IBKR - Regulatory Protection from outside developed countries

[danbdzs]

Hello dear Bogleheads,

This might be a silly question, and also will show my very limited understanding in regulation/compliance, but I would like to tap into the collective knowledge in search of some clarity.

I'm planning to use Interactive Brokers as main investment brokerage.
However, I'm investing from Latin America (Mexico as of now) and this is where I opene my account as a Mexican citizen.

Is anyone aware of relevant protections to an account outside the US / UK / Europe ?

Anything to reasure IBKR global clients in the event of bankruptcy or like that.
I'm thinking something analogue to the SIPC in the US?

This to understand the real level of risk in having a large account with them.

There are local brokers as alternatives that are locally registered and have regulatory compliance requirements that provide reasurance.
However, IBKR does not have a corporation here.
In the highly unlikely event of catastrophe in the brokerage, which regulation would apply to have access to the funds?

Thanks for sharing any thoughts

[typical.investor]

Hello dear Bogleheads,

This might be a silly question, and also will show my very limited understanding in regulation/compliance, but I would like to tap into the collective knowledge in search of some clarity.

Not silly at all. Rather important actually.

I'm planning to use Interactive Brokers as main investment brokerage.
However, I'm investing from Latin America (Mexico as of now) and this is where I opene my account as a Mexican citizen.

Where will you be a customer of?

IBKR explains the protections for each of their subsidiary locations. I wonder if you would be at Interactive Brokers LLC (IB LLC) and thus under SIPC protection.

If not, you'll be at one of the subsidiaries here https://ibkr.info/node/1000

Anyway, first figure out which IBKR you are at (at the top of your Activity Statement), and then look at the customer agreement.

Or probably someone knows of the top of their head. I do suspect Mexico is part of Interactive Brokers LLC (IB LLC) but don't know for sure.

[galeno]

As Costa Rican citizens we go direct with USA IBKR. I believe that's the case with all LATAM.

Mexico has a USA treaty for withholding and (I believe) inheritance taxes. If that's the case then the OP could use any US domiciled ETF instead of the Ireland domiciled UCITS ETFs.

So instead of 50% VWRD + 50% AGGG it would be 50% VTI + 50% VAGU.

[TedSwippet]

Mexico has a USA treaty for withholding and (I believe) inheritance taxes. If that's the case then the OP could use any US domiciled ETF instead of the Ireland domiciled UCITS ETFs. ...

Mexico has a better than average income tax treaty with the US; a 10% US dividend withholding tax rate, compared to the 15% found in most treaties.

However, Mexico does not have any US estate tax treaty.

[assyadh]

@OP, what is the taxation of ETFs in Mexico like? I couldn't find a final and definite answer online. Any ideas?

[galeno]

IBKR will not accept any corp accounts that use IBCs (SAs) from any LATAM country. Schwab International will however.

The OP should consider using a LATAM IBC (SA) and opening a corp account at Schwab International and buying USA domiciled ETFs.

It would be cheaper and "better" than going direct with IBKR and buying Ireland domiciled UCITS ETFs.

Mexico has a USA treaty for withholding and (I believe) inheritance taxes. If that's the case then the OP could use any US domiciled ETF instead of the Ireland domiciled UCITS ETFs. ...

Mexico has a better than average income tax treaty with the US; a 10% US dividend withholding tax rate, compared to the 15% found in most treaties.

However, Mexico does not have any US estate tax treaty.

[danbdzs]

Where will you be a customer of?

IBKR explains the protections for each of their subsidiary locations. I wonder if you would be at Interactive Brokers LLC (IB LLC) and thus under SIPC protection.

If not, you'll be at one of the subsidiaries here https://ibkr.info/node/1000

Anyway, first figure out which IBKR you are at (at the top of your Activity Statement), and then look at the customer agreement.

Or probably someone knows of the top of their head. I do suspect Mexico is part of Interactive Brokers LLC (IB LLC) but don't know for sure.

Thank you, this is exactly what I was looking for.

