Nonresident alien's ETF domicile decision table

Using a  helps non-US investors decide whether to use US domiciled or non-US domiciled ETFs.

When selecting an index tracking fund, non-US investors (that is, US nonresident aliens) have a broad choice between US domiciled ETFs and non-US domiciled ETFs. This article summarises the recommended  ETF domicile that non-US investors might use, based on their own country of residence and domicile. The goal is for investors to obtain the best tax result.

These tables do not cover every nuance of ETF domicile selection, but rather they aim to offer a broad-brush overview. You may find that there are cases where they do not offer optimal results, for example where US taxes interact with your local country taxes in subtle ways. See the notes at the end of the page for more.

Because of 2018 European MiFID and PRIIPs regulations, it is now difficult or impossible for European and UK investors to buy US domiciled funds. For more, see the explanation at the end of the page.

ETF domicile recommendations by asset class
Finding the best ETF domicile can be heavily influenced by asset class. Some asset classes are almost always better held in non-US domiciled ETFs, and not in US domiciled ones. The table below summarises the normal best ETF domicile to choose for particular asset classes.

As a general rule, nonresident aliens should avoid US domiciled ETFs and prefer non-US domiciled ones for all asset classes except US stocks and US bonds.

For US stocks, finding the best ETF domicile depends on the investor's country of residence and domicile. The country table for stocks breaks this decision down further. In a few cases, a US domiciled ETF can be suitable.

For US bonds, most nonresident alien investors should probably prefer non-US domiciled ETFs. Some nonresident alien investors can consider a US domiciled ETF, but only where there is no non-US bond component, and contingent on adequate coverage from a US estate tax treaty. Apart from the potential for a lower expense ratio, there is no particular gain to using US domiciled ETFs here, only a lack of specific US tax penalty that using non-US domiciled ETFs always bypasses. For investors in the EU and the UK, access to US domiciled ETFs is in any case likely to be limited due to PRIIPs.

For complex cases, where an ETF contains investments from more than one of these asset classes, investors will need to use their judgement to choose the best ETF domicile, or avoid this type of ETF and instead hold only ETFs that contain a single asset class listed in the table. In general, for ETFs that hold a mix of asset classes (for example a global stock index ETF, where US stocks are a large component, more than 50%, of world market cap), choosing non-US domiciled ETFs is most often the safest and best choice.

Special exemption for interest distributions paid as dividends
Where a US domiciled ETF receives US source interest on its holdings, and that interest would not have been taxable to a US nonresident if paid directly, the portion of the dividend attributable to this interest can be exempted from nonresident withholding. The term for this is 'portfolio interest'. It will be most common in bond ETFs. For it to occur correctly both the ETF provider and the broker need to be aware of the relevant qualified interest income (QII) regulations.

This exemption aims to reduce a nonresident alien's US tax on a US domiciled ETF holding US bonds so that it is the same as an Ireland domiciled ETF holding identical assets. However, note that the exemption is particularly narrowly drawn. It does not apply to any non-US source interest that the ETF receives. This means that a US domiciled ETF containing non-US bonds suffers the standard 30% or lower treaty rate US tax on its dividends.

In other words, any and every non-US country's interest is nevertheless taxed by the US when paid out to non-US investors if it has the misfortune to first pass through a US domiciled ETF. Nonresident alien investors should nearly always strongly avoid US domiciled ETFs holding non-US bonds, and strongly prefer non-US domiciled ETFs for these assets.

While this exemption may make the choice between US domiciled and non-US domiciled ETFs holding purely US bonds a more balanced one, in practice US estate tax risks will often dominate the decision. Aside from any slight gain from a lower expense ratio, there is no benefit to using a US domiciled ETF to hold US bonds where a usable non-US domiciled one exists.

ETF domicile recommendations table for US stocks
Find your country of residence and domicile in the table below to help you decide whether US domiciled ETFs or non-US domiciled ETFs are likely to be the best ones for you to use for your own allocation to US stocks.

If your country is not listed in this table, then it has no US tax treaties. In that case, the 'Other Countries' entry applies to you.

Recommendations explained
The tables above offer recommendations for holdings below $60,000 and above $60,000. This is because for US nonresident aliens domiciled in countries without a US estate tax treaty, US estate taxes begin at a discriminatory $60,000 of aggregate US situated investments, and rapidly rise to 40% of the balance.

Because of the threat of extortionate US estate taxes, if you live in a country without a US estate tax treaty you should avoid US domiciled ETFs where the balance exceeds $60,000, and strongly prefer non-US domiciled ETFs instead.

Ireland is the most common domicile for non-US domiciled ETFs, although Luxembourg is another popular non-US domicile for ETFs. Of the two, Ireland has the better treatment for dividends from US stocks. ETFs domiciled in Ireland can take advantage of the US/Ireland treaty rate of 15%, but because of a less favourable US treaty ETFs domiciled in Luxembourg suffer 30% tax withholding on dividends from US stocks. In general then, if avoiding US domiciled ETFs you should prefer Ireland domiciled ETFs over Luxembourg domiciled ones unless the ETF itself holds no US stocks.

