Pension plan in Europe. Which ETFs?

For residents of Spain.
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international001
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Pension plan in Europe. Which ETFs?

Post by international001 »

Hi,

This is for a friend in Spain. It's difficult to have a good pension plan (deducted when contributed, taxed on retirment with your regular bracket)
The ones indexed I found select a package of ETFs. For instance SP500 with ISIN US78462F1030

Questions:

- It seems that particular fund is traded on mexico and uses British pounds. That's why performance is higher than SP500 in US. Anything I should be worried about?
- Performance seems about the same than sP500 index. I thought non-US ETF investing on US stocks would have to pay taxes on US for dividends. So performance should be lower. Anything I'm missing?
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Re: Pension plan in Europe. Which ETFs?

Post by TedSwippet »

international001 wrote: Wed May 30, 2018 5:54 am- It seems that particular fund is traded on mexico and uses British pounds. That's why performance is higher than SP500 in US. Anything I should be worried about?
Potentially. Any ETF with an ISIN starting US... is US domiciled, and Spain has no estate tax treaty with the US. This means that any holding above $60k may be liable to US estate tax at rates that quickly reach 40% of total holdings.

I say "potentially" because I do not know the legal structure of Spanish pension plans, assuming this is to be held inside a Spanish pension (it is not quite clear from your original post). It could be that such a plan falls outsides one's 'estate'.

The fund ISIN you quote is simply a vanilla USD denominated and US domiciled S&P 500 index tracker, so I am not sure where the part about traded in Mexico but in GBP comes from. For folk in non-treaty countries, Vanguard's VUSD or iShares IUSA are the normal first choices. Both are domiciled in Ireland (ISIN starts with IE...), and so well insulated from any nasty US tax surprises.
international001 wrote: Wed May 30, 2018 5:54 am- Performance seems about the same than sP500 index. I thought non-US ETF investing on US stocks would have to pay taxes on US for dividends. So performance should be lower. Anything I'm missing?
Unless you are comparing to the S&P 500 total return index, you would not see any dividend tax drag in the ETF performance. And in this case, since you appear to be looking at a US domiciled ETF (again, ISIN is US...), there would be no US tax withholding within the ETF, only on dividends paid out by it.

Some countries have a 0% US dividend tax rate for US shares and US domiciled ETFs held inside pension plans. It does not look like Spain is one, but you probably need somebody more familiar with the US/Spain tax treaty to verify this.
Last edited by TedSwippet on Wed May 30, 2018 12:30 pm, edited 2 times in total.
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international001
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Re: Pension plan in Europe. Which ETFs?

Post by international001 »

Thanks for all the info. I had been reading some of your older posts trying to get a bit more knowledgeable

So this one is just a version of SPY. It can be traded on many exchanges and it's listed using GBP because I looked at http://www.morningstar.co.uk

This is inside a Spanish pension plan, and this is how is being marketed to Spanish residents. It typically works deducting the contributions from your income tax. Distributions (after retirement) are taxed as income. SImilar to a pre-tax 401k
https://finizens.com/planes/plan-de-pensiones/


This ETF is distribution (not accumulation), so not sure why should I look at dividend accumulation. But SPX does not consider taxes, right? Since the ETF is domiciled in US, it should not discount taxes either (like an Irish fund would do), so it makes sense that it tracks SPX quite well
Other Ireland domiciled funds like IE0032620787 seem to lag behind the indexes despite being accumulation

I was not aware of the pension plans treaty of 0% with Spain. This means that if a Spanish pension plan invests on US stocks/ETFs, it doesn't have to pay anything on dividends to US?


This are all the ETF that pension plan is including

Schwab US Large-Cap ETF™ US8085242019
iShares Core MSCI Emerging Markets US46434G1031
Vanguard FTSE Developed Europe ETF IE00B945VV12
X Stoxx Europe 600 ETF 1C LU0328475792
SPDR S&P 500 ETF US78462F1030
Vanguard IS Plc - Global Bond Index - Institutional Euro Hedged Shares IE00B18GC888
Invesco Physical Gold ETC IE00B579F325
Amundi IS JP Morgan EMU Govies IE-C LU1050569870
Lyxor Euro Corporate Bond ETF C-EUR FR0010737544
iShares Global REIT US46434V6478
Nomura TOPIX ETF JP3027630007


There are some domiciled in Ireland. Does this mean the ETFs would have to pay taxes? Despite being in a pension plan?



estate tax is just for passing the ETFs to heirs, right? So I am not worried about this now, but it's good to know
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Re: Pension plan in Europe. Which ETFs?

