Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

For residents of the United Arab Emirates.
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Joekh06
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Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by Joekh06 »

Hello!
New to bond investing here. I am a NRA investor, and while well-versed in why ireland-domiciled for stock ETFs vs US-domiciled (estate tax, dividend tax withholding etc), I have been trying to find answers regarding bond ETFs - mainly because US-domiciled usually have lower expense ratios.

With a lot of time and effort, what I've gathered online:

1. Interest earned on US company, treasury, and government agency bonds do NOT get taxed for a NRA (US Tax Withholding section here: https://www.schwab.com.hk/public/file/P ... G30213.pdf).

2. There is NO estate tax related to bonds (Page 3 here: https://advisor.morganstanley.com/miche ... _NRAs_.pdf ).

3. This Blackrock page seems to show they are basically identical except for the 0-30% withholding for Non-Us (on the left side), without explaining wat that condition is: https://www.blackrock.com/americas-offs ... xed-income

Since interest isn't taxed, and there's no estate tax applicable? Why would you buy an Ireland-domiciled ETF vs the US-domiciled counterpart? I am a Colombian national living in the UAE.

For reference some of the comparable ETFs are:
- US: BND/BNDW
- Ireland: IUAG/AGGG

Thank you to whoever can unravel this mystery!!
Joe

Joe
TedSwippet
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by TedSwippet »

Joekh06 wrote: Tue Jul 09, 2024 8:51 am 2. There is NO estate tax related to bonds (Page 3 here: https://advisor.morganstanley.com/miche ... _NRAs_.pdf ).
Are you certain of this? There may be no US estate tax risk from some directly held bonds, but if you hold BND or BNDW, you hold shares in a US corporation. And shares in a US corporation are at risk from US estate tax, no matter what the ETF holds internally.
Topic Author
Joekh06
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by Joekh06 »

Based on the document link i shared under point #2:

“U.S. situs assets do not include debt obligations of U.S. corporations and of the U.S. and its political subdivisions if the interest on such obligations qualifies as portfolio interest”.

By hold BND who are holding corporate (and government) bonds ie debt that they are paying back + interest. You are not bolding corporate stock if you hold BND - of that i am sure :)
Topic Author
Joekh06
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by Joekh06 »

TedSwippet wrote: Tue Jul 09, 2024 11:00 am
Joekh06 wrote: Tue Jul 09, 2024 8:51 am 2. There is NO estate tax related to bonds (Page 3 here: https://advisor.morganstanley.com/miche ... _NRAs_.pdf ).
Are you certain of this? There may be no US estate tax risk from some directly held bonds, but if you hold BND or BNDW, you hold shares in a US corporation. And shares in a US corporation are at risk from US estate tax, no matter what the ETF holds internally.
Based on the document link i shared under point #2:

“U.S. situs assets do not include debt obligations of U.S. corporations and of the U.S. and its political subdivisions if the interest on such obligations qualifies as portfolio interest”.

By hold BND who are holding corporate (and government) bonds ie debt that they are paying back + interest. You are not bolding corporate stock if you hold BND - of that i am sure :)
TedSwippet
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by TedSwippet »

Joekh06 wrote: Tue Jul 09, 2024 11:11 am
TedSwippet wrote: Tue Jul 09, 2024 11:00 am
Joekh06 wrote: Tue Jul 09, 2024 8:51 am 2. There is NO estate tax related to bonds (Page 3 here: https://advisor.morganstanley.com/miche ... _NRAs_.pdf ).
Are you certain of this? There may be no US estate tax risk from some directly held bonds, but if you hold BND or BNDW, you hold shares in a US corporation. And shares in a US corporation are at risk from US estate tax, no matter what the ETF holds internally.
Based on the document link i shared under point #2:

“U.S. situs assets do not include debt obligations of U.S. corporations and of the U.S. and its political subdivisions if the interest on such obligations qualifies as portfolio interest”.

