Questions from EU resident investing in US domiciled assets

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oceanexpat
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Questions from EU resident investing in US domiciled assets

Post by oceanexpat »

Hi all,

I have a number of questions about how to best invest in US assets from Europe (Portugal). Hoping I can get answers to my questions on this forum.

Background: I recently moved from the United States to Portugal. I'm a Swiss citizen (and now EU resident), and a non-US resident for tax and investment purposes. All of my investments are currently in US domiciled investments (401K, Roth IRA, Stocks, ETFs), and while some of them are global investments (i.e. total stock market ETFs), they're all US domiciled since I invested in them via US brokerages (Vanguard, Ally Invest, E*trade US).

While my salary is currently paid in EUR, I plan to continue with the same strategy of investing in primarily US based companies via stocks and ETFs and am trying to learn how to do this best out of Europe as a non-US resident.

Questions:
  • I'm aware that I can invest in US assets via both US based brokerages who allow Europeans (e.g. tastytrade) or via European based brokerages (e.g. IBKR, Degiro). What are the pros and cons of using one over the other? From what I gathered, only US brokerages offer no-fee trading and allow EU based investors to invest in US based ETFs since they don't need to follow the KID regulation. On the other hand, I don't understand if there are any downsides in using a US broker over an EU based broker.
  • I'm currently paid in EUR and will need to exchange EUR to USD before investing into US stocks. I haven't done frequent currency conversions before outside of converting some money with Transferwise. Since I'm not investing more frequently, it seems to make sense to better understand how to optimize currency conversions. I'm not trying to time the market, just understand what the most practical and low-cost way is to convert EUR to USD before investing. Is it correct to assume that using a broker (that can hold both EUR and USD) is the proper way to do this? For example, IBKR Europe can hold both USD and EUR and seems to have low cost currency conversion. Is it also correct to assume that all brokers use the interbank exchange rates? Again, my goal is to be practical and low cost.
  • From a regulation and asset insurance perspective, are there any key items I should better understand? e.g. am I misunderstanding that I can use a US brokerage (as EU resident) to invest in US ETFs (am I bypassing regulations?), or am I now aware of certain regulations that would heavily tax US investments (either via EU or US brokerage), perhaps on death? And lastly, while I plan to use a financially stable brokerage (i.e. no startups) -- are there any considerations on having my investments insured via US or EU based brokerages?
  • I read some posts on investing Ireland domiciled ETFs over US based ones, but don't understand the benefits. Would be super helpful if someone could shed some light or point me towards the right direction for better understanding.
  • Any considerations for keeping my existing US domiciled investments in the US (i.e. my Vanguard, Ally Bank, E*Trade) vs. moving them to a EU broker should I decide to use one instead?
  • Anything else I may be forgetting?
Thank you in advance for your help. Great to have a forum available to be able to ask these (complicated) questions.
Last edited by oceanexpat on Mon Nov 22, 2021 11:56 am, edited 1 time in total.
DJN
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Re: Questions from EU resident investing in US domiciled assets

Post by DJN »

Hi,
have you investigated the potential of a tax advantaged status for non habitual resident (or the former golden visa scheme which I believe has been recently revised).
Under NHR you can live on 10% tax rate for 10 years as long as you qualify.
Capital gains are taxed in Portugal.
I am not sure how the US estate tax situation will affect you as a Swiss citizen and a tax resident of Portugal, you should check.
EU citizens cannot generally access funds without a KIID.
For currency conversion to US dollars I use IBKR to keep things simple.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
TedSwippet
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Re: Questions from EU resident investing in US domiciled assets

Post by TedSwippet »

Welcome.
oceanexpat wrote: Mon Nov 22, 2021 6:18 am Background: I recently moved from the United States to Portugal. I'm a Swiss citizen (and now EU resident), and a non-US resident for tax and investment purposes.
Before continuing, can you confirm absolutely that you are not a US citizen or a green card holder? If you are either of these, your investing situation is entirely different to if you are not.

For the rest of this post, I am assuming you are a US 'nonresident alien'; that is, not a US citizen or green card holder.
oceanexpat wrote: Mon Nov 22, 2021 6:18 amI'm aware that I can invest in US assets via both US based brokerages who allow Europeans (e.g. tastytrade) or via European based brokerages (e.g. IBKR, Degiro). What are the pros and cons of using one over the other? From what I gathered, only US brokerages offer no-fee trading and allow EU based investors to invest in US based ETFs since they don't need to follow the KID regulation. On the other hand, I don't understand if there are any downsides in using a US broker over an EU based broker.
Portugal has a decent US income tax treaty, 15% on dividends from US stocks and US domiciled funds and ETFs. For investors from Portugal, the main threat comes from the US estate tax; Portugal has no US estate tax treaty. This would be 26-40% of everything you hold in the US above just $60k. Your 401k and IRA count as 'US situs', no matter what investments you hold inside them.

