Synthetic ETFs to save on dividend tax?

Owners of shares of this fund paid taxes for 2018 and will have to pay taxes for 2019 (ammount is to be determined later by ESTV). Never look for the current year when you want to know the taxes.

I don’t know the details but I guess the ETF gets distribution via contracts. Doesn’t need to be technically/legally a dividend to be taxed.

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If it performs essentially the same as a physically replicating fund, why should it be taxed differently? Only for some “creative” legal construction? If it sounds too good to be true, it probably is (or the tax administration will make sure that it is eventually).

They have decided to close that potential loophole and thwart circumvention of tax.

Also, the ETF is likely to receive dividends from the substitute basket.

It’s still investment income.

An inflation-linked bond has interest payments that aren’t predetermined either but only determined later (according to rules and contracts) - not much different than a synthetic ETF.

Thanks for a good hint. ICTAX showed correct numbers for VOO even for 2020. But even when I put 01.01.2018 as a purchase date to ICTAX, it still shows 0 for SPXS.L (ISIN: IE00B3YCGJ38).
Could you please point me to the ETF you checked which has non-0 tax?
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Could you elaborate on this a bit? A distribution from whom? What contracts we’re talking here?
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Stocks with dividends and without them basically behave the same way if you immediately reinvest dividends back (and if there were no div taxes), but still, Swiss authorities tax dividends for some reason, despite they do not tax capital gain. So, it bothers me that they are taxed differently only because of some “creative” legal construction differences. The only explanation I have is that maybe there were both capital gain and div taxes before, but then at some point capital gain was abolished and div tax just stayed as legacy. I haven’t researched this thought, so not sure, would be cool to hear why it works this way if someone happens to know.
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That’s a good point, but substitute basket is just collateral, it doesn’t have anything to do with tracking the index. These are totally internal affairs of the fund if you ask me.
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Agree, that’s why I’m asking around here :slight_smile:
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We’re getting too deep into taxation philosophy here :grin:
I would be grateful if someone could just throw some evidence at me, that these ETFs are taxed or are not.

Btw, I just checked SPXS.L ETF in etax.ch (which I used for filing my taxes for 2019) and it shows 0 taxable income in contrast to VOO, which has some expected taxable income stated.

https://www.ictax.admin.ch/extern/fr.html#/security/11358996/20181231

There was 9.912 USD of taxed income per share.

The ETF do (= buy/sell/write/whatever) something (=contract/product/option) to earn money. It is not like it was paper trading. It definitely gets money from someone.

It is the other way arround. When you earn money you have to pay taxes. Capital gain in the private wealth is an exception.

Synthetic ETFs could reduce a little withholding tax. However, you will need to pay the income tax.
It takes longer for ICTax to have the data from the provider as there is no distribution and some calculation is needed.

I would compare VOO and IE00B3YCGJ38 (Invesco S&P 500 UCITS ETF) which is synthetic. Tell me if you find significant differences on performance and taxation.

Btw aren’t synthetic index ETFs benchmarking themselves against the index with withholding tax on distribution applied? So you’d get the same performance (or worse, because you could use DA-1) and the ETF provider would get more of your money :slight_smile:

Yes, European ETFs tracking US holdings use a benchmark with a withholding tax (30% less on dividends). In reality, Ireland based ETFs like VUSA beat their index as they only paid 15% less on dividends due to double tax agreements.

That why you need to compare the performances of VOO and Invesco S&P 500 UCITS ETF.

S&P500 TR vs Invesco S&P 500 UCITS ETF

VOO between 09 sept 2010 and 21 Jul 2020 => 260.8%

SPXS between 09 sept 2010 and 21 Jul 2020 => 238.21 %

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Now just need to use the tax data and compare :slight_smile:

On the tax side, SPXS has an higher taxable income
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Synthetic ETFs are more risky due to the use of swaps. Based on previous posts, VOO has better performance and lower taxation.
However, this assumes you are able to retrieve the full refund of the withholding tax through DA-1, which is not always the case: Vaudtax DA-1 reimbursement denied

I think SPXS makes sense if you live in a country without double tax agreements or if you need to take an european ETFs. SPXS will have better performance than full replication ETF based in Ireland like VUSA.

You have to love paying taxes, your comment is so bashful. What is so creative about an ETF accumulating its dividends? I didn’t do much research, but here’s a quote from Bogleheads wiki:

In some countries, investors do not have to pay taxes on dividends that they do not receive. For investors in these countries, holding accumulating ETFs can provide a usable tax advantage over distributing ones.