By hold BND who are holding corporate (and government) bonds ie debt that they are paying back + interest. You are not bolding corporate stock if you hold BND - of that i am sure :)
But from the sentence directly above the one you quote, in the document you linked:
For estate tax purposes, U.S. situs assets include U.S. real property, tangible property located within the U.S. and stock in U.S. corporations.
Shares of BND and BNDX are stock in US corporations. The simple presence of a US domiciled ETF wrapper can miraculously transform something not US taxable into something US taxable. You can see this much more directly for the case of US withholding tax on dividends paid out by US domiciled ETFs which hold purely non-US stocks.

Are you still sure?

As an aside, you also need to be very certain of 'portfolio interest'. Not all US bonds avoid US estate tax risk. See IRS ruling 9422001 ("U.S. Treasury Bill Is Includable In Nonresident Alien's Estate").
jg12345
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by jg12345 »

Joekh06 wrote: Tue Jul 09, 2024 11:11 am
TedSwippet wrote: Tue Jul 09, 2024 11:00 am
Joekh06 wrote: Tue Jul 09, 2024 8:51 am 2. There is NO estate tax related to bonds (Page 3 here: https://advisor.morganstanley.com/miche ... _NRAs_.pdf ).
Are you certain of this? There may be no US estate tax risk from some directly held bonds, but if you hold BND or BNDW, you hold shares in a US corporation. And shares in a US corporation are at risk from US estate tax, no matter what the ETF holds internally.
Based on the document link i shared under point #2:

“U.S. situs assets do not include debt obligations of U.S. corporations and of the U.S. and its political subdivisions if the interest on such obligations qualifies as portfolio interest”.

By hold BND who are holding corporate (and government) bonds ie debt that they are paying back + interest. You are not bolding corporate stock if you hold BND - of that i am sure :)
Hi OP
As TedSwippet, I would not be so sure.

An ETF is a fund, a fund is an investment company, if you buy BND you hold shares in the company of the same name
Trying to stay the course
Topic Author
Joekh06
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by Joekh06 »

jg12345 wrote: Tue Jul 09, 2024 1:02 pm
Joekh06 wrote: Tue Jul 09, 2024 11:11 am
TedSwippet wrote: Tue Jul 09, 2024 11:00 am
Joekh06 wrote: Tue Jul 09, 2024 8:51 am 2. There is NO estate tax related to bonds (Page 3 here: https://advisor.morganstanley.com/miche ... _NRAs_.pdf ).
Are you certain of this? There may be no US estate tax risk from some directly held bonds, but if you hold BND or BNDW, you hold shares in a US corporation. And shares in a US corporation are at risk from US estate tax, no matter what the ETF holds internally.
Based on the document link i shared under point #2:

“U.S. situs assets do not include debt obligations of U.S. corporations and of the U.S. and its political subdivisions if the interest on such obligations qualifies as portfolio interest”.

By hold BND who are holding corporate (and government) bonds ie debt that they are paying back + interest. You are not bolding corporate stock if you hold BND - of that i am sure :)
Hi OP
As TedSwippet, I would not be so sure.

An ETF is a fund, a fund is an investment company, if you buy BND you hold shares in the company of the same name
So we haven't really gotten closer to getting clarity on this then :p
Is interest earned taxed? And is there or isn't there estate tax risk?
jg12345
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by jg12345 »

The 'I would not be so sure' was referred to 'you should not be sure that there is no estate tax because BND hold bonds'.

We are sure BND is US corporate, so you definitely face US estate tax.

On interest earned, I don't know.
On estate tax, yes, there is.
Trying to stay the course
Topic Author
Joekh06
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by Joekh06 »

jg12345 wrote: Tue Jul 09, 2024 2:03 pm The 'I would not be so sure' was referred to 'you should not be sure that there is no estate tax because BND hold bonds'.

We are sure BND is US corporate, so you definitely face US estate tax.

On interest earned, I don't know.
On estate tax, yes, there is.
On estate tax then i would assume that just like ireland domiciled ETFs for stocks, the same benefit applies to bond ETFs and that's what makes them favorable to US-domiciled ETFs.
jg12345
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by jg12345 »

That is correct.
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by TedSwippet »

Joekh06 wrote: Tue Jul 09, 2024 1:56 pm Is interest earned taxed?
It is ... complicated.

The US has a special dividend tax exception for nonresident aliens who receive fund or ETF interest that originates from US bonds. So distributions from BND should face no US dividend tax. So far, so (sort of) good.

