New South African Boglehead moving to US or UK in future – domicile decision

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JRTI
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New South African Boglehead moving to US or UK in future – domicile decision

Post by JRTI » Tue Jun 30, 2020 7:18 am

I'm a new Boglehead that has spent the past several weeks absorbing what I can — really awesome community!

I'm a recent graduate in South Africa working at a multinational tech company, but will be moving to either the US or the UK in the next 2—3 years for my job.

I have the choice to go with either US- or Irish-domiciled Vanguard ETFs. I'm looking at a three-fund portfolio of VTI (Vanguard Total Stock Market ETF), VXUS (Vanguard Total International Stock ETF) and BND (Vanguard Total Bond Market ETF), or their Irish equivalents, in a 90:10 ratio for stocks and bonds. I'd start with a $10,000 initial deposit and $2,000 per month going forward.

The decision on which domicile option to go with is tricky given the circumstances that I'll try to outline below, so any advice here would be appreciated.
  • Post-emigration — From my understanding, the IRS takes a rather draconian view of foreign ETFs; the tax liabilities from owning Irish-domiciled ones may be a pain when arriving and living stateside. From the UK side, investing in US-domiciled ETFs is no longer possible for a retail investor due to the EU's PRIIPs regulations. I'm a UK citizen but only a South African tax resident so don't see this impacting anything tax-wise.
  • Tax — both US- and Irish-domiciled ETFs will have a 15% dividend withholding tax for the IRS due to tax treaties with the US. However, Irish dividends already factor in this deduction and it isn't recorded separately, and consequently some South Africans have reported struggles with convincing SARS (our local tax authority) that foreign taxes were paid in order to claim our foreign tax credit, so US-domiciled ones could have an advantage there.
  • Estate duties — US-domiciled funds for foreign aliens attract up to 40% in estate duties, with Irish-domiciled ones not attracting any. I'm in my early 20s so don't think it's a huge factor for me right now.
  • Brokers — I set up a TD Ameritrade account due to it not having maintenance or trading fees, but it's limited to US-domiciled ETFs. For Irish ETFs I can setup an Interactive Brokers foreign account, which unfortunately has $10/month maintenance fees (for <$100k balances) and trading fees; these are more than I'd like as I'm just starting out.
When I leave South Africa I'll need to pay capital gains tax on all my investments, so I could always just liquidate all my holdings at that time and then go with a different option if needs be.

I'm personally leaning towards US-domiciled funds, but would appreciate any insight. I'd like to try and keep things as simple and streamlined as possible for myself in future. Thanks!
Last edited by JRTI on Tue Jun 30, 2020 9:52 am, edited 8 times in total.

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Re: New South African Boglehead moving to US or UK in future – domicile decision

Post by LadyGeek » Tue Jun 30, 2020 8:25 am

This thread is now in the Non-US Investing forum (South Africa).

JRTI, Welcome!
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TedSwippet
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Re: New South African Boglehead moving to US or UK in future – domicile decision

Post by TedSwippet » Tue Jun 30, 2020 9:53 am

Welcome. I'd say you've picked up most of the angles on the tax issues here, so just a few added notes below.
JRTI wrote:
Tue Jun 30, 2020 7:18 am
Post-emigration — From my understanding, the IRS takes a rather draconian view of foreign ETFs; the tax liabilities from owning Irish-domiciled ones may be a pain when arriving and living stateside. From the UK side, investing in US-domiciled ETFs is no longer possible for a retail investor due to the EU's PRIIPs regulations. I'm a UK citizen but only a South African tax resident so don't see this impacting anything tax-wise.
Over time, if left alone the US's PFIC tax rules on non-US domiciled funds can devour 100% of your gains, so 'draconian' is one way to put it. The UK has a much milder version for non-UCITS and non-reporting status funds. If you held US domiciled ETFS that have UK reporting status though, that would let you avoid US PFIC if you move to the US, and UK non-reporting issues if you move to the UK, so arguably the best way to stay flexible yet be able to keep existing holdings.

If you move to the UK, note that UK investors can non longer buy US domiciled ETFs, thanks to the PRIIPs regulation, but there's no tax or other issue with holding any you might already have when you arrive. Rebalancing will be a bit of a pain though, since you'll only be able to sell what you hold, and new purchases may have to be in Ireland or other EU domiciled UCITS ETFs.
JRTI wrote:
Tue Jun 30, 2020 7:18 am
Tax — both US- and Irish-domiciled ETFs will have a 15% dividend withholding tax for the IRS due to tax treaties with the US. However, Irish dividends already factor in this deduction and it isn't recorded separately, and consequently some South Africans have reported struggles with convincing SARS (our local tax authority) that foreign taxes were paid in order to claim our foreign tax credit, so US-domiciled ones could have an advantage there.
Not many countries (at least that I know of) let investors claim back tax paid indirectly; that is, internally by an ETF, rather than explicitly through broker withholding or similar. South Africa might be an exception, but from the sound of it perhaps not a straightforward one. So there's a potential tax benefit holding US stocks through a US domiciled ETF.