There is a treaty 'cheat-sheet' here:

Nonresident alien's ETF domicile decision table - Bogleheads

One wrinkle. Estate tax treaties revolve around domicile, of which residency is one element, but not the only one. If you are legally domiciled in Switzerland then you might be able to gain some cover from the US/Switzerland estate tax treaty. From your description of things so far, it sounds like that could be a stretch, but perhaps worth looking into.
oceanexpat wrote: Mon Nov 22, 2021 6:18 amFrom a regulation and asset insurance perspective, are there any key items I should better understand? e.g. am I misunderstanding that I can use a US brokerage (as EU resident) to invest in US ETFs (am I bypassing regulations?), or am I now aware of certain regulations that would heavily tax US investments (either via EU or US brokerage), perhaps on death? And lastly, while I plan to use a financially stable brokerage (i.e. no startups) -- are there any considerations on having my investments insured via US or EU based brokerages?
Using a US brokerage does bypass PRIIPs. But PRIIPs regulates the broker, not the end customer (you), so any risk here is the broker's and not yours. And brokers with no EU/UK presence don't need to conform to PRIIPs.

On tax though, as above. You could be risking confiscatory US estate tax on all your holdings. And a US broker generally will not offer non-US domiciled funds (not least because these constitute a US tax death-sentence to their main customer base of US citizens and US residents).
oceanexpat wrote: Mon Nov 22, 2021 6:18 amI read some posts on investing Ireland domiciled ETFs over US based ones, but don't understand the benefits. Would be super helpful if someone could shed some light or point me towards the right direction for better understanding.
These wiki articles explain:

- Nonresident alien taxation - Bogleheads
- Nonresident alien investors and Ireland domiciled ETFs - Bogleheads
oceanexpat wrote: Mon Nov 22, 2021 6:18 amAny considerations for keeping my existing US domiciled investments in the US (i.e. my Vanguard, Ally Bank, E*Trade) vs. moving them to a EU broker should I decide to use one instead?
Mostly covered above. Xenophobic US tax laws, basically. (Nothing from me about how or when Portugal might -- or might not -- tax your existing investments.)
oceanexpat wrote: Mon Nov 22, 2021 6:18 amAnything else I may be forgetting?
Probably, but it is difficult to say what! Two more wiki articles that might help you sort through the issues:

- Non-US investor's guide to navigating US tax traps - Bogleheads
- US tax pitfalls for a non-US person moving to the US - Bogleheads
Topic Author
oceanexpat
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Re: Questions from EU resident investing in US domiciled assets

Post by oceanexpat »

Hi TedSwippet, thanks for your detailed answer.
Before continuing, can you confirm absolutely that you are not a US citizen or a green card holder? If you are either of these, your investing situation is entirely different to if you are not.
Technically, I'm a US tax resident for the remainder of the year (I pass the substantial presence test), but I'm a non-resident alien moving forward (not a US citizen or green card holder).
Portugal has a decent US income tax treaty, 15% on dividends from US stocks and US domiciled funds and ETFs. For investors from Portugal, the main threat comes from the US estate tax; Portugal has no US estate tax treaty. This would be 26-40% of everything you hold in the US above just $60k. Your 401k and IRA count as 'US situs', no matter what investments you hold inside them.
That's helpful. Thank you. How can I factor this into deciding if I should use a US based or EU based broker? As far as I understand, dividends are taxed the same regardless, correct? But, I would avoid the US tax estate situation by using a non-US based broker—even if holding US stocks—correct?

I will also read through the links you shared. Thanks again
TedSwippet
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Re: Questions from EU resident investing in US domiciled assets

Post by TedSwippet »

oceanexpat wrote: Mon Nov 22, 2021 11:56 am Technically, I'm a US tax resident for the remainder of the year (I pass the substantial presence test), but I'm a non-resident alien moving forward (not a US citizen or green card holder).
I think you should be able to use split year treatment, potentially with a 'closer connection' claim, to get you free of US tax shackles at the date you departed the US, rather than wait until the end of the year. It may well be though that this close to year end, it is advantageous -- or at least, not really disadvantageous -- to remain a US 'taxable person' until Dec 31.

Just a note that you may have more options here than you thought, then.
oceanexpat wrote: Mon Nov 22, 2021 11:56 am That's helpful. Thank you. How can I factor this into deciding if I should use a US based or EU based broker? As far as I understand, dividends are taxed the same regardless, correct? But, I would avoid the US tax estate situation by using a non-US based broker—even if holding US stocks—correct?
No. You are at risk of US estate tax if you hold US stocks or US domiciled funds in any broker, US based or EU based. Conversely, you avoid US estate tax risk if you hold non-US stocks and non-US domiciled funds in any broker, US based or EU based. What matters is the location of the stock or ETF, not the location of exchange on which you hold it.