Post by TedSwippet »

international001 wrote: Wed May 30, 2018 8:04 amSo this one is just a version of SPY. It can be traded on many exchanges and it's listed using GBP because I looked at http://www.morningstar.co.uk
Okay. It sounds odd to me that a Spanish pension plan would offer a GBP priced item listed on a Mexican exchange in the way suggested in your original post, but... whatever. As you say, just SPY at its core.
international001 wrote: Wed May 30, 2018 8:04 amThis is inside a Spanish pension plan, and this is how is being marketed to Spanish residents. It typically works deducting the contributions from your income tax. Distributions (after retirement) are taxed as income. SImilar to a pre-tax 401k, https://finizens.com/planes/plan-de-pensiones/
Thanks for clarifying.
international001 wrote: Wed May 30, 2018 8:04 amThis ETF is distribution (not accumulation), so not sure why should I look at dividend accumulation.
The NAVs of a pair of distributing ETFs, one Ireland domiciled and one US domiciled, can each be compared to SPX. In this case, US domiciled and Ireland domiciled ETFs should look the same relative to SPX because the US tax withholding is on dividends, and the ETFs' NAVs and SPX all exclude dividends.

The NAVs of a pair of accumulating ETFs, one Ireland domiciled and one US domiciled, could theoretically be compared to SPXT (total return). In this case, you would expect the Ireland domiciled ETF would lag the US domiciled one when each is compared to SPXT because of US withholding tax drag inside the Ireland ETF. However, because of US fund and ETF regulations, you cannot actually make this comparison because there is no such thing as a US domiciled accumulating ETF. US regulations require all US domiciled funds and ETFs to distribute dividends at least annually.
international001 wrote: Wed May 30, 2018 8:04 amOther Ireland domiciled funds like IE0032620787 seem to lag behind the indexes despite being accumulation
The NAV of that ETF is denominated in EUR, but the SPX is denominated in USD. Are you taking account of currency fluctuations in your comparison?
international001 wrote: Wed May 30, 2018 8:04 amI was not aware of the pension plans treaty of 0% with Spain. This means that if a Spanish pension plan invests on US stocks/ETFs, it doesn't have to pay anything on dividends to US?
Yes, in theory. In practice, not all non-US pension plans are happy to get embroiled in all the US paperwork and hassle in order to claim this 0% treatment though. Check with the provider.
( ETA: It appears I was mistaken earlier; the US/Spain treaty does not contain the expected clause that provides for 0% US tax withholding on US source dividends specifically for pension funds. Check with somebody more knowledgeable in this area. )
international001 wrote: Wed May 30, 2018 8:04 amThere are some domiciled in Ireland. Does this mean the ETFs would have to pay taxes? Despite being in a pension plan?
Potentially, but not necessarily.

Many countries do not tax dividend paid to non-residents, including non-resident funds. Take the Vanguard FTSE Developed Europe ETF. This ETF will pay withholding taxes to the countries whose stocks it holds, but these may be low or zero (the UK, for example, does not withhold tax on dividend payments). And in this case, holding a US domiciled version of the same thing -- not offered in this plan, but hypothetically -- would not reduce this tax drag because the withholding on dividends of stocks held inside the ETF will be broadly (if not exactly) the same whether those dividends flow to the US domiciled ETF or to the Ireland domiciled one.
international001 wrote: Wed May 30, 2018 8:04 amestate tax is just for passing the ETFs to heirs, right? So I am not worried about this now, but it's good to know.
Yes, but I would be clear on it anyway before proceeding.

Not all deaths are from old age, and US estate taxes, if they would apply, are rapacious to the point of being confiscatory and yet easily sidestepped. And even if they do not apply, there can sometimes be an excruciatingly complex and glacially slow IRS process to drag though to release US assets from a broker that it would be better not to have to navigate.

