Investing from outside of the US

From Bogleheads
Jump to: navigation, search

Investing from outside of the US serves as introduction to the investment and taxation concerns of US and non-US citizens domiciled outside the US.

In most countries, the domicile of the investor determines the applicable rules; there are two notable exceptions to this: nationals of Eritrea and the US are taxed by their country independently of where they are domiciled.

In law, domicile is the status or attribution of being a lawful permanent resident in a particular jurisdiction. A person can remain domiciled in a jurisdiction even after they have left it, if they have maintained sufficient links with that jurisdiction or have not displayed an intention to leave permanently (that is, if that person has moved to a different state but has not yet decided to remain there indefinitely).

Most of the Bogleheads investment philosophy is universally applicable and hence the principles also apply if you live outside of the US assuming you take into account the local situation, rules and taxation.


This section concentrates on topics that apply to the non-US domiciles; some would be very "alien" and unbelievable to US investors. Short topics are explained in this page itself. Larger topics are split out in seperate pages.

There is a set of pages that guide the reader through the maze of "domicile" investment choices: choice of domicile of the funds, choice of currency, ...

Next to these generic pages, there are a set of country pages that give an overview of investing in specific countries. They treat a varying set of topics. Some of these country pages contain sample portfolios or suggestions for (ETF) funds for the specific country. While these can be taken to draft a first portfolio it is good to post a question on the forum as every country is different and the recommendation might change over time.

Taxation as a US person living abroad

US (tax) resident investors are invited to start their journey with the Taxation as a US person living abroad as their situation is very specific.

Impact of US legislation on investors outside of the US (Nonresident alien - NRA)

The US stock market is a large portion of the world equity market. As such there can be a large impact of the US legislation on investing from outside of the US. Nonresident alien taxation summarizes how a non-resident alien (NRA) is taxed when investing in US domiciled ETFs. Pay attention to the US withholding taxes and US estate taxes.

Guidance and decision tables for Non-US investors

  • Nonresident alien with no US tax treaty & Irish ETFs: This page intends to discuss why it may be better for a nonresident alien with no US tax treaty to invest in Ireland domiciled exchange-traded funds (ETFs) as opposed to the popular US domiciled mutual funds discussed often by US-based investors.
  • Non-US investor's guide to navigating US tax traps: US tax laws contain multiple traps for unwary non-US investors. This page contains a guide for non-US investors planning to use index tracker funds or ETFs, with the aim of helping these investors to avoid falling into US tax traps by navigating around, through, or between them.
  • Nonresident alien's ETF domicile decision table: When selecting an index tracking fund, US nonresident alien investors have a broad choice between US domiciled ETFs and non-US domiciled ETFs. This page summarises the recommended ETF domicile that US nonresident aliens might use, based on their own country of residence and domicile. The goal is for investors to obtain the best tax result.

Accumulating/capitalizing vs. distributing ETF share classes

One of the biggest difference between US domiciled ETFs and EU domiciled ETFs is that EU domiciled ETFs can reinvest the received dividends/interests, without distributing them. Let's say that an ETF holds a number of stocks. The ETF keeps receiving dividends from these stocks periodically. In the US, a fund must distribute these dividends to the investors. In the EU, the ETF can either distribute the dividends, or immediately reinvest back into the ETF, buying more stocks.

Many countries in Europe do not tax dividends if they are reinvested by the fund itself. In those countries, buy only capitalizing/accumulating ETF shares, but consult your tax advisor before doing so. [note 1]

The problem with distributing ETFs is that you may have to pay dividend tax in your home country, then when you reinvest the dividends you must pay brokerage commissions, and also the bid/ask spread. These problems often do not exist in capitalizing/accumulating ETFs.

The KIID of the ETFs will tell you whether the ETF is accumulating or distributing.

Base currency vs. trading currency vs. currency of the underlying asset

The same ETF can have different share classes, and can be listed on several different stock exchanges. For example, the SPDR® MSCI ACWI IMI ETF is listed on 5 different stock exchanges, and in different currencies tracks the MSCI All-Country World Investable Market Index, which is a truly global index.

Where should you buy it, and in which currency?

