Difference between revisions of "Nonresident alien's ETF domicile decision table"

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(Remove Norway from the list of countries with a US estate tax treaty, remove python table generation source code so that the Talk page version becomes definitive, add a note linking to Talk page.)
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== ETF domicile recommendations table for US stocks ==
 
== ETF domicile recommendations table for US stocks ==
  
Find your country of residence and [https://en.wikipedia.org/wiki/Domicile_(law) 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.
+
Find your country of residence and [https://en.wikipedia.org/wiki/Domicile_(law) domicile] in the table below<ref group=note>This table is built using a Python script. You can find the source code for the script in the [[Talk:{{PAGENAME}}|discussion page]] associated with this page.</ref> 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.
 
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.
  
 
{{anchor|stock_table}}
 
{{anchor|stock_table}}
<!-- The following Python code will generate the wikitable that follows this comment:
+
<!-- Start of table built using a Python script.
#!/usr/bin/python
+
    The source code for the script is in the Talk page associated with this page. -->
# ... or run online through https://repl.it/languages/python3
 
 
 
# Source: https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1_2019_Feb.pdf
 
INCOME_TAX_TREATY_DATA = '''
 
Australia 15 10(2)/P6
 
Austria 15 10(2)
 
Bangladesh 15 10(2)
 
Barbados 15 10(2)/PIII(1)
 
Belgium 15 10(2)
 
Bulgaria 10 10(2)
 
Canada 15 X(2)/5P5(1)
 
China, People's Rep. of 10 9(2)
 
Comm. of Independent States 30 None
 
Cyprus 15 12(2)
 
Czech Republic 15 10(2)
 
Denmark 15 10(2)/PII
 
Egypt 15 11(2)
 
Estonia 15 10(2)
 
Finland 15 10(2)/PIII
 
France 15 10(2)/2P2
 
Germany 15 10(2)/PIV
 
Greece 30 IX
 
Hungary 15 9(2)
 
Iceland 15 10(2)
 
India 25 10(2)
 
Indonesia 15 11(2)/P1
 
Ireland 15 10(2)
 
Israel 25 12(2)
 
Italy 15 10(2)
 
Jamaica 15 10(2)/P2
 
Japan 10 10(2)
 
Kazakhstan 15 10(2)
 
Latvia 15 10(2)
 
Lithuania 15 10(2)
 
Luxembourg 15 10(2)
 
Malta 15 10(2)
 
Mexico 10 10(2)/2PII
 
Morocco 15 10(2)
 
Netherlands 15 10(2)/P3(a)
 
New Zealand 15 10(2)/PVI
 
Norway 15 8(2)/PIV(1)
 
Pakistan 30 VII(2)/VI(1)
 
Philippines 25 11(2)
 
Poland 15 11(2)
 
Portugal 15 10(2),(3)
 
Romania 10 10(2)
 
Russia 10 10(2)
 
Slovak Republic 15 10(2)
 
Slovenia 15 10(2)
 
South Africa 15 10(2)
 
South Korea 15 12(2)
 
Spain 15 10(2)
 
Sri Lanka 15 10(2)
 
Sweden 15 10(2)/PIV
 
Switzerland 15 10(2)
 
Thailand 15 10(2)
 
Trinidad & Tobago 30 12(1)
 
Tunisia 20 10(2)
 
Turkey 20 10(2)
 
Ukraine 15 10(2)
 
United Kingdom 15 10(2)
 
Venezuela 15 10(2)
 
Other Countries 30 None
 
'''
 
 
 
# Source: https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international
 
ESTATE_TAX_TREATY_DATA = '''
 
Australia
 
Austria
 
Denmark
 
Finland
 
France
 
Germany
 
Greece
 
Ireland
 
Italy
 
Japan
 
Netherlands
 
Norway
 
South Africa
 
Switzerland
 
United Kingdom
 
'''
 
 
 
# Note: Canada effectively has an estate tax treaty, just as part of its US income tax treaty.
 
#      The entry for Canada below is added manually after retrieving the above page, which
 
#      omits Canada in its list of estate tax treaties.
 
ESTATE_TAX_TREATY_DATA += '''
 
Canada
 
'''
 
 
 
# Note: Some countries have old treaties that lack PR-UC estate tax treatment.
 
# Source: https://www.ey.com/Publication/vwLUAssets/2012-international-estate-and-inheritance-tax-guide/$FILE/2012-international-estate-and-inheritance-tax-guide.pdf
 
NON_PR_UC_DATA = '''
 
