Nonresident alien's ETF domicile decision table

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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.

ETF domicile recommendations table

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 investing.

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% Yes Limited Consider Limited Consider
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 table above offers 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[1] $60,000 of aggregate US situated investments[2], 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[3] 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[4]. 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[3] or where your US ETF holdings balance will always be below $60,000, and if your country's US tax treaty rate[5] 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[6] (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[5] 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[3]. 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[7] nor a US estate tax treaty[3] 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.

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.[8] This will be most common in bond ETFs. For this 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 appear to 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.

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 TER, there is no benefit to using a US domiciled ETF to hold US bonds where a usable non-US domiciled one exists.

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[9].

The US estate tax treaty with Switzerland may not protect against potential double-tax on US situated assets[10], 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[11].

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 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[5], 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[12], 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 TER 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 will nevertheless only be able to use ETFs domiciled in Ireland, Luxembourg, and other EU countries anyway.

See also

References

  1. Omer Harel, Rethinking the U.S. Estate Tax on Nonresident Aliens, University of Michigan Law School, published by TaxAnalysts October 6 2011. Retrieved March 19 2019.
  2. IRS, Some Nonresidents with U.S. Assets Must File Estate Tax Returns, retrieved March 17, 2019.
  3. 3.0 3.1 3.2 3.3 IRS, Estate & Gift Tax Treaties (International), retrieved March 17, 2019.
  4. KPMG, KPMG Withholding Tax Study 2017, retrieved March 18 2019.
  5. 5.0 5.1 5.2 IRS, Tax Rates on Income Other Than Personal Service Income Under Chapter 3, Internal Revenue Code, and Income Tax Treaties (Rev. Feb 2019), retrieved March 17, 2019.
  6. European Union, Countries, retrieved 17 March, 2019.
  7. IRS, US income tax treaty United States Income Tax Treaties - A to Z, retrieved March 17, 2019.
  8. K&L Gates, Permanent U.S. Withholding Tax Relief for Non-U.S. Investors in U.S. Mutual Funds, viewed 23 May, 2019.
  9. National Law Review, Future of United States – Chile Bilateral Tax Treaty Remains Uncertain, retrieved March 17, 2019.
  10. Swiss-American Chamber of Commerce, Flaws in the Current U.S.-Swiss Estate Tax Treaty and the Need for a Modern Treaty, retrieved March 17, 2019.
  11. IRS, UNITED STATES - CANADA INCOME TAX CONVENTION, retrieved March 17, 2019.
  12. Irish Funds, WHY IRELAND FOR ETFs, retrieved March 19 2019.