Based on the sheer number of US domiciled ETFs in this plan, my guess is that US estate taxes probably do not apply to Spanish pension plans, but you should check with the provider.
Last edited by TedSwippet on Wed May 30, 2018 12:33 pm, edited 1 time in total.
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international001
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Re: Pension plan in Europe. Which ETFs?

Post by international001 »

TedSwippet wrote: Wed May 30, 2018 9:39 am The NAVs of a pair of distributing ETFs, one Ireland domiciled and one US domiciled, can each be compared to SPX. In this case, US domiciled and Ireland domiciled ETFs should look the same relative to SPX because the US tax withholding is on dividends, and the ETFs' NAVs and SPX all exclude dividends.

The NAVs of a pair of accumulating ETFs, one Ireland domiciled and one US domiciled, could theoretically be compared to SPXT (total return). In this case, you would expect the Ireland domiciled ETF would lag the US domiciled one when each is compared to SPXT because of US withholding tax drag inside the Ireland ETF. However, because of US fund and ETF regulations, you cannot actually make this comparison because there is no such thing as a US domiciled accumulating ETF. US regulations require all US domiciled funds and ETFs to distribute dividends at least annually.
Tx.. all this makes sense
TedSwippet wrote: Wed May 30, 2018 9:39 am The NAV of that ETF is denominated in EUR, but the SPX is denominated in USD. Are you taking account of currency fluctuations in your comparison?
No.. just a rough analysis with morningstar.co.uk was giving me with its own index. Both in GBP. I am not aware of a website that would allow me to compare funds with different currrencies
TedSwippet wrote: Wed May 30, 2018 9:39 am Yes, in theory. In practice, not all non-US pension plans are happy to get embroiled in all the US paperwork and hassle in order to claim this 0% treatment though. Check with the provider.
Ok.. so if an ETF domiciled in Ireland (with US stocks) or in US is included inside of a Spanish pension plan, the Spanish broker is responsible of telling the ETF managers that this is for a pension plan in Spain, so no taxes should be withholded
TedSwippet wrote: Wed May 30, 2018 9:39 am Potentially, but not necessarily.

Many countries do not tax dividend paid to non-residents, including non-resident funds. Take the Vanguard FTSE Developed Europe ETF. This ETF will pay withholding taxes to the countries whose stocks it holds, but these may be low or zero (the UK, for example, does not withhold tax on dividend payments). And in this case, holding a US domiciled version of the same thing -- not offered in this plan, but hypothetically -- would not reduce this tax drag because the withholding on dividends of stocks held inside the ETF will be broadly (if not exactly) the same whether those dividends flow to the US domiciled ETF or to the Ireland domiciled one.

Looking at the funds list, it appears to be constructed to reasonably well minimise these unnecessary taxes for investor, assuming that this provider applies the 0% treaty rate for dividends from US sources.
y ou lost me here. Let's assume US78462F1030, that it's US domiciled. Because of being on a pension plan, it doesn't withhold any taxes to US, does it?

A different case would be if I own the ETF outside the pension plan (US would withhold 15%, but 'Vanguard FTSE Developed Europe ETF.' would withhold perhaps a small amount).

Do I get it right?
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Re: Pension plan in Europe. Which ETFs?

Post by TedSwippet »

international001 wrote: Wed May 30, 2018 11:15 amOk.. so if an ETF domiciled in Ireland (with US stocks) or in US is included inside of a Spanish pension plan, the Spanish broker is responsible of telling the ETF managers that this is for a pension plan in Spain, so no taxes should be withholded.
Oh, hang on. I might have this wrong.

I just looked again at the US/Spain tax treaty, and it does not have the clause in Article 10 that makes US dividend payments taxed at 0% for pensions. In that case, the pension might see 15% lost in US withholding tax on its US domiciled fund holdings. That would be no worse than if it held an Ireland domiciled ETF with the same underlying assets, but also no better either.

Sorry about that. You should really check this with the pension provider themselves. I am not expert in the US/Spain tax treaty.
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international001
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Re: Pension plan in Europe. Which ETFs?

Post by international001 »

Hmm..

