relief and the ability to offset losses. The difference in fees is just another smaller incentive.
DJN
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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Thu Feb 14, 2019 6:02 am

Options for addressing the US estate tax dilemma (following this short posting) seem to be:
- Buy US domiciled stocks / funds and anticipate that whatever your US - home country treaty states will apply to the receipts of your survivors.
- Buy US domiciled stocks / funds and that without a US - home country treaty your survivors should anticipate a 40% estate tax above $60K asset value.
- Buy US domiciled stocks / funds up to $60,000 value only and your survivors will receive the proceeds in full.
- Set up your platform account as a Joint Tenancy with survivor rights. The surviving tenant should anticipate a 40% estate tax for 50% of the estate value or will be asked to demonstrate what contribution that they made to the assets so as to be able to receive the assets estate tax free.
- Set up a Foreign Grantor Trust administered by a US trustee holding a non US entity which in turn can hold US domiciled stocks / funds which can be given to survivors without taxation

Or forget the whole thing and buy UCITS and pay your local taxes or if you want another option choose non regulated UK Investment Trusts such as Foreign and Colonial and struggle with UK estate taxes and tax treaties!

Any further comments are appreciated.
DJN
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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by TedSwippet » Thu Feb 14, 2019 6:12 am

DJN wrote:
Thu Feb 14, 2019 4:35 am
... the difference if you have a tax domicile in Ireland is the punitive local tax on UCITS at 41% on all gains, with no offset for other losses and a deemed and / or actual sale valuation after every 7 years subject to 41% tax.
Ah yes. Just when you think US tax laws are as bonkers as it is possible to imagine, along come Ireland with this. Your problem is extremely niche then, but that doesn't make it any less acute.

Aside from the binary choice of either sucking up the extra tax cost with UCITS ETFs or the horrible US estate tax risk with US domiciled ETFs, off the top of my head I can think of only two other ways to avoid the US estate tax problem. The first would be to use a personal 'blocker' corporation, and hold your US domiciled assets within this. No idea how easy or hard this is to make it work with both Irish and US tax laws and regulations, nor how expensive, and you would need to make sure to use the exact right type of holding company to avoid the US's 'look-through' rules. The other would be to take out (additional?) life insurance to the value of the US estate tax that would come due should the worst happen.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by international001 » Thu Feb 14, 2019 6:57 am

Just for my information. So you are not a US citizen, but you are US resident and plan to move to EU.
I thought you were not able to hold US funds (FATCA)? Am I missing something?

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by AlohaJoe » Thu Feb 14, 2019 7:32 am

international001 wrote:
Thu Feb 14, 2019 6:57 am
Just for my information. So you are not a US citizen, but you are US resident and plan to move to EU.
I thought you were not able to hold US funds (FATCA)? Am I missing something?
FATCA has nothing to do with holding US funds. Lots of foreigners hold US funds.

(I am subject to FATCA and hold lots of US funds.)

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Thu Feb 14, 2019 7:38 am

Hi there,
clarification, I should have said this in the first place:
- EU citizen
- Offshore from EU and can therefore access US domiciled stocks / funds
- Non resident in US
- Not intending to reside in US
- Currently liable for US estate taxes on US domiciled stocks / funds as per notes above as far as I can work out to date
- Returning to EU country with unfavourable tax treaty, i.e. remains liable for estate tax on amounts of assets above $60k
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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by typical.investor » Thu Feb 14, 2019 7:47 am

TedSwippet wrote:
Thu Feb 14, 2019 6:12 am
DJN wrote:
Thu Feb 14, 2019 4:35 am
... the difference if you have a tax domicile in Ireland is the punitive local tax on UCITS at 41% on all gains, with no offset for other losses and a deemed and / or actual sale valuation after every 7 years subject to 41% tax.
Ah yes. Just when you think US tax laws are as bonkers as it is possible to imagine, along come Ireland with this. Your problem is extremely niche then, but that doesn't make it any less acute.