Indeed, both you and Galeno are correct, after checkign the activity statement, confirmed my account is under IB LLC. So it should be under SIPC.

[danbdzs]

@OP, what is the taxation of ETFs in Mexico like? I couldn't find a final and definite answer online. Any ideas?

Ted Swippet has got it correct above your statement.
There is also a local 10% tax in Mexico (on top of the international one, either US or ireland 15%).

However, you do need to submit a W8-BEN format to have the tax treaty enacted. Otherwise, you get the 'non-treaty' treatment by default.

As PSA - My local brokers have charged me $150 USD for submitting my W8-BEN and it has to be renewed every 2-3 years.

I have not yet explored this process with IBKR.

[danbdzs]

IBKR will not accept any corp accounts that use IBCs (SAs) from any LATAM country. Schwab International will however.

The OP should consider using a LATAM IBC (SA) and opening a corp account at Schwab International and buying USA domiciled ETFs.

Thank you Galeno,

May I ask what does IBCs (SAs) stand for?

The idea of a corporation would be to not have the US estate tax as concern??

Another question for you, I saw that you were discusing taxes on bonds elsewhere. May I ask what setup would you suggest for the fixed income in my situation? (let's assume am only interested in us govt bonds).

Thanks again for the input.

[TedSwippet]

The OP should consider using a LATAM IBC (SA) and opening a corp account at Schwab International and buying USA domiciled ETFs.

Using a corporation should remove US estate tax risks, but wouldn't that also lose cover from the US/Mexico income tax treaty, meaning 30% US rather than 10% US on dividends from these ETFs? If yes, that would more than undo any benefit from slightly lower TERs on US domiciled ETFs.

[typical.investor]

The OP should consider using a LATAM IBC (SA) and opening a corp account at Schwab International and buying USA domiciled ETFs.

Using a corporation should remove US estate tax risks, but wouldn't that also lose cover from the US/Mexico income tax treaty, meaning 30% US rather than 10% US on dividends from these ETFs? If yes, that would more than undo any benefit from slightly lower TERs on US domiciled ETFs.

Actually, I don't think that is always true for a pass through entity (such as an LLC that has not made an election for corporate treatment).

For purposes of claiming treaty benefits, if an entity is fiscally transparent for U.S. tax purposes and the entity is or is treated as a resident of a treaty country, it will derive the item of income and may be eligible for treaty benefits.

https://freemanlaw.com/fiscally-transparent-entities/

However, many jurisdictions such as the UK, Canada and some EU countries will view it as a non nontransparent entity. In that case, when
a company is regarded as fiscally transparent by the United States and nontransparent by the other jurisdiction, foreign taxpayers would face loss of treaty benefits with respect to U.S.-source income earned by the LLC.

https://www.thetaxadviser.com/issues/20 ... ayers.html

Or so I believe, but am not an expert on these things.

[galeno]

Correct. Using an LATAM IBC other than from Mexico with Schwab Internatinal would nullify the Mexico USA treaty advantages.

The OP should just go direct with IBKR and buy Ireland domiciled UCITS ETFs like the rest of us plebes in LATAM. Too bad about having to "waste" that really nice tax treaty.

The OP should consider using a LATAM IBC (SA) and opening a corp account at Schwab International and buying USA domiciled ETFs.

Using a corporation should remove US estate tax risks, but wouldn't that also lose cover from the US/Mexico income tax treaty, meaning 30% US rather than 10% US on dividends from these ETFs? If yes, that would more than undo any benefit from slightly lower TERs on US domiciled ETFs.

[brrio]

If I am not wrong some Ireland domiciled UCITS ETFs like VWRA are listed in Mexico Stock Exchange. So the OP could buy them direct from a local broker.

[galeno]

Hopefully the OP would know for sure. Several months ago I looked at Ireland Vanguard and iShares UCITS ETFs from a Mexican investor's POV. They have enough selection for me.

If I am not wrong some Ireland domiciled UCITS ETFs like VWRA are listed in Mexico Stock Exchange. So the OP could buy them direct from a local exchange.