Look at https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1.pdf

It's on section 20(1)(a). Different treaties seem to have it on different sections

What it says

---
. Subject to the provisions of Article 21 (Government Service):
(a) pensions and other similar remuneration derived and beneficially owned by a
resident of a Contracting State in consideration of past employment shall be taxable only in that
State; and
(b) social security benefits paid by a Contracting State to a resident of the other
Contracting State or a citizen of the United States may be taxed in the first-mentioned State.

---

So my guess is by 'remuneration' they mean the dividens being reinvested. So If I have a US pension plan (or 401k/IRA) with Spain stock, or a Spanish pension plan with US stocks, no taxes have to be paid (while plan is growing, and I'm still not retired)

But (b) point is interesting.. 'benfits' I guess it mean distributions. If I had US social security benefits and I go to retire to Spain, do I only have to pay taxes on US for those? But If I get a distribution for a 401k, I need to pay income taxes in Spain, and then possibly use it as a credit for US taxes? This would be very advantageous (taxes would be higher in Spain, but SS would increase taxable income in US and I could make use of the full credit)

Also, if I have a 401k/SS benefits in US but I am not a US citizen, do I have to file US taxes?
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Re: Pension plan in Europe. Which ETFs?

Post by LadyGeek »

international001 wrote: Wed May 30, 2018 6:07 pm ...But (b) point is interesting.. 'benfits' I guess it mean distributions. If I had US social security benefits and I go to retire to Spain, do I only have to pay taxes on US for those? But If I get a distribution for a 401k, I need to pay income taxes in Spain, and then possibly use it as a credit for US taxes? This would be very advantageous (taxes would be higher in Spain, but SS would increase taxable income in US and I could make use of the full credit)

Also, if I have a 401k/SS benefits in US but I am not a US citizen, do I have to file US taxes?
Are you asking about your own situation? If so, please start a new thread so we can help you directly.

I'm not an expert, but you should start reading here (I assume you are living in the US):

For taxes, see: Publication 519 (2017), U.S. Tax Guide for Aliens | Internal Revenue Service

For Social Security, see: International Programs - Nonresident Alien Tax Withholding
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Re: Pension plan in Europe. Which ETFs?

Post by TedSwippet »

international001 wrote: Wed May 30, 2018 6:07 pmSo my guess is by 'remuneration' they mean the dividens being reinvested. So If I have a US pension plan (or 401k/IRA) with Spain stock, or a Spanish pension plan with US stocks, no taxes have to be paid (while plan is growing, and I'm still not retired).
By 'similar remuneration' they mean anything that is pension-like. The treaty says nothing about the assets held inside the pension itself, nothing about dividends paid by Spanish companies into a US pension, and nothing about dividends paid by US companies into a Spanish pension.
international001 wrote: Wed May 30, 2018 6:07 pmBut (b) point is interesting.. 'benfits' I guess it mean distributions. If I had US social security benefits and I go to retire to Spain, do I only have to pay taxes on US for those? But If I get a distribution for a 401k, I need to pay income taxes in Spain, and then possibly use it as a credit for US taxes? This would be very advantageous (taxes would be higher in Spain, but SS would increase taxable income in US and I could make use of the full credit).
Benefits does not mean distributions, but in essence the effect is the same. Here is what these two treaty clauses are saying:

If you are a non-US citizen living in Spain and receiving US SS payments, the treaty says that the US may tax these. What it does not say, though, is that Spain may not tax them. So depending on Spanish domestic law, you could find yourself paying tax to both and claiming a foreign tax credit against one for the other, leaving you paying the higher of the two rates.

In contrast, the treaty does say that if you are a non-US citizen living in Spain and taking 401k or IRA withdrawals, only Spain may tax these. Again though, what it does not say is when Spain may tax them. If domestic Spanish tax law generally honours non-Spanish pensions then these plans would be taxable to Spain only on withdrawals. If Spain behaves like the US and completely ignores most foreign pensions, then the dividends and capital gains inside the 401k or IRA could be fully taxable to Spain annually as if the pension wrapper were not there at all.