Aside from the binary choice of either sucking up the extra tax cost with UCITS ETFs or the horrible US estate tax risk with US domiciled ETFs, off the top of my head I can think of only two other ways to avoid the US estate tax problem. The first would be to use a personal 'blocker' corporation, and hold your US domiciled assets within this. No idea how easy or hard this is to make it work with both Irish and US tax laws and regulations, nor how expensive, and you would need to make sure to use the exact right type of holding company to avoid the US's 'look-through' rules. The other would be to take out (additional?) life insurance to the value of the US estate tax that would come due should the worst happen.
Ask galeno who posted above. I believe he used to use a US company he set up to hold assets. Ulitimately holding Irish domiciled ETFs was cheaper.

None of that dealt with Irish tax laws for Irish residents though. Still, it might be helpful.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by Valuethinker » Thu Feb 14, 2019 9:37 am

AlohaJoe wrote:
Thu Feb 14, 2019 7:32 am
international001 wrote:
Thu Feb 14, 2019 6:57 am
Just for my information. So you are not a US citizen, but you are US resident and plan to move to EU.
I thought you were not able to hold US funds (FATCA)? Am I missing something?
FATCA has nothing to do with holding US funds. Lots of foreigners hold US funds.

(I am subject to FATCA and hold lots of US funds.)
FATCA is a problem for Americans with financial affairs abroad.

No it is MIFID II and the associated consumer protection legislation in the EU (PRIIP ?).

Means that a non-expert investor cannot own funds which do not have certain key European disclosure documentation: KIID Key Investor Information Document. US funds of course meet SEC rules not UCITS VI (European fund rules) so don't have these.

AFAIK no European broker will now sell US products (ETFs included) to its EU retail clients.

There's another stinger in the tail, for UK residents the fund must be "reporting" classification by HMRC or the tax implications are grievous (been there, done that, paid that price for ignorance).

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by TedSwippet » Thu Feb 14, 2019 11:12 am

Valuethinker wrote:
Thu Feb 14, 2019 9:37 am
AFAIK no European broker will now sell US products (ETFs included) to its EU retail clients.
Right. And just to tie up loose ends here for the benefit of anyone still reading this ...

Due to PRIIPS regulations, EU residents effectively can no longer buy US domiciled ETFs, but they usually can continue to hold any they already own, and sell as and when necessary.

DJN's aim is to buy US domiciled ETFs before returning to the EU, specifically Ireland, because for DJN -- apart from the not inconsiderable risk of US estate taxes -- these could be more locally tax efficient than UCITS ETFs. The reason is some truly silly capital gain tax laws that Ireland applies to its resident investors who hold UCITS and other EU domiciled funds, but which do not apply to US domiciled funds.

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Re: EU investor: any way to avoid punitive US estate tax on death? [Ireland]

Post by Epsilon Delta » Thu Feb 14, 2019 5:05 pm

The US and Ireland are not the only two countries in the world. If you find these are bad you might need a wider net.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Fri Feb 15, 2019 1:29 am

Hi,
Epsilon Delta wrote:
Thu Feb 14, 2019 5:05 pm
The US and Ireland are not the only two countries in the world. If you find these are bad you might need a wider net.
This is reasonable advice and is one of the options under consideration.
However it is pretty extreme if you have to up sticks and move your family to a new jurisdiction, that can be complicated. There are options for this including Non Habitual Residence and you can see the options here if you are interested:
https://www.bogleheads.org/wiki/EU_non- ... _residence
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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by msk » Fri Feb 15, 2019 2:10 am