Ireland
 
South Africa
 
'''
 
 
 
# Source: https://europa.eu/european-union/about-eu/countries_en
 
EU_COUNTRY_DATA = '''
 
Austria
 
Belgium
 
Bulgaria
 
Croatia
 
Cyprus
 
Czechia
 
Denmark
 
Estonia
 
Finland
 
France
 
Germany
 
Greece
 
Hungary
 
Ireland
 
Italy
 
Latvia
 
Lithuania
 
Luxembourg
 
Malta
 
Netherlands
 
Poland
 
Portugal
 
Romania
 
Slovakia
 
Slovenia
 
Spain
 
Sweden
 
'''
 
 
 
# Note: Norway is not EU but is EEA, so is treated as if EU for PRIIPs purposes.
 
#      The UK is no longer EU, but continues to conform to EU PRIIPs.
 
EU_COUNTRY_DATA += '''
 
Norway
 
United Kingdom
 
'''
 
 
 
# Note: Hacky fix for differences in country names in the US tax treaty and EU lists.
 
EU_COUNTRY_DATA += '''
 
Czech Republic
 
Slovak Republic
 
'''
 
 
 
# Source: https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1_2019_Feb.pdf
 
DEFAULT_US_TAX_RATE = 30
 
IRELAND_US_TREATY_TAX_RATE = 15
 
 
 
# Returns: [('country', tax_rate,
 
#            'treaty article', has_estate_tax_treaty, has_pr_uc, is_priips), ...]
 
lines = lambda data: [line for line in data.split('\n') if line]
 
def clean_countries(data):
 
  return [' '.join(line.split()) for line in lines(data)]
 
def parse_country_data():
 
  has_estate_tax_treaty = clean_countries(ESTATE_TAX_TREATY_DATA)
 
  non_pr_uc = clean_countries(NON_PR_UC_DATA)
 
  is_priips = clean_countries(EU_COUNTRY_DATA)
 
  def __dissect(line):
 
    elements = line.split()
 
    country = ' '.join(elements[:-2])
 
    tax_rate, treaty_article = int(elements[-2]), elements[-1]
 
    return (country, tax_rate, treaty_article,
 
            country in has_estate_tax_treaty,
 
            country not in non_pr_uc, country in is_priips)
 
  return [__dissect(line) for line in lines(INCOME_TAX_TREATY_DATA)]
 
 
 
# Returns: [['country', 'treaty article', tax_rate, 'Yes/No',
 
#            '<$60k_US_ETF_recommendation', '<$60k_nonUS_ETF_recommendation',
 
#            '>$60k_US_ETF_recommendation', '>$60k_nonUS_ETF_recommendation'],
 
#          ...]
 
def build_table_data(parsed):
 
  def _build(entry):
 
    country, tax_rate, treaty_article, has_estate_tax_treaty, has_pr_uc, is_priips = entry
 
    if tax_rate < IRELAND_US_TREATY_TAX_RATE:
 
      if is_priips:
 
        low_recommend = ['Prefer_Limited', 'Accept']
 
      else:
 
        low_recommend = ['Prefer', 'Consider']
 
    elif tax_rate > IRELAND_US_TREATY_TAX_RATE:
 
      low_recommend = ['Avoid', 'Prefer']
 
    else:
 
      if is_priips:
 
        low_recommend = ['Consider_Limited', 'Consider']
 
      else:
 
        low_recommend = ['Consider', 'Consider']
 
    estate_treaty = ['No', 'Yes'][has_estate_tax_treaty]
 
    if has_estate_tax_treaty and has_pr_uc:
 
      high_recommend = low_recommend
 
    else:
 
      high_recommend = ['Avoid', 'Prefer']
 
    return [country, treaty_article,
 
            tax_rate, estate_treaty] + low_recommend + high_recommend
 
  return [_build(entry) for entry in parsed]
 
 
 
# Returns: ['line', ...] in wikitable format
 
def format_wiki_table(table_data):
 
  __color = lambda color, string: 'style="color: ' + color + '" | ' + string
 
  def treaty_article_style(article):
 
    if article == 'None':
 
      return __color('red', article)
 
    return article
 
  def rate_style(rate):
 
    text = str(rate) + '%'
 
    if rate == DEFAULT_US_TAX_RATE:
 
      return __color('red', text)
 
    elif rate > IRELAND_US_TREATY_TAX_RATE:
 
      return __color('orange', text)
 
    elif rate < IRELAND_US_TREATY_TAX_RATE:
 
      return __color('green', text)
 
    return text
 
  def estate_treaty_style(text): 
 
    return __color({'No': 'red', 'Yes': 'green'}[text], text)
 
  def recommendation_style(text):
 