In Switzerland they decided that dividends are taxed, but capital gains not. For investors there is a really thin line between the two. Are these scenarios really so different:

  • company pays no dividends, so its stock price grows faster
  • company pays dividend, but you immediately reinvest it

Assuming the company has good opportunities with the money, there is a WORLD of difference.
See for the maths here:

https://www.fundsmith.co.uk/news/article/2018/10/03/financial-times---busting-the-myths-of-investment-who-needs-income

Edit for those won don’t want to read the article:

  • dividends are taxed twice (corporate and income tax), while retained earnings only once (i am not talking about ETFs here, where the legislation is different as said above)
  • When you reinvest dividend, you do so at the market price, which is a multiple of the book value. When the company retains earnings on your behalf, it is done at the book value price, which is usually 3.5 times lower in a S&P500 company). Your capital compounds way faster if management retains earnings. With the obvious caveat that if the reinvestment is done in dubious ventures, you’d be better off with the dividends.

I meant the difference from the point of a small investor. You don’t have any say, you just want to buy and hold. So if the company does not pay dividend then good. If it pays dividend, then you will reinvest it (and pay income tax). It all depends on the company, if it decides to pay dividend or not. That’s why I find it silly for someone to take the moral high ground when someone looks for a way to not pay income tax for dividends.

By the way, it looks to me like a company should only pay dividend if they are swimming in cash and have no ideas for further growth? A dividend looks to me like a signal: dear investor, take your money elsewhere. Even a stock buyback sends a better message: we got a lot of cash, nothing to invest in, but we believe in our company, so we will buy back our own stock from the market.

Of course, there are many people who believe in the magic of steady dividend income, they like getting paid. There are even people who looks for high dividend paying stock as a strategy…

I wasn‘t referring to accumulating dividends as „creative“ - but rather the concept of a synthetic fund that tracks the performance of something - without actually investing in it.

  • your employer pays you no (a low) salary, so its business can grow faster
  • your employer pays you a (high) salary, which you are then free to invest

The key difference is: when paying out, the funds will be at your own free disposal. This is the moment that they are getting taxed. Whereas in the case of a company or your employer, they‘re still at the disposal of the company and/or its managers (possibly even the sum of its shareholders - but not yours individually).

Taxing them in the accumulating fund is just a way look-through taxation. They aren‘t at the disposal of fund administrator‘s, since the reinvestment is stipulated in the fund‘s terms and conditions that they have to follow.

Others might call it financially reasonable and responsible handling of earnings through distribution.

I mean, does the opposite necessarily hold true?
Is there a gurantee that a non dividend-paying company „spends“ these funds more wisely?

There isn’t.

There‘s lots of companies that will retain earnings and not pay a dividend (or only a small one) but that do not invest the funds in a way that’s most beneficial to the share holder. I‘d rather someone pay me back part of my investment in him/her once he/she has exhausted his realistic investment or growth options (that would exceed a minimum expected rate of return, taking into account risk) - than squandering or risking them elsewhere or somehow.

This analogy makes no sense. in my analogy you are a shareholder and that’s why you’re getting paid. in your analogy you’re getting paid for doing a job.

I assume you count buyback same as dividend in your reasoning? (since it also redistributes earnings to shareholders).

It doesn’t make a difference. You can easily be both at the same time.

Income is funds that you receive free to your disposal, to spend as you please (though of course in practice the definition of taxable income will have been modified to some degree). And that’s the basis on which it is taxed.

It doesn’t - though there might be an indirect effect through market price effects.
Conversely, I am not investing when a company makes a share issue, am I? (Though I could by exercising my rights).

I thought it was a widely acknowledged view on buyback.

Eg Wikipedia

Share repurchase (or share buyback or stock buyback ) is the re-acquisition by a company of its own shares. It represents a more flexible way (relative to dividends) of returning money to shareholders.

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You are free to sell at market prices to anyone at any time.
There is no distribution or direct transfer of money to you, when a company buys shares at market prices.

It “only” helps to potentially prop up the stock price.
Also, with regard to taxation, capital gains are taxed in many (most?) developed countries.

https://en.wikipedia.org/wiki/Share_repurchase any idea why wikipedia would present it as a (more flexible) distribution to shareholders (and that’s also how I’ve always seen it mentioned in press, e.g. Matt Levine’s Money Stuff).

The wiki page has a nice table, there’s quite a few country who have lower taxation rates for capital gains (and surprisingly some countries are reversed).

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