Just stating that one is an EU citizen tax resident in an EU country does not illuminate all that is relevant. Assuming the OP is going to be tax resident in Ireland then I suggest he calls his local bank branch in Ireland and makes an appointment with an investment/tax advisor to review his actual or future residency status. EU countries do not have uniform tax laws and hence locally relevant advice is crucial. Tax residency in London or Belfast is not the same as tax residency in Dublin. A friend with a NW in 10 figures has companies registered in various tax jurisdictions all over the world. Depending on how big a portfolio one wishes to shield, it may be worthwhile to use a company structure in e.g. the Channel Islands, despite the annual fees. With more average BH portfolios in the 7 figure range the local bank's advisor may have suggestions that are less costly in annual expenditure. A word of warning regarding Joint accounts with Survivor Rights at IB. Make sure that your partner is always able to actually sign on at IB (remarkable how quickly we forget routine procedures like two-factor authentication with advancing age and non-use) and that the Joint bank account that your IB account has been designated to link to remains able to receive transfers from IB even after you or your joint signatory dies or becomes incapacitated. You will still have the nagging issue as to what happens if both the joint IB account owners die at the same time. This is where a company structure outliving both of you becomes relevant.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by galeno » Fri Feb 15, 2019 3:19 pm

Before we went with IB we used Schwab International. Schwab International is for non-USA persons. Schwab International is just like Schwab USA except it allows one a limited access to Ireland domiciled FUNDS. All those funds are actively managed and all with outrageous ERs.

So for us it was cheaper to use the USA domiciled ETFs for equities (50% SCHB + 40% SCHF + 10% SCHE). It was painful to pay the 30% dividend income tax.

The FI (fixed income) side was limited to USA FDIC Insured CDs from USA banks or direct USA Treasuries. Any other USA domicled fixed income asset was subject to the 30% interest income tax. We used the brokered CDs that Schwab International offers with one click buying.

A more important problem using Schwab International was the horrible USA inheritance laws against USA-NRAs. Our (Costa Rican) attorney suggested we form a family corporation and open a corporate account which is what we did. A corporations in CR can't die until someone kills it.

Before I discovered IB (Interactive Brokers) Schwab International was the best we could do. All the other non-USA brokers I looked at (mainly in Bermuda) seemed too shady. Trying to invest like a USA Boglehead was very expensive and very inefficient in the old days. It was also very LONELY.

When we discovered IB (Interactive Brokers) I felt like I died and went to Boglehead heaven. AT LAST we non-USA persons can invest ALMOST as cheaply and ALMOST as efficiently as our USA friends who mostly populate these boards.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by international001 » Wed Feb 20, 2019 7:31 pm

TedSwippet wrote:
Thu Feb 14, 2019 11:12 am

Right. And just to tie up loose ends here for the benefit of anyone still reading this ...

Due to PRIIPS regulations, EU residents effectively can no longer buy US domiciled ETFs, but they usually can continue to hold any they already own, and sell as and when necessary.
Wow.. So Midif II disallows EU brokers to sell US funds. And PRIIPS disallows any EU resident to buy US funds. FATCA disallows a US citizen to buy any fund via a non-US broker. Did I get it right?

So what is a US citizen resident in US supposed to do?

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by TedSwippet » Thu Feb 21, 2019 4:48 am

international001 wrote:
Wed Feb 20, 2019 7:31 pm
Wow.. So Midif II disallows EU brokers to sell US funds. And PRIIPS disallows any EU resident to buy US funds. FATCA disallows a US citizen to buy any fund via a non-US broker. Did I get it right?
Close. PRIIPs currently stops EU-regulated brokers selling US domiciled funds to EU residents. And it is the US's horrible PFIC tax regime that makes it so unpleasant for a US citizen to hold a non-US domiciled fund that nobody would want to.
international001 wrote:
Wed Feb 20, 2019 7:31 pm
So what is a US citizen resident in US supposed to do?
Presumably you meant a US citizen resident in the EU? Yes, this might leave them entirely locked out of funds and ETFs.

Anyone still holding a brokerage account in the US might be able to access US domiciled funds that way, because US brokers are not bound by EU regulation (though Interactive Brokers, one you might think immune to this, is now reported to no longer offer US domiciled funds and ETFs to EU residents). So that's one possible route around this for a few people. It mostly relies on you having opened an account while living in the US and then being able to keep it after leaving.

For the rest though, no easy way out. US brokers often won't allow non-US residents (even if US citizens) to open new accounts. And to add insult to injury, non-US brokers often refuse accounts to US citizens because of FATCA.