If your country has a US income tax treaty, and if it also has a US estate tax treaty or where your US ETF holdings balance will always be below $60,000, and if your country's US tax treaty rate is lower than the US/Ireland treaty rate of 15%, you may generally prefer US domiciled ETFs where some or all of the ETF holdings are US stocks. If however your country's US tax treaty rate is higher than the US/Ireland tax treaty rate, you should prefer Ireland domiciled ETFs. Also, if an ETF holds only non-US stocks, or if holds bonds, then you should consider Ireland domiciled ETFs.

An EU-wide regulation known as PRIIPs took effect in 2018. As a result, US domiciled ETFs are now limited for residents of EU countries (and non-EU countries which conform to EU regulations), and effectively unavailable to retail investors in these countries. If you live in an EU country where the US tax treaty rate is lower than the US/Ireland tax treaty rate of 15%, you may nevertheless have to accept Ireland domiciled ETFs and live with the slightly worse tax result.

If your country's US tax treaty rate equals the US/Ireland tax treaty rate of 15%, for ETFs that hold mostly or only US stocks then you can consider either US or non-US domiciled ETFs, although you should restrict investments in US domiciled ETFs to below $60,000 if your country does not have a US estate tax treaty. Choosing the best ETF domicile in this case will usually be decided by a combination of how local tax laws treat 'offshore' funds, whether and how they provide foreign tax credits, and any large differences in the ETF annual charges. For ETFs holding only non-US stocks, or holding only bonds, consider Ireland domiciled ETFs. These may produce a better tax outcome for you because you will avoid paying US withholding tax on their dividends.

If you live in a country with neither a US income tax treaty nor a US estate tax treaty you should strongly avoid US domiciled ETFs and strongly prefer non-US domiciled ones. For you, choosing US domiciled ETFs will probably lead to poor tax results all round.

In the notes above, "non-US domiciled ETFs" would typically be Vanguard's or iShares' Ireland domiciled ETFs, but others are available.

Specific country notes
There is no US tax treaty with Hong Kong and it is not covered by the treaty with China. The tax treaty with Chile was executed in 2010 but has still not been ratified by the US senate, and so has not entered into force.

The US tax treaty with the UK allows for a 0% tax withholding for dividends paid to UK pension funds. A UK investor might therefore obtain a tax benefit by holding their US stock allocation in US domiciled ETFs, rather than non-US domiciled ones, within a UK personal pension. In practice however, PRIIPs may frustrate or prevent this.

The US estate tax treaty with Switzerland may not protect against potential double-tax on US situated assets, but Swiss investors are probably protected up to the level of the US estate tax exemption allowed to US citizens.

The Ireland and South Africa estate tax treaties are very old, and unlike other US estate tax treaties they may not raise the US estate tax exemption to the level allowed to US citizens. Irish and South African investors should check this carefully before proceeding.

Canada does not have a separate estate tax treaty with the US. Instead, the US maintains a single treaty with Canada that combines both income taxes and estate taxes. Under this combined treaty, Canadians receive protection up to the level of the US estate tax exemption allowed to US citizens, the same as generally provided by the separate US estate tax treaties for other countries.

At the time of writing the helpful folk at Tax Treaty Law offer convenient access to the text of both US estate tax and US income tax treaties.

Residence and domicile
US income tax treaties treaties are generally controlled by your country of residence. Being a 'tax resident' of a country is normally sufficient to allow you to use that country's income tax treaty with the US.

In contrast, US estate tax treaties are generally controlled by your domicile rather than your country of residence. Domicile is where your permanent home is, and although it includes residence as one of its elements, residence alone in a country may not be enough to gain you coverage from a US estate tax treaty, so you may need to be particularly careful here. A few US estate tax treaties also cover citizens even when perhaps not resident or domiciled in the treaty partner country, for example the UK.

Interaction between local tax rates and US withholding taxes
If you live in a country with an income tax, and if your local tax rate on dividends exceeds the US tax withholding rate for your country, and if you can claim a credit against local tax for US withholding tax, then you can consider using US domiciled ETFs where appropriate. This is because the tax credit will leave you in a neutral position.

For other cases you will need to understand whether an Ireland domiciled ETF will produce a better tax outcome. For ETFs that hold non-US stocks or only bonds, an Ireland domiciled ETF might generally be a safer choice in all circumstances. Ireland domiciled ETFs are tax-neutral, meaning that all the income generated within the ETF flows to the investor without any other taxes being deducted or withheld by Ireland. In contrast, with a US domiciled ETF you could end up having to pay US withholding tax on income generated entirely from non-US assets, something that does not occur with Ireland domiciled ETFs.

The picture is more confused for global funds that contain both US and non-US assets. However, because the US is more than half of global stock markets, this generally argues for following the recommendations in the table above for this type of fund.

In truly marginal cases a cheaper expense ratio can occasionally swing the balance in favour of US domiciled ETFs. Here everything will depend heavily on your own tax rate as an investor and your ability to use foreign tax credits against local tax.

Finally, as a general rule of thumb, bear in mind that most of the time, most non-US investors should prefer Ireland domiciled ETFs to US domiciled ones. The majority of the exceptions are found where US domiciled ETF access is limited, and where this limit is enforced by EU or similar local regulation, investors may nevertheless only be able to use ETFs domiciled in Ireland, Luxembourg, and other EU countries anyway.