    __background = lambda color, text: 'style="background: ' + color + '" | ' + text
 
    __colors = {'Avoid': '#f99', 'Prefer': '#9f9', 'Prefer_Limited': '#9f9',
 
              'Consider': '#ffff90', 'Consider_Limited': '#ffb', 'Accept': '#ffff90'}
 
    if text.endswith('_Limited'):
 
      return __background(__colors[text], 'Limited')
 
    return __background(__colors[text], text)
 
  table = ['{| class="wikitable sortable"',
 
          '|+ ETF domicile recommendations by country of residence and domicile',
 
          '|-',
 
          '! scope="col" colspan="4" class="unsortable" style="background: none" |',
 
          '! scope="col" colspan="2" class="unsortable" | Holdings below $60,000',
 
          '! scope="col" colspan="2" class="unsortable" | Holdings above $60,000',
 
          '|-',
 
          '! scope="col" | Country of residence/domicile',
 
          '! scope="col" class="unsortable" | Treaty article',
 
          '! scope="col" | US dividend tax rate',
 
          '! scope="col" | Estate tax treaty?',
 
          '! scope="col" class="unsortable" | US domiciled ETFs',
 
          '! scope="col" class="unsortable" | Non-US domiciled ETFs',
 
          '! scope="col" class="unsortable" | US domiciled ETFs',
 
          '! scope="col" class="unsortable" | Non-US domiciled ETFs']
 
  for elements in table_data:
 
    table += ['|-',
 
              '! ' + elements[0],
 
              '| ' + treaty_article_style(elements[1]),
 
              '| ' + rate_style(elements[2]),
 
              '| ' + estate_treaty_style(elements[3])]
 
    for element in elements[4:]:
 
      table += ['| ' + recommendation_style(element)]
 
  table += ['|}']
 
  return table
 
 
 
def main():
 
  data = build_table_data(parse_country_data())
 
  for line in format_wiki_table(data):
 
    print(line)
 
 
 
if __name__ == '__main__':
 
  main()
 
-->
 
 
 
 
{| class="wikitable sortable"
 
{| class="wikitable sortable"
 
|+ ETF domicile recommendations by country of residence and domicile
 
|+ ETF domicile recommendations by country of residence and domicile
Line 668: Line 416:
 
| 8(2)/PIV(1)
 
| 8(2)/PIV(1)
 
| 15%
 
| 15%
| style="color: green" | Yes
+
| style="color: red" | No
| style="background: #ffb" | Limited
 
| style="background: #ffff90" | Consider
 
 
| style="background: #ffb" | Limited
 
| style="background: #ffb" | Limited
 
| style="background: #ffff90" | Consider
 
| style="background: #ffff90" | Consider
 +
| style="background: #f99" | Avoid
 +
| style="background: #9f9" | Prefer
 
|-
 
|-
 
! Pakistan
 
! Pakistan
Line 872: Line 620:
 
| style="background: #9f9" | Prefer
 
| style="background: #9f9" | Prefer
 
|}
 
|}
 +
<!-- End of table built using a Python script. -->
  
 
== Recommendations explained ==
 
== Recommendations explained ==
Line 922: Line 671:
  
 
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.
 
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.
 +
 +
==Notes==
 +
<references group="note" />
  
 
==See also==
 
==See also==

Revision as of 08:27, 29 December 2020

Ambox globe content.svg This article contains details specific to non-US investors. It does not apply to United States (US) investors, or to US citizens and US permanent residents (green card holders) living outside the US.

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 page 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.

ETF domicile recommendations by asset class
Holdings below $60,000 Holdings above $60,000
Asset class US domiciled ETFs Non-US domiciled ETFs US domiciled ETFs Non-US domiciled ETFs
US stocks See country table for stocks
Non-US stocks Avoid Prefer Avoid Prefer
US bonds Consider (or Limited) Prefer Contingent (or Limited) Prefer
Non-US bonds Avoid Prefer Avoid Prefer

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.[1] 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.[2] 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[note 1] 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.