A decade ago I qualified for US citizenship through naturalization, but decided not to take it up because of the tax drawbacks of being a US citizen not living in the US. Definitely the right decision for me. I have far more financial freedom as a non-US person. In the whole time that I have watched it, the unswerving trajectory of US tax law and regulation has been towards even more hostility to all things non-US.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by international001 » Thu Feb 21, 2019 5:10 am

So what is the difference between Midif II and PRIIPS, then?

Las time I open a US broker account, it didn't ask me for my residency. So this is expected to change? I see it difficult to enforce, but worse case scenario you just open a bunch of brokerage accounts with 0$ before you move out of the US.

Which are exactly those bad tax consequences (or the worse)? It's because being resident of any non-US or just UK?

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by TedSwippet » Thu Feb 21, 2019 6:01 am

international001 wrote:
Thu Feb 21, 2019 5:10 am
So what is the difference between Midif II and PRIIPS, then?
Covered in this FTAdviser article:

https://www.ftadviser.com/regulation/20 ... fferences/
international001 wrote:
Thu Feb 21, 2019 5:10 am
Las time I open a US broker account, it didn't ask me for my residency. So this is expected to change? I see it difficult to enforce, but worse case scenario you just open a bunch of brokerage accounts with 0$ before you move out of the US.
If you have a US address, a US broker is not going to ask. They will just assume you live in the US. If you give them a non-US address though, they may well just refuse to open the account. There is no regulation that says they cannot open it. It is just that US regulation around everything foreign is so costly and difficult to comply with that most brokers would rather just avoid it entirely.
international001 wrote:
Thu Feb 21, 2019 5:10 am
Which are exactly those bad tax consequences (or the worse)? It's because being resident of any non-US or just UK?
Any non-US, but worse in countries that enthusiastically enforce FATCA and other US extraterritorial tax law and regulation.

As a US citizen living abroad you are always subject to the full effect of US tax laws, none of which ever take any account of people living in other countries. You are also subject to all the protectionist laws designed to dissuade US resident investors from holding non-US investments. As a US citizen, the US always deems you to be a US resident, even if you are not.

That can leave you stuck -- no way to comply with both local and US tax law at the same time. In some cases you are literally forced to break the law of one or the other country. The US insists that you report non-US accounts on FBAR and similar forms under threat of outrageous penalties, and pay any US tax due in USD, even if this would break data protection, currency exchange, or other local country laws.

Specifically for the UK, if I had become a US citizen I would not be able to use UK tax-free ISA accounts. The UK does not tax these, but the US would so I would not have any tax-free investments available to me. These are valuable accounts, used by the majority of UK residents (except of course, those that are US citizens). I would not be able to sell my home without worrying about US tax on the gains; in contrast, the UK does not tax gains in your primary home, no limits or exceptions. I would not be able to use the UK's £11k/year capital gains tax exemption, since again anything that the UK does not tax here, the US would. I might have to pay US tax on phantom currency gains, where I get no gain in GBP but a gain on an asset when measured in USD purely due to currency shifts (it is even possible to get a GBP loss but a USD taxable gain!). And the final kick in the pants, many UK brokers now explicitly exclude US citizens living in the UK from holding accounts with them, because of FATCA.

Life as a US citizen outside of the US is a continual series of hassles, trying to thread the needle between often conflicting local and US tax laws. If I planned to move back to the US to live, having citizenship would be a useful (though extremely expensive) option. As I do not though, it would just be a tax ball-and-chain.
Last edited by TedSwippet on Fri Feb 22, 2019 8:52 am, edited 1 time in total.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by minimalistmarc » Thu Feb 21, 2019 6:30 am

Give away your money before you die ;)

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by international001 » Thu Feb 21, 2019 10:31 am

TedSwippet wrote:
Thu Feb 21, 2019 6:01 am
Covered in this FTAdviser article:

https://www.ftadviser.com/regulation/20 ... fferences/
Thx. From what I can gather, PRIIPS does not have that many requirements (basically, offer a Kid document), but at the end, everything comes down that EU brokers won't offer US funds (in the medium term, at least)