In practice though, you will find that few US brokers offer non-US domiciled funds. Vanguard US and similar generally may not. (Interactive Brokers would be an exception, but they are a specialist international broker). So to avoid US estate tax risk, you probably want to go with an EU broker, or Interactive Brokers in a pinch.

For best isolation from the US, you will want to move what you currently hold there out to the EU, to the largest extent possible. That will be infeasible for 401k, IRA and similar accounts (the US does not participate in QROPS), but moving everything else out minimises the US estate tax risk. Maybe consider taking out life insurance to cover any unavoidable US estate tax risk; also, some motivation there to draw down your US retirement accounts as early as you can and as is sensible.

US tax laws for nonresident aliens are discriminatory. You should make every effort to avoid or neuter them.
asteroidnix
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Re: Questions from EU resident investing in US domiciled assets

Post by asteroidnix »

TedSwippet wrote: Mon Nov 22, 2021 12:32 pm
I think you should be able to use split year treatment, potentially with a 'closer connection' claim, to get you free of US tax shackles at the date you departed the US, rather than wait until the end of the year. It may well be though that this close to year end, it is advantageous -- or at least, not really disadvantageous -- to remain a US 'taxable person' until Dec 31.
This is something I am investigating right now. One downside of doing split year is that you lose the standard deduction. This may however still be advantageous if it means not paying US tax on the part which would otherwise be the non resident part given you may not have sufficient foreign tax credits. In my case this is a big issue as I am doing aggressive UK pension salary sacrifice right now meaning little to no UK tax is being paid. I am not able to deduct on US side if I filed 1040 for the whole year given I maxed out 401k already.

Interestingly, there appears to be a difference of opinion on whether the closer connections is a "statement of fact" or an election for the case where the person gives up the Green Card and passes Substantial Presence Test. I talked to one specialist in the US before I left who said that letting it run to 31st December without doing a closer ties election is a "cute interpretation". In an audit situation, the IRS may try and push towards split year if it means a preferable tax situation to them. I saw one other similar interpretation online from some firm. I recently however talked to two specialist firms in the UK who didn't agree this would be an issue, but however suggested still doing split year as it creates a clean separation and shows clear intent to the IRS.
TedSwippet
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Re: Questions from EU resident investing in US domiciled assets

Post by TedSwippet »

asteroidnix wrote: Mon Nov 22, 2021 3:12 pm Interestingly, there appears to be a difference of opinion on whether the closer connections is a "statement of fact" or an election for the case where the person gives up the Green Card and passes Substantial Presence Test. I talked to one specialist in the US before I left who said that letting it run to 31st December without doing a closer ties election is a "cute interpretation". In an audit situation, the IRS may try and push towards split year if it means a preferable tax situation to them. I saw one other similar interpretation online from some firm. I recently however talked to two specialist firms in the UK who didn't agree this would be an issue, but however suggested still doing split year as it creates a clean separation and shows clear intent to the IRS.
It is difficult to know what to make of that. The IRS's verbiage on this, such that it is, uses the phrase "You may qualify for a residency termination date that is earlier than December 31." Qualifying for something usually means "can", but not "must".

And the actual law ("if the individual establishes that ...") also seems fairly unambiguous in offering split year as an elective choice rather than a compulsion.

I'd be inclined to side with your latter two specialists, but that may just be me.
masni
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Re: Questions from EU resident investing in US domiciled assets

Post by masni »

The issue is with US estate taxes, and is applied on any US based asset that you own. If you are a US resident, your exception to your spouse on your death is like 11 million, none US resident, 60K, after which you be charged 40%. It does not matter where your broker is based, when you want to change owner of that stock from you to your wife, on your death, the broker will withhold that % in taxes

To get around this, most people hold non US based EFT, so like VUSA, which being based in Ireland, does not have inheritance tax on non residence
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oceanexpat
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Re: Questions from EU resident investing in US domiciled assets

Post by oceanexpat »

No. You are at risk of US estate tax if you hold US stocks or US domiciled funds in any broker, US based or EU based. Conversely, you avoid US estate tax risk if you hold non-US stocks and non-US domiciled funds in any broker, US based or EU based. What matters is the location of the stock or ETF, not the location of exchange on which you hold it.
I see, that makes sense. So in summary, it really doesn't matter from a dividends or estate tax perspective if I use a n US or EU based broker. The way to avoid estate tax risk is to invest in EU domiciled investments (even if they track US assets), not by choice of brokerage location.