However, this exception does not include interest that originates from non-US bonds. So you would lose 30% of dividends paid by BNDX to US tax, even though if you held the non-US bonds themselves directly you would receive the interest tax-free. In other words, the simple presence of the US domiciled wrapper around non-US investments turns them from non-taxable into US taxable. Clearly a bad deal for you.
Joekh06 wrote: Tue Jul 09, 2024 1:56 pm And is there or isn't there estate tax risk?
Here, things are simpler. You would not pay US estate tax if you directly held US bonds.

However, if you hold them through a US domiciled ETF such as BND, you hold "stock in a US corporation", and that is something the US applies its estate tax to. There appears to be no exception made for what the ETF may or may not contain within it. And you would also pay US estate tax on BNDX (assuming the dividend tax issue outlined above has not already put you off holding that).

So the answer posed in the thread's title is two-fold. Ireland domiciled bond ETFs avoid paying US tax on non-US bond returns. And they avoid the risk of US estate tax on both US and non-US bonds.

As (presumably) a resident of a country without any US tax treaty coverage, you very much want to avoid holding any US domiciled funds or ETFs. The tiny additional cost of equivalent Ireland domiciled ETFs over US domiciled ones is a bargain compared to a significant (or even huge) US dividend tax and US estate tax loss.
Topic Author
Joekh06
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by Joekh06 »

TedSwippet wrote: Wed Jul 10, 2024 3:05 am
Joekh06 wrote: Tue Jul 09, 2024 1:56 pm Is interest earned taxed?
It is ... complicated.

The US has a special dividend tax exception for nonresident aliens who receive fund or ETF interest that originates from US bonds. So distributions from BND should face no US dividend tax. So far, so (sort of) good.

However, this exception does not include interest that originates from non-US bonds. So you would lose 30% of dividends paid by BNDX to US tax, even though if you held the non-US bonds themselves directly you would receive the interest tax-free. In other words, the simple presence of the US domiciled wrapper around non-US investments turns them from non-taxable into US taxable. Clearly a bad deal for you.
Joekh06 wrote: Tue Jul 09, 2024 1:56 pm And is there or isn't there estate tax risk?
Here, things are simpler. You would not pay US estate tax if you directly held US bonds.

However, if you hold them through a US domiciled ETF such as BND, you hold "stock in a US corporation", and that is something the US applies its estate tax to. There appears to be no exception made for what the ETF may or may not contain within it. And you would also pay US estate tax on BNDX (assuming the dividend tax issue outlined above has not already put you off holding that).

So the answer posed in the thread's title is two-fold. Ireland domiciled bond ETFs avoid paying US tax on non-US bond returns. And they avoid the risk of US estate tax on both US and non-US bonds.

As (presumably) a resident of a country without any US tax treaty coverage, you very much want to avoid holding any US domiciled funds or ETFs. The tiny additional cost of equivalent Ireland domiciled ETFs over US domiciled ones is a bargain compared to a significant (or even huge) US dividend tax and US estate tax loss.
Tedswippet that was excellent - I don't know how you managed to get all that clarity but I have spent the past 3 days trying to get a definitive answer to all this and this helps clarify a lot. Where did you manage to get all this info/clarity from?

One last clarification question from my end - when you say "if you hold them through a US domiciled ETF such as BND, you hold "stock in a US corporation" - in this case i assume the "US corporation" you are referring to would be Vanguard, right? Just to clarify since it is a "bond" ETF ie not stocks - but for the purpose of taxation stock in Vanguard makes it taxable - am i understanding this correctly?

Thank you!
Joe
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by TedSwippet »

Joekh06 wrote: Wed Jul 10, 2024 5:37 am One last clarification question from my end - when you say "if you hold them through a US domiciled ETF such as BND, you hold "stock in a US corporation" - in this case i assume the "US corporation" you are referring to would be Vanguard, right?
Almost. Every US domiciled fund and ETF is organised either as its own corporation, or as a sub-fund of an overall umbrella corporation. BND shares are not (part-)shares in Vanguard, but they are part shares of a trust that Vanguard created specifically to hold investments and issue BND shares. You have to dig a little to uncover this. For example:

Vanguard Bond Index Funds - Statement of Additional Information
Vanguard Bond Index Funds (the Trust) currently offers the following funds and share classes (identified by ticker symbol):
... BND ...