TedSwippet wrote:
Thu Feb 21, 2019 6:01 am
If you have a US address, a US broker is not going to ask. They will just assume you live in the US. If you give them a non-US address though, they may well just refuse to open the account. There is no regulation that says they cannot open it. It is just that US regulation around everything foreign is so costly and difficult to comply with that most brokers would rather just avoid it entirely.
That's my understanding as well. Nowadays, getting a US address is not difficult. This is why I wonder how enforceable it is
TedSwippet wrote:
Thu Feb 21, 2019 6:01 am

Any non-US, but worse in countries that enthusiastically enforce FATCA and other US extraterritorial tax law and regulation.

As a US citizen living abroad you are always subject to the full effect of US tax laws, none of which ever take any account of people living in other countries. You are also subject to all the protectionist laws designed to dissuade US resident investors from holding non-US investments. As a US citizen, the US always deems you to be a US resident, even if you are not.

That can leave you stuck -- no way to comply with both local and US tax law at the same time. In some cases you are literally forced to break the law of one or the other country. The US insists that you report non-US accounts on FBAR and similar forms under threat of outrageous penalties, and pay any US tax due in USD, even if this would break data protection, currency exchange, or other local country laws.

Specifically for the UK, if I had become a US citizen I would not be able to use UK tax-free ISA accounts. The UK does not tax these, but the US would so I would not have any tax-free investments available to me. These are valuable accounts, used by the majority of US resident (except of course, those that are US citizens). I would not be able to sell my home without worrying about US tax on the gains; in contrast, the UK does not tax gains in your primary home, no limits or exceptions. I would not be able to use the UK's £11k/year capital gains tax exemption, since again anything that the UK does not tax here, the US would. I might have to pay US tax on phantom currency gains, where I get no gain in GBP but a gain on an asset when measured in USD purely due to currency shifts (it is even possible to get a GBP loss but a USD taxable gain!). And the final kick in the pants, many UK brokers now explicitly exclude US citizens living in the UK from holding accounts with them, because of FATCA.

Life as a US citizen outside of the US is a continual series of hassles, trying to thread the needle between often conflicting local and US tax laws. If I planned to move back to the US to live, having citizenship would be a useful (though extremely expensive) option. As I do not though, it would just be a tax ball-and-chain.
I didn't know FBAR reporting could break local laws. Other countries have similar requirements (in Spain, you have to report foreign accounts with > $50k)

AFAIK, the general calculation (w/o going in particulars I don't know) is that you have to pay the max of US and your residence country, so it's a risk, but in general if your residence country has higher taxes it doesn't matter much. I have suffered PFIC (just a bit), so yes, you would have to keep all your investments on US. I know for many years now in Spain, the brokers would not sell anything to US citizens.

Retirement accounts must be a pain. You can still invest on an USA IRA, but it may not be enough. But in Spain max a year you can invest sheltered is 8k euros, so it's not such a huge difference.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by DJN » Thu Feb 21, 2019 10:37 am

I believe that if you have a financial adviser they can access US domiciled funds.
Yah shure

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by international001 » Thu Feb 21, 2019 11:23 am

In EU? That would be great, but a EU resident non-US citizen may be better just buying an low cost Irish fund

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by TedSwippet » Thu Feb 21, 2019 11:49 am

international001 wrote:
Thu Feb 21, 2019 10:31 am
I didn't know FBAR reporting could break local laws. Other countries have similar requirements (in Spain, you have to report foreign accounts with > $50k)
This type of reporting law might not be rare. What is rare though, unique in fact, is how the US applies it to people not living in the US.