In summary, since I invest exclusively in US assets my options are the following:

A) Use a US based brokerage for investing in US stocks and US based ETFs (since US brokerages do not need to provide KIDs); the pros are that I save on fees since many US brokerages offer zero-fee trading; the cons are there are now few US brokerages that accept EU based investors. Am I missing something?

B) Use an EU based brokerage for investing in US stocks, and EU based ETFs that track US assets (e.g. EU version of Vanguard Total Stock Market); the pros are that I have a wider choice of brokerages, am know the brokerage won't refuse me service in the future; the cons are that I pay for higher transaction fees (no zero fee trading) and EU based ETFs generally have a higher fee structure. Am I missing something?
For best isolation from the US, you will want to move what you currently hold there out to the EU, to the largest extent possible.
Also makes sense based on your explanation, i.e. transfer into EU based equivalents of the US ETFs, and for stocks I'm out of options since they're US stocks and I want to maintain my US focused investment plan. Correct?
Maybe consider taking out life insurance to cover any unavoidable US estate tax risk; also, some motivation there to draw down your US retirement accounts as early as you can and as is sensible.
I may return to the US at some point in the future, so there may be benefit in not withdrawing from the tax shielded accounts and incur the early withdrawal fees. I don't think I can get out of those. Life insurance to cover for tax risk is a sensible suggestion (I didn't think of that) — thank you.
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oceanexpat
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Re: Questions from EU resident investing in US domiciled assets

Post by oceanexpat »

To get around this, most people hold non US based EFT, so like VUSA, which being based in Ireland, does not have inheritance tax on non residence
There is no similar option for investing in US stocks, correct?
TedSwippet
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Re: Questions from EU resident investing in US domiciled assets

Post by TedSwippet »

oceanexpat wrote: Wed Nov 24, 2021 8:26 am In summary, since I invest exclusively in US assets ...
By which you mean, you only hold US stocks, either directly or through ETFs? That is, you do not hold stocks from any of the other 190 or so countries on the face of the planet? Toyota. Nestle. HSBC. And so on?

If so, as a non-US investor you might want to look at diversifying away from only US stocks.
oceanexpat wrote: Wed Nov 24, 2021 8:26 am A) Use a US based brokerage for investing in US stocks and US based ETFs (since US brokerages do not need to provide KIDs); the pros are that I save on fees since many US brokerages offer zero-fee trading; the cons are there are now few US brokerages that accept EU based investors. Am I missing something?
Unless I'm misreading, what you're still missing here I think is the risk of US estate tax.

To the extent that you want to directly hold any US stocks this is going to be unavoidable unless you open an intermediate holding company (something that can have unpleasant US tax ramifications of its own, not to mention added costs). However, for ETFs that themselves hold US stocks, you avoid the US estate tax risk by using non-US domiciled ETFs, rather than US domiciled ones.

As far as US tax is concerned, for the most part a US domiciled ETF is just another US stock, no matter what assets it contains under the covers.
oceanexpat wrote: Wed Nov 24, 2021 8:26 am B) Use an EU based brokerage for investing in US stocks, and EU based ETFs that track US assets (e.g. EU version of Vanguard Total Stock Market); the pros are that I have a wider choice of brokerages, am know the brokerage won't refuse me service in the future; the cons are that I pay for higher transaction fees (no zero fee trading) and EU based ETFs generally have a higher fee structure.
This. The unstated pro is insulation from US estate tax that comes with EU based ETFs. The cons (transaction fees and a slightly higher TER) are the price of that insulation from confiscatory US taxes. Generally reckoned to be good value.
oceanexpat wrote: Wed Nov 24, 2021 8:26 am Also makes sense based on your explanation, i.e. transfer into EU based equivalents of the US ETFs, and for stocks I'm out of options since they're US stocks and I want to maintain my US focused investment plan. Correct?
Yes. Unless you use an intermediate holding corporation to isolate you from the US. Or perhaps one alternative, take out life insurance to the value of the US estate tax you might face if the worst should happen.
oceanexpat wrote: Wed Nov 24, 2021 8:26 am I may return to the US at some point in the future, so there may be benefit in not withdrawing from the tax shielded accounts and incur the early withdrawal fees. I don't think I can get out of those.
If you return to the US then yes, you will be better of holding your tax deferred accounts. However, until then they represent a nasty US tax risk.