Be very careful with treaties. They are porous, malleable, and only rarely mean what you think they mean on first reading. For a perfect example of this, take a look at Article 1 Para 3. Because the US taxes on both citizenship and residence whereas Spain taxes only on residence, this clause effectively wipes out every single subsequent treaty benefit for US citizens. Para 4 then reinstates a few of them, but overall you can see that US citizens get far, far less protection from this treaty than non-US citizens.
international001 wrote: Wed May 30, 2018 6:07 pmAlso, if I have a 401k/SS benefits in US but I am not a US citizen, do I have to file US taxes?
Good question. For 401k and IRA withdrawals, possibly not. The general rule is that no 1040NR is required if the US tax is fully satisfied by withholding. In this case the US tax would be zero, so if the 401k or IRA provider does the right thing for the treaty when supplied with a W-8BEN then the superficial answer is no, no 1040NR. But... anecdotal reports suggest that post-FATCA, several 401k and IRA providers are withholding at 30% and completely ignoring the correct treaty withholding rates. In that case, the only way to get the over-withholding back is to file an annual 1040NR.

For US SS payments, probably yes, to get the right US rate where SS has withheld US tax at non-resident alien rates.
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Re: Pension plan in Europe. Which ETFs?

Post by international001 »

LadyGeek wrote: Wed May 30, 2018 8:45 pm Are you asking about your own situation? If so, please start a new thread so we can help you directly.

I'm not an expert, but you should start reading here (I assume you are living in the US):

For taxes, see: Publication 519 (2017), U.S. Tax Guide for Aliens | Internal Revenue Service

For Social Security, see: International Programs - Nonresident Alien Tax Withholding
YEs.. I'm expanding a bit the topic. They are related to the original questions. So far it's more about theoretical questions.
I'll open a new thread with more specific questions about my case
Thanks for the links, but I'm US citizen so this do not apply to me at the moment
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Re: Pension plan in Europe. Which ETFs?

Post by international001 »

TedSwippet wrote: Thu May 31, 2018 3:24 am If you are a non-US citizen living in Spain and receiving US SS payments, the treaty says that the US may tax these. What it does not say, though, is that Spain may not tax them. So depending on Spanish domestic law, you could find yourself paying tax to both and claiming a foreign tax credit against one for the other, leaving you paying the higher of the two rates.
You are right. I read too fast

So how would this work in practice. I get $1000 from SS. I pay $200 in Spain, $150 in US. Where do I get the credit? IT's a deadlock situation if A has to get the credit from B and B from A
TedSwippet wrote: Thu May 31, 2018 3:24 am In contrast, the treaty does say that if you are a non-US citizen living in Spain and taking 401k or IRA withdrawals, only Spain may tax these. Again though, what it does not say is when Spain may tax them. If domestic Spanish tax law generally honours non-Spanish pensions then these plans would be taxable to Spain only on withdrawals. If Spain behaves like the US and completely ignores most foreign pensions, then the dividends and capital gains inside the 401k or IRA could be fully taxable to Spain annually as if the pension wrapper were not there at all.

Wow.. I guess this is the 30% anecdotal withholding post-FATCA you mention. But does this really happen? My friend has a US 401k account (from old time work there) and never got any special withholding. I don't think any W-8BEN was filed. They just didn't check US residency?

How would it work with Roth accounts. No taxes to be paid at all during distributions?
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Re: Pension plan in Europe. Which ETFs?

Post by TedSwippet »

international001 wrote: Thu May 31, 2018 7:24 amSo how would this work in practice. I get $1000 from SS. I pay $200 in Spain, $150 in US. Where do I get the credit? IT's a deadlock situation if A has to get the credit from B and B from A.
Handled by treaty Article 24 Para 1(a), which says:
1. In Spain, double taxation will be avoided, in accordance with the relevant provisions of the law of Spain, as follows:
(a) Where a resident of Spain derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, other than solely by reason of citizenship, Spain shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax actually paid in the United States.
Notice again how US citizens get the worse deal here, under the "other than solely by reason of citizenship" rider.
international001 wrote: Thu May 31, 2018 7:24 am... But does this really happen? My friend has a US 401k account (from old time work there) and never got any special withholding. I don't think any W-8BEN was filed. They just didn't check US residency?
It seems to depend entirely on the provider and their interpretation of post-FATCA regulations. Fidelity is reported to be poor. And there is a report here from just two days ago, involving Voya. Some US 401k and IRA providers are now so scared of failing to properly comply with US regulations that they have chosen to give up entirely and leave compliance up to their non-resident alien customers. It's also probable that many US 401k and IRA providers do not fully understand how to comply with these regulations, either.
international001 wrote: Thu May 31, 2018 7:24 amHow would it work with Roth accounts. No taxes to be paid at all during distributions?
Don't know, but I will find out in a decade or so.