Spain does not insist that Spanish citizens living full-time outside Spain should list their non-Spanish (that is, local to them) accounts to Spanish tax authorities annually. In other words, Spanish jurisdiction ends at Spanish borders. The US, on the other hand, applies its laws far outside its own borders. It treats the local accounts of US citizens living abroad as reportable and 'offshore', roughly equated to 'illegal' as far as the IRS and congress is concerned.
international001 wrote:
Thu Feb 21, 2019 10:31 am
AFAIK, the general calculation (w/o going in particulars I don't know) is that you have to pay the max of US and your residence country, so it's a risk, but in general if your residence country has higher taxes it doesn't matter much.
That's the general theory, but there are many, many ways in which this breaks down. Locally tax free accounts. Higher local tax-free allowances. Locally untaxed items, such as home sale.

Local sales taxes. Imagine a country with no income tax and with all services funded by sales taxes. A US citizen in this country has no way to offset their US income tax, because the US only allows tax deductions for US state sales taxes. So they will pay the full local tax on their purchases, and also the full US income tax on all their investment income and any employment income above the FEIE. That's pure double-tax. There may be no such country as the one imagined, but it is quite normal for countries to decide that sales taxes rather than income taxes should form the major way to raise public funds, and US citizens in such countries lose out hugely.

Or the NIIT. The US allows no foreign tax credit for this, treaty or not, so again a pure double-tax.
international001 wrote:
Thu Feb 21, 2019 10:31 am
Retirement accounts must be a pain. You can still invest on an USA IRA, but it may not be enough. But in Spain max a year you can invest sheltered is 8k euros, so it's not such a huge difference.
A US IRA, assuming you can even open one when living outside the US, is mostly useful only if you earn above the FEIE, so $102k/year. Up to that point, you have no US taxable employment income to put into an IRA. You cannot put investment income into an IRA, even though the US will tax it. Not taking the FEIE and taking foreign tax credits instead may get around this, but not always. And Roths phase out once you earn above $133k. That's a very narrow range of retirement savings options.

Depending on treaty, a local retirement account can be an option. Quite a few treaties don't cover this though, and of course there are plenty of countries without a US tax treaty too. In practice, due to the extraterritorial nature of the US's unique tax regime, many US citizens living abroad can find themselves entirely unable to invest or save in the same way as their friends, colleagues and neighbours, and potentially unable to invest or save at all.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by international001 » Thu Feb 21, 2019 1:55 pm

Yes.. I understand it depends on the particulars

I had no idea that you could not offset the NIIT if you are paying higher taxes on your resident country.

About IRA, if you take income credits you can always consider backdoor, right?

I'm also concerned about how different types of accounts (Roth, after-tax, accumulation, distribution) are taxed differently by each country.
An option could be to get your US citizenship and renounce to it if you see that your particular situation gets very complicated. I'm not sure if you can avoid the exit tax
Another option if you are thinking about retirement is to take a year off (let's say in retirement), establish your residency in US while doing vacation, sell everything and then come back to your country. If that's a personal option.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by TedSwippet » Fri Feb 22, 2019 3:40 am

international001 wrote:
Thu Feb 21, 2019 1:55 pm
I'm also concerned about how different types of accounts (Roth, after-tax, accumulation, distribution) are taxed differently by each country.
Yes. Some countries honour the tax-free status of Roths, but many do not. Some recognise the tax deferral of IRAs and 401ks, but again some do not. And where local countries have unfavourable taxes for these accounts, they can become a multi-decade tax nightmare.
international001 wrote:
Thu Feb 21, 2019 1:55 pm
An option could be to get your US citizenship and renounce to it if you see that your particular situation gets very complicated. I'm not sure if you can avoid the exit tax.
Renouncing is not cheap. At $2,350, the US has by far the highest citizenship renunciation fee on the face of the planet.

The exit tax is another area where double-tax is entirely likely. It immediately taxes all unrealised capital gains, and when an asset is eventually sold and gains realised some years later the local country is not going to allow a tax credit for US exit taxes paid years or decades before. And it immediately taxes all unwithdrawn IRA balances at your marginal tax rate.