As for early withdrawal penalties, article 21 paragraph 1(a) of the US/Portugal tax treaty reserves taxing rights on non-government pensions to the country of residence. Ordinarily then, while a Portuguese resident, the US cannot tax pension withdrawals, only Portugal can. And a good argument can be made that the normal US early withdrawal penalties on IRA and 401k accounts are actually a tax. In which case, the US may be prevented by treaty from applying early withdrawal penalties. Admittedly an ... assertive view, but worth bearing in mind if you do decide that the US estate tax risks on these accounts is unacceptably high.
masni
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Re: Questions from EU resident investing in US domiciled assets

Post by masni »

oceanexpat wrote: Wed Nov 24, 2021 8:27 am
To get around this, most people hold non US based EFT, so like VUSA, which being based in Ireland, does not have inheritance tax on non residence
There is no similar option for investing in US stocks, correct?
You can of course invest in US stock directly, but you (well, not you per say) will get hit by estate tax of anything over 60K unless you are a US resident. For me, I do have US stock, but as I get older, I cycle out of these and move into non US ETF. It also helps that all my assets are held by a family trust, so it is protected
kserio
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Re: Questions from EU resident investing in US domiciled assets

Post by kserio »

Hi,

I feel like you guys are missing one detail - the taxation of the dividends. When you invest through EU funds I believe there are three levels of taxation. First one is the 15% withheld dividend tax on stocks or ETF paid by the fund in EU from your money, then there is usually 0% of tax owned by you to the fund domicile in EU, only then there is the last step of dividend tax in your home country.

In my case (Poland) the dividends are taxed with flat rate of 19%, but when I invest through EU funds the 15% withheld tax is not paid by me but by the EU fund which means I can't recover it. On the other hand if I use US funds I need to pay only extra 4% in Poland since I already paid 15% of the withheld tax.

I think this is still true when the EU fund is accumulating instead of distributing - in that case it only means that you own no tax in your home country, but the 15% is still lost.

Might be worth calculating whether 15% extra of each divided would pay for some nice life insurance to mitigate the estate tax risk.

Please, correct me if I'm wrong.


PS: Ted is actually the one who pointed this out to me almost two years ago viewtopic.php?p=4316099#p4316099
TedSwippet
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Re: Questions from EU resident investing in US domiciled assets

Post by TedSwippet »

kserio wrote: Thu Nov 25, 2021 4:27 am Might be worth calculating whether 15% extra of each divided would pay for some nice life insurance to mitigate the estate tax risk.

Please, correct me if I'm wrong.
You are right on the concept. Your number is slightly off, though.

Suppose a $100 dividend. Lose $15 to US withholding tax internally in the ETF and you receive $85. Polish tax of 19% on that leaves you with $68.65. An effective tax drag of 31.15%, so you get 12.15% extra of each dividend if you invest in US stocks through US domiciled ETFs rather than EU domiciled ones. Probably still enough for life insurance.

The above only applies for ETFs holding US stocks. For ETFs holding non-US stocks, there is no US withholding tax internal to the ETF.
Valuethinker
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Re: Questions from EU resident investing in US domiciled assets

Post by Valuethinker »

kserio wrote: Thu Nov 25, 2021 4:27 am Hi,

I feel like you guys are missing one detail - the taxation of the dividends. When you invest through EU funds I believe there are three levels of taxation. First one is the 15% withheld dividend tax on stocks or ETF paid by the fund in EU from your money, then there is usually 0% of tax owned by you to the fund domicile in EU, only then there is the last step of dividend tax in your home country.

In my case (Poland) the dividends are taxed with flat rate of 19%, but when I invest through EU funds the 15% withheld tax is not paid by me but by the EU fund which means I can't recover it. On the other hand if I use US funds I need to pay only extra 4% in Poland since I already paid 15% of the withheld tax.

I think this is still true when the EU fund is accumulating instead of distributing - in that case it only means that you own no tax in your home country, but the 15% is still lost.

Might be worth calculating whether 15% extra of each divided would pay for some nice life insurance to mitigate the estate tax risk.

Please, correct me if I'm wrong.


PS: Ted is actually the one who pointed this out to me almost two years ago viewtopic.php?p=4316099#p4316099
How are you able to invest in US funds?

Any European broker I know of will not offer these funds to their investors. That is because of the requirements for Key Investor Information Document etc, that US funds just don't produce (I think the relevant EU legislation is PIIRP ?).
kserio
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Re: Questions from EU resident investing in US domiciled assets

Post by kserio »

I'm doing that through US Interactive Brokers. I cannot buy US funds directly, but I can do that by buying options and exercising them immediately. That will get you 100 units of given fund. Recently IKBR has created a EU branch and I was migrated there and last I checked it was still working for me but I'm afraid this might change in near future.
TedSwippet wrote: Thu Nov 25, 2021 5:42 am
kserio wrote: Thu Nov 25, 2021 4:27 am Might be worth calculating whether 15% extra of each divided would pay for some nice life insurance to mitigate the estate tax risk.

Please, correct me if I'm wrong.
You are right on the concept. Your number is slightly off, though.