There may be no tax (chapter 3) withholding, but in tandem with this there is also the potential for a different 30% FATCA (chapter 4) withholding. So neither, one, the other, or worst case both at the same time, depending on the country you live in, its tax treaty and FATCA IGA status, and ultimately the whim of the compliance department of the provider in question, I guess.
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Re: Pension plan in Europe. Which ETFs?

Post by international001 »

TedSwippet wrote: Thu May 31, 2018 8:17 am
1. In Spain, double taxation will be avoided, in accordance with the relevant provisions of the law of Spain, as follows:
(a) Where a resident of Spain derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, other than solely by reason of citizenship, Spain shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax actually paid in the United States.
Notice again how US citizens get the worse deal here, under the "other than solely by reason of citizenship" rider.
So I guess 'deduction from the tax' means tax credit for Spanish taxes. (different than deduction from the taxable income)

Does the next sentence make sense: 'Such deduction shall not, however, exceed that part of the income tax, as computed before the
deduction is given, which is attributable to the income derived from the United States'. It seems to mean that the US tax you are deductiong

But 24.(2) talks about the credit in US taxes. Or this would apply only when you are US resident getting income from Spanish social security? It cannot be both 24.(1) and 24.(2)!

//2. In accordance with the provisions and subject to the limitations of the law of the United States (as
it may be amended from time to time without changing the general principle thereof), the United States
shall allow to a resident or citizen of the United States as a credit against the United States tax on
income the income tax paid to Spain by or on behalf of such citizen or resident //

IMO, logic of the 3 cases in 24. is a bit convoluted

The '"other than solely by reason of citizenship" seems fair here. PRoblem are the extras you have to pay for being a US citizen, what I'd think happens only if you are in a higher tax bracket in USA than in Spain (unlikely)




TedSwippet wrote: Thu May 31, 2018 8:17 am It seems to depend entirely on the provider and their interpretation of post-FATCA regulations. Fidelity is reported to be poor. And there is a report here from just two days ago, involving Voya. Some US 401k and IRA providers are now so scared of failing to properly comply with US regulations that they have chosen to give up entirely and leave compliance up to their non-resident alien customers. It's also probable that many US 401k and IRA providers do not fully understand how to comply with these regulations, either.
I guess it's (relatively) safe to assume that nothing should be withhold, then. And don't try to submit a W-8BEN just because providers may try to get out from the mess. As always, really frustrating dealing with international tax issues.

TedSwippet wrote: Thu May 31, 2018 8:17 am Don't know, but I will find out in a decade or so.

There may be no tax (chapter 3) withholding, but in tandem with this there is also the potential for a different 30% FATCA (chapter 4) withholding. So neither, one, the other, or worst case both at the same time, depending on the country you live in, its tax treaty and FATCA IGA status, and ultimately the whim of the compliance department of the provider in question, I guess.
So you don't know or nobody knows yet? ;-)

It would be useful to know. If Roth are not honored, it would be nice to know and plan to contribute to a pre-tax 401k instead
Otherwise, it may be even worth moving to US for one year and cash out the whole roth.
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Re: Pension plan in Europe. Which ETFs?

Post by international001 »

international001 wrote: Wed May 30, 2018 6:07 pm (a) pensions and other similar remuneration derived and beneficially owned by a
resident of a Contracting State in consideration of past employment shall be taxable only in that
State; and
Hmm.. doing more research I'm actually confused about this point. If I hold in a 401k a US fund with stocks in Spain, taxes will be withhold in Spain, right?

https://www.onefpa.org/journal/Pages/JU ... tocks.aspx

Shouldn't be the same if I hold an Irish fund with stocks in US in a Spanish pension plan?
What does the quoatation from the treaty mean, then?
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Re: Pension plan in Europe. Which ETFs?