The base currency of the fund is USD. This means that the ETF shares are managed in the USD currency, and the tracked index is also quoted in USD. You can also buy the ETF shares in the USD, EUR, GBP or CHF[note 2] currencies, on different stock exchanges. This is useful if your money is in EUR, GBP or in CHF, and not in USD, and you don't want to exchange your money for USD.

It is important to understand that the real currency risk is linked to the currency of the underlying assets. For example: Assume a fund that invest in Japanese Assets that trade in JPY. Assume the base currency of the fund is USD and the trading currency is GBP. Assume a EUROpean buys the fund (by exchanging his Euro's to British pound and then buy the fund). The currency risk for the above is related to the evolution of the exchange rate JPY-EUR. The evolution of the exchange rates of GBP (trading currency) and USD (base currency) are immaterial to the currency risk that the investor from EUROpe runs.

Of course, if you bought in EUR, you won't get the same level of return (in EUR) as compared to the return in USD. For Example: take the db x-trackers II Barclays Global Aggregate Bond UCITS ETF 1C as an example: compare the graphs of performance in USD and performance in EUR the graphs are different but actually the fund (and the assets) are the same. The difference that you see in the graphs is only a representation of the change of the exchange rate over the last months.

Taxation of your investments

There are different kinds of taxation: dividend taxation, taxation of capital gains, wealth taxes, taxation of the transactions, and others. Every country has its own tax legislation.

Investors that hold funds that hold securities are taxed at multiple levels.

  • Level 1: Taxation by the home country of the security.
    • The Level 1 taxes depend on the tax-treaties, if any, between the country of the asset and the country of the fund.
  • Level 2: Taxation by the country where the fund is domiciled.
    • The Level 2 taxes paid by the fund depend on the tax-treaties, if any, between the country of the fund and the country of the investor, and the tax laws in each country.
  • Level 3: Taxation by the home country of the investor.
    • The Level 3 taxes paid by the investor depend on the tax laws in their country.
    • Sometimes countries allow investors to claim local tax credits for Level 2 and Level 1 taxes, also based on the respective tax-treaties.

Depending on the situation of the individual investor one can optimize the taxation.

Dividend Taxation

Investors that hold funds that hold securities can be taxed on dividends by multiple countries at multiple levels.

There are 3 levels of dividend taxation to apply.

  • L1TW: Percentage of tax withholding by the home country of the security on the dividends distributed by the underlying international securities (Level 1).
  • L2TW: Percentage of tax withholding by the country where the fund is domiciled on the dividends distributed by the fund (Level 2).
  • L3T: Percentage of taxation that the individual investor needs to pay in his home country (Level 3).

The taxation to be withheld for Levels 1 and 2 can be calculated as a ratio:

Tax Withholding Ratio = (YIELD × L1TW) + ((YIELD × (1 - L1TW) - TER) × L2TW)

The first term in parentheses calculates the Level 1 leakage. The second term uses the remaining dividend, deducts the fund's TER[note 3] then applies the individual's Level 2 tax to the remaining sum.

The main article contains detailed example calculations for both US and Ireland domiciled funds.

Aspects influencing the taxation

  • for L1TW: taxation by the country of the asset
    • The L1TW taxes paid by the fund depend on the tax-treaties between the country of the asset and the country of the fund.
    • The L1TW taxes paid by the fund can be estimated using each fund's annual report, by dividing "Non-reclaimable withholding tax" by "Dividend Income".
  • for L2TW: taxation by the country of the fund
    • If you are a non-treaty NRA investing in US domiciled investments, that number is 30%, in a treaty country this is often 15% (and for a few countries, 10%).
    • If you are investing in Ireland domiciled ETFs and you do not reside in Ireland, you do not have to pay any Irish tax withholding.
    • In most countries, if your fund does not distribute the dividend, but reinvest them immediate, no L2TW taxes are withheld.
  • for L3T: taxation by the country of the investor
    • This taxation can be a withholding tax, where the broker withholds the tax before paying the investor, or it can be a taxation in the yearly tax return based on the dividends declared.
    • Many countries will not have a L3T if there are no dividends paid to the investor.
    • Some countries will still tax the reinvested dividends, the reporting of these reinvested-dividends poses a real challenge. In these countries it might be easier not to acquire accumulating funds.
    • Sometimes countries allow to claim local tax credits for L2TW and L1TW taxes, also based on the respective tax-treaties.
    • Ireland domiciled ETFs are generally not required to make capital gains distributions. Capital gains accrued within the ETF accumulate, and are realised only when the investor sells ETF shares.