ETF domicile recommendations by country of residence and domicile
Holdings below $60,000 Holdings above $60,000
Country of residence/domicile Treaty article US dividend tax rate Estate tax treaty? US domiciled ETFs Non-US domiciled ETFs US domiciled ETFs Non-US domiciled ETFs
Australia 10(2)/P6 15% Yes Consider Consider Consider Consider
Austria 10(2) 15% Yes Limited Consider Limited Consider
Bangladesh 10(2) 15% No Consider Consider Avoid Prefer
Barbados 10(2)/PIII(1) 15% No Consider Consider Avoid Prefer
Belgium 10(2) 15% No Limited Consider Avoid Prefer
Bulgaria 10(2) 10% No Limited Accept Avoid Prefer
Canada X(2)/5P5(1) 15% Yes Consider Consider Consider Consider
China, People's Rep. of 9(2) 10% No Prefer Consider Avoid Prefer
Comm. of Independent States None 30% No Avoid Prefer Avoid Prefer
Cyprus 12(2) 15% No Limited Consider Avoid Prefer
Czech Republic 10(2) 15% No Limited Consider Avoid Prefer
Denmark 10(2)/PII 15% Yes Limited Consider Limited Consider
Egypt 11(2) 15% No Consider Consider Avoid Prefer
Estonia 10(2) 15% No Limited Consider Avoid Prefer
Finland 10(2)/PIII 15% Yes Limited Consider Limited Consider
France 10(2)/2P2 15% Yes Limited Consider Limited Consider
Germany 10(2)/PIV 15% Yes Limited Consider Limited Consider
Greece IX 30% Yes Avoid Prefer Avoid Prefer
Hungary 9(2) 15% No Limited Consider Avoid Prefer
Iceland 10(2) 15% No Consider Consider Avoid Prefer
India 10(2) 25% No Avoid Prefer Avoid Prefer
Indonesia 11(2)/P1 15% No Consider Consider Avoid Prefer
Ireland 10(2) 15% Yes Limited Consider Avoid Prefer
Israel 12(2) 25% No Avoid Prefer Avoid Prefer
Italy 10(2) 15% Yes Limited Consider Limited Consider
Jamaica 10(2)/P2 15% No Consider Consider Avoid Prefer
Japan 10(2) 10% Yes Prefer Consider Prefer Consider
Kazakhstan 10(2) 15% No Consider Consider Avoid Prefer
Latvia 10(2) 15% No Limited Consider Avoid Prefer
Lithuania 10(2) 15% No Limited Consider Avoid Prefer
Luxembourg 10(2) 15% No Limited Consider Avoid Prefer
Malta 10(2) 15% No Limited Consider Avoid Prefer
Mexico 10(2)/2PII 10% No Prefer Consider Avoid Prefer
Morocco 10(2) 15% No Consider Consider Avoid Prefer
Netherlands 10(2)/P3(a) 15% Yes Limited Consider Limited Consider
New Zealand 10(2)/PVI 15% No Consider Consider Avoid Prefer
Norway 8(2)/PIV(1) 15% No Limited Consider Avoid Prefer
Pakistan VII(2)/VI(1) 30% No Avoid Prefer Avoid Prefer
Philippines 11(2) 25% No Avoid Prefer Avoid Prefer
Poland 11(2) 15% No Limited Consider Avoid Prefer
Portugal 10(2),(3) 15% No Limited Consider Avoid Prefer
Romania 10(2) 10% No Limited Accept Avoid Prefer
Russia 10(2) 10% No Prefer Consider Avoid Prefer
Slovak Republic 10(2) 15% No Limited Consider Avoid Prefer
Slovenia 10(2) 15% No Limited Consider Avoid Prefer
South Africa 10(2) 15% Yes Consider Consider Avoid Prefer
South Korea 12(2) 15% No Consider Consider Avoid Prefer
Spain 10(2) 15% No Limited Consider Avoid Prefer
Sri Lanka 10(2) 15% No Consider Consider Avoid Prefer
Sweden 10(2)/PIV 15% No Limited Consider Avoid Prefer
Switzerland 10(2) 15% Yes Consider Consider Consider Consider
Thailand 10(2) 15% No Consider Consider Avoid Prefer
Trinidad & Tobago 12(1) 30% No Avoid Prefer Avoid Prefer
Tunisia 10(2) 20% No Avoid Prefer Avoid Prefer
Turkey 10(2) 20% No Avoid Prefer Avoid Prefer
Ukraine 10(2) 15% No Consider Consider Avoid Prefer
United Kingdom 10(2) 15% Yes Limited Consider Limited Consider
Venezuela 10(2) 15% No Consider Consider Avoid Prefer
Other Countries None 30% No Avoid Prefer Avoid Prefer

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[3] $60,000 of aggregate US situated investments,[4] 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[5] 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.[6][7] 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[5] or where your US ETF holdings balance will always be below $60,000, and if your country's US tax treaty rate[8] 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[9] (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[8] 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.[5] 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[10] nor a US estate tax treaty[5] 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.[11]

The US tax treaty with the UK allows for a 0% tax withholding for dividends paid to UK pension funds.[12] 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,[13] 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.[14]

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,[15] 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,[8] 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,[16] 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.