Suppose a $100 dividend. Lose $15 to US withholding tax internally in the ETF and you receive $85. Polish tax of 19% on that leaves you with $68.65. An effective tax drag of 31.15%, so you get 12.15% extra of each dividend if you invest in US stocks through US domiciled ETFs rather than EU domiciled ones. Probably still enough for life insurance.
Yes, that makes more sense.
TedSwippet wrote: Thu Nov 25, 2021 5:42 am The above only applies for ETFs holding US stocks. For ETFs holding non-US stocks, there is no US withholding tax internal to the ETF.
I'm wondering if the same is happening with other countries that are also withholding the tax. For example if you hold Vanguard FTSE All-World UCITS ETF (USD) IE00BK5BQT80, when the accumulating dividend is paid US will take 15%, but is it the same for Germany, UK or France?

According to this https://taxsummaries.pwc.com/germany/co ... ding-taxes Germany is withholding 25% on individuals which is quite a lot, but I've noticed people are not taking this into account when advising to go for UCITS funds. Although, I think there is no better alternative, it would be too complicated to look for funds in each country just to try to save on withholding tax, but at least for US it makes sense when the exposure is currently at 56.11% in this ETF.
TedSwippet
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Re: Questions from EU resident investing in US domiciled assets

Post by TedSwippet »

kserio wrote: Thu Nov 25, 2021 7:56 am
TedSwippet wrote: Thu Nov 25, 2021 5:42 am The above only applies for ETFs holding US stocks. For ETFs holding non-US stocks, there is no US withholding tax internal to the ETF.
I'm wondering if the same is happening with other countries that are also withholding the tax. For example if you hold Vanguard FTSE All-World UCITS ETF (USD) IE00BK5BQT80, when the accumulating dividend is paid US will take 15%, but is it the same for Germany, UK or France?
Strictly, the US takes it 15% when the underlying US stock pays its dividend to the fund. And ... well, the UK does not apply any tax withholding on dividends paid to non-UK investors or non-UK domiciled funds. But yes, other countries may well withhold on dividends paid by their stocks to foreign funds, ETFs and other entities, perhaps including France and Germany.

The logic here is that the withholding tax applied by France, Germany, and any and every other non-US country that does this is probably the same for both US domiciled and Ireland domiciled funds. After all, both these funds would be 'foreign' in relation to the country paying the dividend. So it's not that non-US tax withholding does not exist for non-US stocks, it is just that there is a working assumption of it being equal no matter whether the container ETF is a US domiciled one or an Ireland domiciled one.

To really pick that apart you would have to rummage around in multiple tax treaties, at minimum two (US and Ireland) for each country whose stock appears in a given all-world ETF. And even there, treaties are usually fairly clear what rate an individual investor might seem, but often pretty unclear on what dividend withholding rate a fund or SICAV based in a country might face(*).

Added to which, because US stocks are more than half of an all-world index, the effect of tax withholding from all the other non-US countries that indulge in it put together will collectively be lower than the effect from US stocks(**), so to the extent that there is any difference between withholding tax rates of non-US countries across US and Ireland domiciled ETFs, the effect is likely to be minimal.


(*) Case in point: individual investors in Ireland and Luxembourg can use their respective treaties to obtain a 15% rate on US stocks; ETFs based in Ireland can use the treaty for the same 15% rate, but ETFs based in Luxembourg cannot, and so face the full 30% rate (some may I suppose indulge in swaps and so on to mitigate this).

(**) Alluded to in the wiki. A few intrepid folk have attempted to estimate non-US tax withholding drag in all-world ETFs in the past, I think. From recollection (too lazy to do a full forum search!), aggregate numbers on the order of 8-12% for dividends from non-US stocks seem to come out.
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oceanexpat
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Re: Questions from EU resident investing in US domiciled assets

Post by oceanexpat »

By which you mean, you only hold US stocks, either directly or through ETFs? That is, you do not hold stocks from any of the other 190 or so countries on the face of the planet? Toyota. Nestle. HSBC. And so on?
I should have clarified. Several of the Vanguard ETFs I hold have global exposure, but the majority of investments I plan to make the coming year are in US based companies (mostly individual stocks).
I feel like you guys are missing one detail - the taxation of the dividends. When you invest through EU funds I believe there are three levels of taxation. First one is the 15% withheld dividend tax on stocks or ETF paid by the fund in EU from your money, then there is usually 0% of tax owned by you to the fund domicile in EU, only then there is the last step of dividend tax in your home country.
This is helpful. I have not thought about the levels of taxation. My understanding for Portugal: Dividends are taxed the same in the end result if investing in US or Ireland domiciled ETFs since both Portugal and Ireland's US tax treaties are similar, i.e. taxing dividends at 15%. In my case, since these are foreign sourced dividends and taxed in country of source (i.e. US or Ireland), under NHR (non habitual tax regime) they are not taxed in Portugal, resulting in effective tax rate of 15%. Correct?