A likely massive cash-flow issue there, and if you cannot cover it with funds from elsewhere, withdrawing a chunk from the IRA to pay the tax could attract a further 10% early withdrawal penalty. And double-tax again, because on any subsequent IRA withdrawals your local country will see this as taxable income with no allowance for US exit taxes paid years before. No real protection from treaties either -- the US exit tax law effectively overrides them.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by Always passive » Fri Feb 22, 2019 4:03 am

The way that some have approached this problem is to create a company for the sole purpose of sheltering from the estate tax. I have a client that did exactly that. Obviously this approach would be practical if you hold significant assets, because there are legal costs involved.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by international001 » Fri Feb 22, 2019 11:34 am

$2,350 is likely the least of the problems

About the exit tax, if you " sold and gains realized some years later the local country", would you keep the original tax basis (when you bought the assets on US, before exit-tax)? If so, it seems more convenient to sell everything to cash and buy equivalent assets again after you have exited.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by TedSwippet » Fri Feb 22, 2019 12:21 pm

international001 wrote:
Fri Feb 22, 2019 11:34 am
About the exit tax, if you " sold and gains realized some years later the local country", would you keep the original tax basis (when you bought the assets on US, before exit-tax)?
Yes. The US 'deeming' something taxable for capital gains tax doesn't change its basis. The exit tax is a tax on pretend gains that has to be paid with real cash.
international001 wrote:
Fri Feb 22, 2019 11:34 am
If so, it seems more convenient to sell everything to cash and buy equivalent assets again after you have exited.
Not always possible. For a start, you'll have less money to buy those equivalent assets, because the US has taken a chunk in tax. Suppose you own a rental home. Sell that to raise the cash to pay the US exit tax (or capital gains tax if doing this before renouncing) and after paying it you no longer have the money to buy an equivalent rental home. And that's not even factoring in the cost overheads of simply selling a house and buying another.

And then there is its effect on retirement accounts. Immediate tax on the balance, as if withdrawn on the day before leaving (even when not withdrawn). No amount of selling before leaving the US will solve that one.

The exit tax is horrible tax law. It rides roughshod over many tax treaties, and is more or less arbitrary in its application -- IRA worth $1.999m, no exit tax; IRA worth $2.000m, that could cost you $700k in exit tax. That's a huge tax rise for a $1k net worth difference.

It positively motivates people to leave the US and/or renounce their US citizenship before it hits them. Got an elderly rich uncle who wrote you into their will? Own a home that has appreciated a lot recently? Close to the end of your career and with a decently sized IRA that you hope will carry you through retirement? For anyone not planning to spend the rest of their days in the US, all these and more suggest leaving the US and renouncing or losing your green card now, and before you reach the $2mm asset limit for the exit tax.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by Hyperborea » Fri Feb 22, 2019 6:30 pm

In regards to US exit (expatriation) taxes, while the individual limit is $2 million (not inflation adjusted either) a couple can directly leave with $4 million ($2 million each). The expatriation taxes are paid as an individual. If one spouse holds more than that then the excess can be gifted to the other spouse before expatriation.

If you've got more than $4 million then you can do a two step expatriation. One spouse expatriates with just below $2 million then the other spouse who still remains a US tax resident gifts up to their unified lifetime gift/estate exemption, which is currently $11.4 million. Now, the second spouse expatriates with up to $2 million. This means that you can get out with up to $15.4 million as a couple.

I would start by reading the excellent blog over at Hodgen Law on international tax and expatriation - https://hodgen.com/category/expatriation/
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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by international001 » Tue Feb 26, 2019 11:18 am

TedSwippet wrote:
Fri Feb 22, 2019 12:21 pm
Not always possible. For a start, you'll have less money to buy those equivalent assets, because the US has taken a chunk in tax. Suppose you own a rental home. Sell that to raise the cash to pay the US exit tax (or capital gains tax if doing this before renouncing) and after paying it you no longer have the money to buy an equivalent rental home. And that's not even factoring in the cost overheads of simply selling a house and buying another.
Sure.. liquidity and transactions costs are a concern.
But for securities it's even worse
You buy at $10 in US. You exit-tx when they are $20. You sell in your new country when they are $25.
You had to pay taxes over $20-$10 and $25-$10. So double taxation just there (if I understood right)

I didn't know about the $2M rule. This seems outrageous. Why not pay just for the difference of your amount - $2M? Any deep reason, or tax-regulators just didn't bother?