Organization
The Trust was organized as a Maryland corporation in 1986 and was reorganized as a Delaware statutory trust in 1998. Prior to its reorganization as a Delaware statutory trust, the Trust was known as Vanguard Bond Index Fund, Inc. The Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. All Funds within the Trust are classified as diversified within the meaning of the 1940 Act.
So, a share of BND is a share in a trust that Vanguard organised as a Delaware corporation. And for nonresident aliens (and especially those in countries without any US tax treaties) shares of US corporations face huge risks from US estate tax.

For completeness, the equivalent document for BNDX is here:

Vanguard Charlotte Funds - Statement of Additional Information
Organization
The Trust was organized as a Delaware statutory trust in 2011. The Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. Vanguard Total International Bond Index Fund and Vanguard Total International Bond II Index Fund are classified as non-diversified within the meaning of the 1940 Act. Vanguard Global Credit Bond Fund is classified as diversified within the meaning of the 1940 Act.
Joekh06 wrote: Wed Jul 10, 2024 5:37 am Just to clarify since it is a "bond" ETF ie not stocks - but for the purpose of taxation stock in Vanguard makes it taxable - am i understanding this correctly?
Again, almost. BND and BNDX are literally 'shares in a US corporation". Not in Vanguard itself, but in US corporations set up by Vanguard specifically to hold and manage (in this case) bonds. And yes, the US corporation (US domiciled ETF) wrapper is what makes this something that is at risk from US estate tax.

US domiciled funds and ETFs? Just. Say. No.
Topic Author
Joekh06
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Re: Ireland domiciled BOND ETFs vs US-domiciled? What's the point?

Post by Joekh06 »

TedSwippet wrote: Wed Jul 10, 2024 6:36 am
Joekh06 wrote: Wed Jul 10, 2024 5:37 am One last clarification question from my end - when you say "if you hold them through a US domiciled ETF such as BND, you hold "stock in a US corporation" - in this case i assume the "US corporation" you are referring to would be Vanguard, right?
Almost. Every US domiciled fund and ETF is organised either as its own corporation, or as a sub-fund of an overall umbrella corporation. BND shares are not (part-)shares in Vanguard, but they are part shares of a trust that Vanguard created specifically to hold investments and issue BND shares. You have to dig a little to uncover this. For example:

Vanguard Bond Index Funds - Statement of Additional Information
Vanguard Bond Index Funds (the Trust) currently offers the following funds and share classes (identified by ticker symbol):
... BND ...

Organization
The Trust was organized as a Maryland corporation in 1986 and was reorganized as a Delaware statutory trust in 1998. Prior to its reorganization as a Delaware statutory trust, the Trust was known as Vanguard Bond Index Fund, Inc. The Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. All Funds within the Trust are classified as diversified within the meaning of the 1940 Act.

Super! Thanks Ted

So, a share of BND is a share in a trust that Vanguard organised as a Delaware corporation. And for nonresident aliens (and especially those in countries without any US tax treaties) shares of US corporations face huge risks from US estate tax.

For completeness, the equivalent document for BNDX is here:

Vanguard Charlotte Funds - Statement of Additional Information
Organization
The Trust was organized as a Delaware statutory trust in 2011. The Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. Vanguard Total International Bond Index Fund and Vanguard Total International Bond II Index Fund are classified as non-diversified within the meaning of the 1940 Act. Vanguard Global Credit Bond Fund is classified as diversified within the meaning of the 1940 Act.
Joekh06 wrote: Wed Jul 10, 2024 5:37 am Just to clarify since it is a "bond" ETF ie not stocks - but for the purpose of taxation stock in Vanguard makes it taxable - am i understanding this correctly?
Again, almost. BND and BNDX are literally 'shares in a US corporation". Not in Vanguard itself, but in US corporations set up by Vanguard specifically to hold and manage (in this case) bonds. And yes, the US corporation (US domiciled ETF) wrapper is what makes this something that is at risk from US estate tax.

US domiciled funds and ETFs? Just. Say. No.
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