Post by TedSwippet »

international001 wrote: Thu May 31, 2018 12:11 pmDoes the next sentence make sense: 'Such deduction shall not, however, exceed that part of the income tax, as computed before the deduction is given, which is attributable to the income derived from the United States'.
All this means is that claiming a credit against Spanish tax for US tax paid cannot push your Spanish tax below zero on this income element. Put differently, you always wind up paying the higher of the two tax rates.
international001 wrote: Thu May 31, 2018 12:11 pmIt would be useful to know. If Roth are not honored, it would be nice to know and plan to contribute to a pre-tax 401k instead.
An IRA provider might not honour any applicable tax treaty, or perhaps mistakenly apply either chapter 3 or chapter 4 (FATCA) withholding on Roth payments, but in all cases any over-withholding should be reclaimable from the IRS by filing a 1040NR. No reason to change strategy because of this.
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Re: Pension plan in Europe. Which ETFs?

Post by TedSwippet »

international001 wrote: Thu May 31, 2018 1:22 pmHmm.. doing more research I'm actually confused about this point. If I hold in a 401k a US fund with stocks in Spain, taxes will be withhold in Spain, right?
https://www.onefpa.org/journal/Pages/JU ... tocks.aspx
Nothing new here. We have a wiki entry that also describes this.
international001 wrote: Thu May 31, 2018 1:22 pmShouldn't be the same if I hold an Irish fund with stocks in US in a Spanish pension plan?
The Ireland ETF pays 15% to the US internally on US stocks, and you get the rest into your Spanish pension with no further tax interference. As far as I can tell from the US/Spain tax treaty though, if you were to hold these US stocks either directly in your Spanish pension or through a US domiciled ETF, your pension would also suffer a 15% US dividend tax withholding. Same outcome in both cases, apparently.

For a UK pension, the results are a little different. The US/UK treaty provides a 0% US dividend tax rate on payments made to UK pension plans, so here using either US stocks directly or a US domiciled ETF can be an advantage for a UK investor. The US/Spain treaty does not have this magic clause in it, though. At least, as far as I can tell -- but again, note that I am not expert in treaties. At least, not this particular one.
international001 wrote: Thu May 31, 2018 1:22 pmWhat does the quotation from the treaty mean, then?
It means that withdrawals from a US 401k or IRA made by a Spanish resident (and non-US citizen) are taxable only by Spain. And symmetrically, that withdrawals from a Spanish pension plan made by a US resident are taxable only by the US.

This clause is talking about withdrawals or payments out of the pension, and is nothing to do with payments or dividends received in to it from the other country or countries.
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international001
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Re: Pension plan in Europe. Which ETFs?

Post by international001 »

Oh.. ok, I think I got confused by the previous posts. So dividends in a pension fund are taxed by the country that hosts the stock. This makes sense.
It's an advantage of being in US and investing in US market in US funds of US stocks. For a the Spanish pension plan, the total comision becomes

Plan overhead: 0.75% (and finizens is one of the best!)
Tax dividends: ~0.6% (assume average dividends 3%, and withholding rate average of 20%)
TER of more ETFs: ~0.1%

If my Spanish friend invests in an accumulation fund in Ireland, the withholding taxes are internally paid by the fund. Is there a way to get a credit for them? section 24 of the treaty should apply, or not? I need to make the numbers and decide what is more tax efficient. You can save just 0.75% if you are not within a pension plan (I think it's a ripoff).



About the Roth IRA by expat retirees, I haven't found any reference (except perhaps https://finance.zacks.com/happens-unite ... -5750.html, that seems to imply roth distributions are not taxable; but I wouldn't trust it)
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international001
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Re: Pension plan in Europe. Which ETFs?

Post by international001 »

I thought I'd share my findings, after getting a hold of somebody (reasonable) knowledgeable on a pension plan provider (similar one https://indexacapital.com)

It seems US ETFs they use withhold 15%. Rest of ETFs don't withhold. This is why the underweight on US ETFs (double taxation)

For regular investments, they prefer Irish domiciled accumulation funds. Internally, the fund would withhold 15% of the dividends. This is because the Irish-US treaty. SInce it's an accumulation fund, you don't have to pay taxes to Spanish taxman. This could be use as loophole if you were investing from a country w/o a US treaty. It seems there is no way of claiming this withholding while doing Spanish personal income taxes. So double taxation again.

I guess you'd be better off owning the ETFs directly (if you can claim tax credit in Spain; I don't know how easy it is)
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