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by Hyperborea » Tue Feb 26, 2019 5:32 pm

international001 wrote:
Tue Feb 26, 2019 11:18 am
Sure.. liquidity and transactions costs are a concern.
But for securities it's even worse
You buy at $10 in US. You exit-tx when they are $20. You sell in your new country when they are $25.
You had to pay taxes over $20-$10 and $25-$10. So double taxation just there (if I understood right)
If you are in such a situation then your best option might be to not just pretend sell for the expatriation tax but to really sell and reset your basis. However, that will also open you up to state taxes which you wouldn't have paid for the expatriation pretend sale.

international001 wrote:
Tue Feb 26, 2019 11:18 am
I didn't know about the $2M rule. This seems outrageous. Why not pay just for the difference of your amount - $2M? Any deep reason, or tax-regulators just didn't bother?
Expatriates don't vote? Anybody leaving the US must be an ingrate and doesn't deserves a fair shake? Who knows?

It's a bit more complicated than that though and you do get a currently $680K exclusion on the gains before the tax is imposed. But even if you don't owe tax due to the exclusion being classed as a covered expatriate comes with other restrictions and filing requirements. You should try and avoid being a covered expatriate if you can. If you are a couple then you can avoid that up to a pretty high limit ($15.4M with some fancy dancing). If you are single then if the amount is high enough you may want to plan to minimize out gains before leaving (i.e. no tax state and staggered sales). If you might fall under the expatriation tax then you should really look into the details. Start with the IRS docs and read the expatriation tax lawyer's blog I posted above.
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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by galeno » Thu Feb 28, 2019 9:21 am

You guys are making my head spin! Ahhhhhh! All I care about is that we (USA-NRAs) are able to hold Ireland domiciled ETFs bought on the LSE thru our stock brokers.

Regarding US citizenship. [OT comment removed by admin LadyGeek]

I found this on Google:

"Natural-born U.S. citizens may not have their citizenship revoked against their will, since birthright citizenship is guaranteed by the 14th Amendment to the Constitution, but they may choose to renounce their citizenship on their own."


Then I found this:

"The U.S. Code does, however, see some acts as creating the possibility of a loss of nationality. When you lose your U.S. nationality, you are no longer under the protection or jurisdiction of the United States. When the United States considers you to no longer be of U.S. nationality, it in effect considers you to no longer be a citizen. Note that these are things you can do that may force you to lose your citizenship. The law also says that these acts must be voluntary and with the intent of losing U.S. citizenship. The ways to lose citizenship are detailed in 8 USC 1481:

Becoming naturalized in another country
Swearing an oath of allegiance to another country
Serving in the armed forces of a nation at war with the U.S., or if you are an officer in that force
Working for the government of another nation if doing so requires that you become naturalized or that you swear an oath of allegiance
Formally renouncing citizenship at a U.S. consular office
Formally renouncing citizenship to the U.S. Attorney General
By being convicted of committing treason"
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by LadyGeek » Thu Feb 28, 2019 5:26 pm

As a reminder, this is a "no politics" forum. I removed an off-topic comment regarding citizenship of a US person that was recently in the news.

Also, please state your concerns in a civil, factual, manner.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by galeno » Thu Feb 28, 2019 6:12 pm

Sorry. Lady Geek.

The recent story and this thread prompted me to look up the issue of US citizenship. First it said it couldn't be taken away. From a natural born citizen. Digging deeper I found many circumstances how it could be.

Now I'm interested about my own home country's citizenship issues.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: EU investor: any way to avoid punitive US estate tax on death?

Post by Thesaints » Thu Feb 28, 2019 6:17 pm

DJN wrote:
Mon Feb 11, 2019 3:49 am
therefore avoids the dreaded US estate tax.
As far as I know, the US estate tax is one of the lowest in the whole civilized world. This year the threshold is almost 12 millions.

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