For non-US stocks, provided your SA or UK (after moving) tax rate exceeds 15% -- US/SA and US/UK treaty rate -- you (presumably) should be able to get SA or UK tax credit for the US tax paid. No advantage to US domiciled ETFs there, but also no disadvantage unless your local tax rate drops below 15%, when the US tax begins to become a deadweight loss that you'd want to avoid.
JRTI wrote:
Tue Jun 30, 2020 7:18 am
Estate duties — US-domiciled funds for foreign aliens attract up to 40% in estate duties, with Irish-domiciled ones not attracting any. I'm in my early 20s so don't think it's a huge factor for me right now.
SA's estate tax treaty with the US is old, and the prevailing wisdom is that it does not protect anything above $60k. At $10k initial plus $2k/month you will exceed $60k in two years, two months, so inside your three-year window for moving. Life insurance might be one way to mitigate any potential for US estate tax; without wishing to be morbid, remember that not all deaths are due to old age.

However ... as a UK citizen, it is possible that you can use the US/UK estate tax treaty, even though not domiciled in the UK. This one, somewhat uniquely as far as I can tell, protects "nationals" of the treaty country, so UK citizens. You'll want to read it very carefully if you plan to rely on it.
JRTI wrote:
Tue Jun 30, 2020 7:18 am
When I leave South Africa I'll need to pay capital gains tax on all my investments, so I could always just liquidate all my holdings at that time and then go with a different option if needs be.
Given this, you want to optimise for your current SA tax position, and accept that you'll potentially change everything on moving.
JRTI wrote:
Tue Jun 30, 2020 7:18 am
I'm personally leaning towards US-domiciled funds, but would appreciate any insight. I'd like to try and keep things as simple and streamlined as possible for myself in future. Thanks!
Up to $60k, and provided your SA tax rate on dividends exceeds the US's 15% withholding (and that you can reclaim this 15% against SA tax), US domiciled ETFs should be okay. Beyond $60k, extreme care needed. And if your SA tax rate is below 15%, US domiciled ETFs for US stocks are still okay, but it would then be better to use non-US domiciled ETFs for non-US stocks, to avoid entering a region of unrecoverable double-tax.

Topic Author
JRTI
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Joined: Sat Jun 20, 2020 7:48 pm

Re: New South African Boglehead moving to US or UK in future – domicile decision

Post by JRTI » Wed Jul 01, 2020 8:36 pm

I appreciate the thorough notes, TedSwippet! It goes a long way in clearing up those concerns of hidden gremlins I may have missed. :happy
TedSwippet wrote:
Tue Jun 30, 2020 9:53 am
If you held US domiciled ETFS that have UK reporting status though, that would let you avoid US PFIC if you move to the US, and UK non-reporting issues if you move to the UK, so arguably the best way to stay flexible yet be able to keep existing holdings.
This is a good point if I become a US citizen/green card holder in future and move to the UK. Thankfully, my choice of VTI, VXUS and BND are all HMRC reporting funds.
TedSwippet wrote:
Tue Jun 30, 2020 9:53 am
Not many countries (at least that I know of) let investors claim back tax paid indirectly; that is, internally by an ETF, rather than explicitly through broker withholding or similar. South Africa might be an exception, but from the sound of it perhaps not a straightforward one. So there's a potential tax benefit holding US stocks through a US domiciled ETF.
My statement was due to forum posts of individual investors attempting this with their Irish domiciled ETFs, so whether it is actually possible or not I can't say. Is there a technical term for this sort of indirect/internal tax claim?
TedSwippet wrote:
Tue Jun 30, 2020 9:53 am
Life insurance might be one way to mitigate any potential for US estate tax; without wishing to be morbid, remember that not all deaths are due to old age.
In this case, the morbid thought was well needed. I had the intention of arranging life insurance cover before reaching the $60k figure, but compensating for the estate tax with additional cover is a great suggestion.
TedSwippet wrote:
Tue Jun 30, 2020 9:53 am
However ... as a UK citizen, it is possible that you can use the US/UK estate tax treaty, even though not domiciled in the UK. This one, somewhat uniquely as far as I can tell, protects "nationals" of the treaty country, so UK citizens. You'll want to read it very carefully if you plan to rely on it.
I wasn't aware of this; whilst I rightly wouldn't want to rely on it alone without consulting an international tax expert and don't plan on solely relying on it anyway, it's nice to know that it remains a possibility.
TedSwippet wrote:
Tue Jun 30, 2020 9:53 am
Up to $60k, and provided your SA tax rate on dividends exceeds the US's 15% withholding (and that you can reclaim this 15% against SA tax), US domiciled ETFs should be okay. Beyond $60k, extreme care needed. And if your SA tax rate is below 15%, US domiciled ETFs for US stocks are still okay, but it would then be better to use non-US domiciled ETFs for non-US stocks, to avoid entering a region of unrecoverable double-tax.
I (fortunately?) expect to pay a 20% tax rate on foreign dividends in SA, which will avoid this potential double-tax issue.

With all this taken into consideration, I've decided that I'll proceed with a US domiciled ETF portfolio, and if needs be liquidate it when leaving SA if my new country of residence leads to a favourable Irish domiciled portfolio.

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