A few more questions:
  • Is it possible to transfer US domiciled ETFs to European equivalents without having to sell them and incur capital gains?
  • If I moved back to the US, is the reverse also possible (i.e. EU domiciled to US domiciled)
  • How would I go about exploring options for withdrawing from my US retirement accounts penalty free? Since I'm not sure if I will return to the US, this isn't a priority but would be good to fully understand the options. Also, are there any downsides to withdrawing if it could be done penalty free and transferred into similar EU domiciled assets (therefore avoiding capital gains)?
To bring it back to the original question(s). In summary, it seems to me that using an EU based broker is preferred for the following reasons:
  • I can avoid US estate risk at least for the the portion that I invest in ETFs as long as they are Ireland domiciled
  • While trading fees can be avoided by using a US brokerage, regular wire transfers from Portugal to the US would likely cost about the same
  • I can't fully avoid US estate tax given that I hold US stocks; but a potential way to hedge is to take out life insurance for the amount of estate tax I would owe
  • Ireland/US tax treaty combined with Portugal NHR also results in a 15% dividends tax rate
  • More choice of reputable brokers, e.g. IBKR
TedSwippet
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Re: Questions from EU resident investing in US domiciled assets

Post by TedSwippet »

oceanexpat wrote: Fri Nov 26, 2021 9:25 am This is helpful. I have not thought about the levels of taxation. My understanding for Portugal: Dividends are taxed the same in the end result if investing in US or Ireland domiciled ETFs since both Portugal and Ireland's US tax treaties are similar, i.e. taxing dividends at 15%. In my case, since these are foreign sourced dividends and taxed in country of source (i.e. US or Ireland), under NHR (non habitual tax regime) they are not taxed in Portugal, resulting in effective tax rate of 15%. Correct?
Partially correct, depending purely on whether the ETF holds only US or only non-US stocks. And assuming you have a 0% Portuguese rate on dividends from any type of (non-Portuguese domiciled?) ETF -- I think that's what the NHR regime allows (though don't trust me on this specific point).

Best illustrated by an example.

If you hold VOO, Vanguard's US domiciled S&P500 ETF (so US-only stocks), you lose 15% of the dividends paid to you in US tax, via broker withholding on the ETF's dividend payout. If you hold VUSD, Vanguard's Ireland domiciled S&P500 ETF (so also, US-only stock), you lose 15% of the dividends paid to you in US tax, via withholding on payments made by each these stocks to the ETF (that is, internally to the ETF). All equal so far then, when considering US-only stocks.

Now, the other case, non-US-only stocks. If you hold VXUS, Vanguard's US domiciled ex-US stock fund (so no US stocks at all), you still lose 15% of the dividends paid to you in US tax, via broker withholding on the ETF's dividend payout. If however you were to hold these exact same stocks in a non-US domiciled ETF, you would lose nothing in US tax. (There may be some tax withholding internally to the ETF from the countries where the underlying stocks are based, but this will usually be equal across both US domiciled and non-US domiciled ETFs.) So for non-US stocks, you should always use non-US domiciled ETFs. Otherwise, you are paying an unnecessary extra layer of 15% US withholding tax.

Boiled down: for ETFs that hold only US stocks, either US domiciled or Ireland domiciled ETFs give you the same result; for ETFs that hold only non-US stocks, Ireland domicile ETFs save you losing 15% to US tax compared to US domiciled ETFs.

Which leaves ETFs that hold both US and non-US stocks; global or all-world ETFs. In those cases, if you use a US domiciled ETF you would lose 15% in unnecessary US tax to the extent of its non-US source dividends. So for these, again Ireland domiciled is better. Otherwise, split this holding into separate component ETFs, and use a US domiciled fund only for the US stock element, and Ireland domiciled for everything else.

In other words, the only case where a US domiciled ETF is worthy of consideration is where it contains only US stocks. And even there, aside from a possible cheaper TER and/or smaller spread, you don't have any real advantage, certainly no tax advantage, only an at best level tax playing field.
oceanexpat wrote: Fri Nov 26, 2021 9:25 am
  • Is it possible to transfer US domiciled ETFs to European equivalents without having to sell them and incur capital gains?
  • If I moved back to the US, is the reverse also possible (i.e. EU domiciled to US domiciled)
No, to both.
oceanexpat wrote: Fri Nov 26, 2021 9:25 am
  • How would I go about exploring options for withdrawing from my US retirement accounts penalty free? Since I'm not sure if I will return to the US, this isn't a priority but would be good to fully understand the options. Also, are there any downsides to withdrawing if it could be done penalty free and transferred into similar EU domiciled assets (therefore avoiding capital gains)?
As mentioned, a very deep and thorough dissection of all the relevant tax treaties would be the place to start. As for downsides ... you're moving tax-deferred money into taxable accounts. Outside of the NHR regime, countries may (often will) recognise US IRAs and 401ks as tax-deferred under treaty, but won't do the same for unwrapped taxable accounts. So in future, and depending where you end up, you might find that the IRA or 401k shelter could have been worth keeping after all. Or not; there is always the spectre of confiscatory US estate tax to worry about.