Net total return vs. gross total return index

It is important to know that ETFs almost always track the net total return version of an index. From the MSCI website (MSCI is one of the most popular index providers) MSCI Index Definitions:

The MSCI Total Return Indices measure the price performance of markets with the income from constituent dividend payments. The MSCI Daily Total Return (DTR) Methodology reinvests an index constituent’s dividends at the close of trading on the day the security is quoted ex-dividend (the ex-date).

Two variants of MSCI Total Return Indices are calculated:

  • With Gross Dividends: Gross total return indices reinvest as much as possible of a company’s dividend distributions. The reinvested amount is equal to the total dividend amount distributed to persons residing in the country of the dividend-paying company. Gross total return indices do not, however, include any tax credits.
  • With Net Dividends: Net total return indices reinvest dividends after the deduction of withholding taxes, using (for international indices) a tax rate applicable to non-resident institutional investors who do not benefit from double taxation treaties.


This means you can only earn the return of the net total return indicies, which is the gross total return less dividend withholding tax.

Securities lending

Securities lending is a common practice for institutional investors as well as commingled funds, mutual funds and exchange traded funds (ETFs), and these practices are strictly regulated in most financial markets. In a securities lending transaction, securities are temporarily transferred by one party (the lender) to another (the borrower). Securities lending may directly benefit shareholders, as it generates revenue for the fund which can offset fund expenses and improve index tracking. Please note that you as an ETF shareholder will only gain a portion of the securities lending income, the rest will go to the ETF provider. The exact ratio may vary by ETF provider. For example, the ETF provider could say that you as a shareholder will receive 50% of the securities lending income, and the remaining 50% will go to the fund provider.

Index tracking strategies : replication or synthetic

The index fund structure determines the strategy to track the index.

Full physical replication: the ETF buys and manages all the underlying constituent securities of that index – ie the ETF aims to hold every security the index at the appropriate weighting.

Some providers that aim for full replication but have minor differences in the statistical weightings of individual assets between the ETF’s basket and the index describe their replication methodology as sampling.

Physical replication with optimization: optimization involves only holding some of the underlying constituents of the index being tracked. Optimization methods are entirely model-driven, with a computer system making the buy and sell decisions. The ETF manager may use the physical replication with optimization if the index being tracked contains too many securities, and the ETF manager would like to reduce transaction costs.

Swap-based replication: Synthetic ETFs allow replication of the index using derivatives as opposed to owning the physical assets.

The most transparent and simplest to understand form of index tracking is the full physical replication.

Further considerations

Researching and comparing ETFs

Links to ETF screeners:

Some of the country pages in the Non-US domiciles in this wiki category contain sample portfolios or suggestions for (ETF) funds. While these can be taken to draft a first portfolio it is good to post a question on the forum as every country is different and the recommendation might change over time.

ETF trading volume

London Stock Exchange (LSE)

You can use to check for an ETF's trading volume the past 12-months or 30-days. Here is a link to the London Stock Exchange ETF Prices & Markets page. After you find the ETF of interest, navigate to its "Prices and trades" page to get the graphs and trading data.

Swiss Exchange (SIX)

You can obtain an ETF's past daily trading volumes using the "Product Search" feature at the SIX Swiss Exchange website to search for a security's ticker/ISIN, then navigating to "Market Data" and clicking on "Historical values".


  1. For example, accumulated dividends are taxed in Germany, Switzerland and the UK.
  2. EUR= EURO
    GBP=British Pound
    CHF=Swiss Franc
  3. Some countries allow funds to subtract the fund's TER before paying the dividends, some don't. Please review the taxation of the country where the fund is domiciled

See also


Further reading

External links