Notes

  1. This table is built using a Python script. You can find the source code for the script in the discussion page associated with this page.

See also

References

  1. "Permanent U.S. Withholding Tax Relief for Non-U.S. Investors in U.S. Mutual Funds". K&L Gates. http://www.klgates.com/permanent-us-withholding-tax-rules-for-non-us-investors-in-rics--a-new-distribution-opportunity-01-12-2016/. Retrieved May 23, 2019.
  2. Jeffrey M. Colon. "Foreign Investors in U.S. Mutual Funds: The Trouble with Treaties, p. 487". Fordham. https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1697&context=faculty_scholarship. Retrieved May 26, 2019.
  3. Omer Harel. "Rethinking the U.S. Estate Tax on Nonresident Aliens". University of Michigan Law School, published by TaxAnalysts October 6 2011. http://www.taxhistory.org/www/features.nsf/Articles/EF4B18A62361343F8525792100546337. Retrieved March 19, 2019.
  4. "Some Nonresidents with U.S. Assets Must File Estate Tax Returns". IRS. https://www.irs.gov/individuals/international-taxpayers/some-nonresidents-with-us-assets-must-file-estate-tax-returns. Retrieved March 17, 2019.
  5. 5.0 5.1 5.2 5.3 "Estate & Gift Tax Treaties (International)". IRS. https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties-international. Retrieved March 17, 2019.
  6. "KPMG Withholding Tax Study 2019". KPMG. https://assets.kpmg/content/dam/kpmg/lu/pdf/2019/lu-en-investements-funds-wht-study-2019.pdf. Retrieved March 1, 2020.
  7. "Luxembourg releases new guidelines on certificates of residence for UCIs". Ernst & Young. https://www.ey.com/Publication/vwLUAssets/Luxembourg_releases_new_guidelines_on_certificates_of_residence_for_UCIs/$FILE/2017G_07129-171Gbl_Luxembourg%20releases%20new%20guidelines%20on%20certificates%20of%20residence%20for%20UCIs.pdf. Retrieved March 1, 2020.
  8. 8.0 8.1 8.2 "Tax Rates on Income Other Than Personal Service Income Under Chapter 3, Internal Revenue Code, and Income Tax Treaties (Rev. Feb 2019)". IRS. https://www.irs.gov/pub/irs-utl/Tax_Treaty_Table_1_2019_Feb.pdf. Retrieved March 17, 2019.
  9. "Countries". European Union. https://europa.eu/european-union/about-eu/countries_en. Retrieved March 17, 2019.
  10. "US income tax treaty United States Income Tax Treaties - A to Z". IRS. https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z. Retrieved March 17, 2019.
  11. "Future of United States – Chile Bilateral Tax Treaty Remains Uncertain". National Law Review. https://www.natlawreview.com/article/future-united-states-chile-bilateral-tax-treaty-remains-uncertain. Retrieved March 17, 2019.
  12. "United Kingdom (UK) - Tax Treaty Documents". IRS. https://www.irs.gov/businesses/international-businesses/united-kingdom-uk-tax-treaty-documents. Retrieved August 9, 2020.
  13. "Flaws in the Current U.S.-Swiss Estate Tax Treaty and the Need for a Modern Treaty". Swiss-American Chamber of Commerce. https://www.amcham.ch/publications/downloads/2011/flaws_in_the_current_US_Swiss_estate_tax_treaty_and_the_need_for_a_modern_treaty.pdf. Retrieved March 17, 2019.
  14. "Canada - Tax Treaty Documents". IRS. https://www.irs.gov/businesses/international-businesses/canada-tax-treaty-documents. Retrieved August 9, 2020.
  15. "Estate, Gift, and Generation-Skipping Transfer Tax Treaties". SMU Law Review. 1983. https://core.ac.uk/download/pdf/147634389.pdf. Retrieved August 1, 2020.
  16. "WHY IRELAND FOR ETFs". Irish Funds. https://files.irishfunds.ie/1481206562-IF_ETFs_Brochure_WEB.pdf. Retrieved March 19, 2019.