One final thought. To the extent that you have and (perhaps) will keep IRA or 401k accounts, this may be the place to keep as much of your US stock and US domiciled ETFs as possible. Two reasons. Firstly, you have a US estate tax risk on your IRA or 401k no matter what they contain, and also on any US stocks you hold directly; by keeping the US stocks in an IRA or 401k you minimise the spread of your assets at risk from US estate tax. And secondly, dividends from these US stocks and US domiciled ETFs will pass into the IRA or 401k free of any and all US tax withholding. There is of course tax to pay on withdrawals from these accounts, but it is both deferred and may (or may not) end up being lower than the 15% US/Portugal treaty rate.
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oceanexpat
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Re: Questions from EU resident investing in US domiciled assets

Post by oceanexpat »

No, to both.
Got it. Just as I thought I knew what to do it gets complicated again :-). If I understand you correctly..

1) To move all my US domiciled ETFs from Vanguard US (For example VTI) into an EU brokerage like IBKR, I'd have to sell them, pay capital gains, and repurchase EU domiciled equivalents. I can not use ACATS to transfer into, for example, an UCITS equivalent. Correct?

2) Assuming I move back to the US in 2-4 years (that's likely the timeframe should I move back), I'd have to repeat this exercise and repurchase US equivalents of my Ireland domiciled ETFs, again incurring capitals gains but this time with Portugal's 28% capital gains rate.

The only two ways around the above are:

(a) I keep investing into US domiciled ETFs with an US brokerage, accepting the estate tax risk, which would not require me to sell them again should I leave Europe in the coming years. I save significantly on capital gains tax.

(b) I construct a more diversified stock portfolio that mimics ETFs, since stocks can be easily transferred between US and EU brokerages using ACATS.

So depending on my time horizon in the EU, investing into EU domiciled ETFs might not be the best choice after all?
TedSwippet
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Re: Questions from EU resident investing in US domiciled assets

Post by TedSwippet »

oceanexpat wrote: Fri Nov 26, 2021 11:45 am The only two ways around the above are:

(a) I keep investing into US domiciled ETFs with an US brokerage, accepting the estate tax risk, which would not require me to sell them again should I leave Europe in the coming years. I save significantly on capital gains tax.

(b) I construct a more diversified stock portfolio that mimics ETFs, since stocks can be easily transferred between US and EU brokerages using ACATS.
Well, it's not either-or. You could stick with what you currently own in US domiciled ETFs and stocks, but use Ireland domiciled ETFs for any new fund purchases. That way at least you don't worsen your US estate tax risk.

The flip side of this strategy though is that if you do end up moving back to the US, you will very much want to sell any and all non-US domiciled funds before becoming a US resident. Read up on the US's PFIC tax treatment for why.
oceanexpat wrote: Fri Nov 26, 2021 11:45 am So depending on my time horizon in the EU, investing into EU domiciled ETFs might not be the best choice after all?
Your problem is that the best choice for investing if you will return to the US in two or three years is not at all the same as the best choice if you do not, but instead remain in Europe. Even which European country makes a difference. Move from Portugal to Switzerland and not only do you get cover from the US/Switzerland estate tax treaty, but Switzerland for the most part does not tax capital gains.

I think you have all the information you need now. All you can do is weigh up the probabilities in order to find the investing path that best suits your most likely future.
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oceanexpat
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Re: Questions from EU resident investing in US domiciled assets

Post by oceanexpat »

Your problem is that the best choice for investing if you will return to the US in two or three years is not at all the same as the best choice if you do not, but instead remain in Europe. Even which European country makes a difference. Move from Portugal to Switzerland and not only do you get cover from the US/Switzerland estate tax treaty, but Switzerland for the most part does not tax capital gains.
Indeed, that's what I now understand after our discussion. A pitstop in Switzerland may actually be on the horizon to restructure some of my investments into a dividend portfolio. As you said, to avoid capitals gains tax.
I think you have all the information you need now. All you can do is weigh up the probabilities in order to find the investing path that best suits your most likely future.
Yep. Thank you for your help.
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