The wrong way around. If it is this kind of “pension fund” fund, the treaty rate is 0% and everything is reclaimed by the fund from the foreign government. Certain countries like the US are more automatic about it than others like JP. Filling the correct forms enables the dividend paying company to not withhold (= give to the government) anything. That would then be your case of no reclaiming.
I understood “shall be exempt from tax” as in “there is no WHT in the first place”, so nothing to be reclaimed. Either way, I’m curious about the result
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Thankfully not the case. You only pay taxes on what you actually receive.
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And the rest is correct?
If you file DA-1, you have to declare the gross amount and pay taxes in Switzerland on that. I.e., the taxable income in Switzerland would include the full CHF 1’000, not just CHF 850. The reason is that these CHF 150 are not lost to you if you (successfully) file DA-1. I.e., the CHF 150 don’t become tax-free income.
Only if you don’t file DA-1 you’re allowed to declare the net amount as in that case the CHF 150 are indeed lost to you without compensation.
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But aren‘t you only effectively taxed on what you then get back with da-1?
Like that would not make sense to file for 1000, only receive 50% of the 150 = 75 with, and then still get taxed on 1000, only you received 925. that could very well negate all your da-1 credit.
Of course if you get back 100% you are taxed on the 1000, that‘s clear.
If you only get 7.5% back with DA-1, this generally means that your Swiss tax rate is only 7.5% (ignoring deductions that may affect the calculation). So on these CHF 1000, you pay CHF 75 in Swiss taxes but get CHF 75 back via DA-1. This seems perfectly fine to me. (You still pay CHF 150 to the US but that’s out of our hands anyway.)
Reducing the taxable income in that case wouldn’t make sense. If you still got CHF 75 back via DA-1 but the taxable income was reduced to CHF 925, you’d pay less than CHF 70 in Swiss taxes. This would not fulfill the goal of only eliminating double taxation.
This is the actually important part though. I.e mortgage and other loan deductions.
In my example, you‘d be effectivelly taxed on your marginal rate on the 1000
Say your marginal rate is 35% for example.
Meaning you‘d pay 350 in tax on that 1000. (and yes I know the tax office doesn‘t see it like that and the average rate applies, but this is for you as an individual the effective rate)
Now you only actually received 850 + 75 with da-1.
925 - 350 = 575 net.
If you‘d not file da-1 at all → 850 -35% = 552 net.
This effectively would mean basically no da-1 return at all.
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Yes, I think you’re right that with substantial ‘wealth income’ deductions, you might hit corner cases where not filing DA-1 would be better (and an IE-domiciled world ETF may become better than a US-domiciled world ETF).
I think one of the underlying issues is that loans don’t always have a corresponding asset, so they don’t even try and distribute all wealth-related deductions across all assets even though it doesn’t really make sense that a mortgage affects the DA-1 credit that much. (If deductions were assigned to certain assets, it would likely not be allowed to deduct more for mortgage and maintenance than what you declare as [imputed] rental income, though, so it’s always a compromise).
If there is ever an agreement on getting rid of imputed rental income and the corresponding mortgage and maintenance deductions, this would be a non-issue for most people, I presume.
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@Brndete, by chance, I found “UBS (CH) Index Fund 2 - Equities Canada ESG Leaders Pension NSL I-X-acc”. It is part of the same former CSIF umbrella as their JP Pension Fund. It does have a prospectus. But the reduction in WHT is far less explicitly mentioned than happens with the JP Pension Fund.
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I think we are looking at this from different perspective.
For tax office , only few numbers matter
- what’s your income (note -: WHT doesn’t reduce income, it’s a provisional tax applied by local governments)
- what‘s your deduction
- if there should be an attempt to reduce burden of double taxation
Let’s take an example
- if the taxable income is 150,000 which includes 1000 CHF of dividend income from US. For income calculation WHT is irrelevant. Income will be 150,000
- Let’s say deductions are 0 and let’s say average tax rate is X% based on progressive tax principles
- Now the compensation of double tax burden would be limited to what CH might tax and that is X%
If X < 15% then it simply means that investor is being taxed in US only for all practical purposes
If X > 15% then it means investor is being taxed in CH only for practical purposes considering all the credits
If we think about it rationally , Switzerland is not asking us to invest in US stocks or ETFs. When we invest in US stocks, we should be prepared for 15% WHT. It’s a bit unfair to ask Swiss tax authorities to compensate us for our decision to invest in US. They only promised to not tax the same income twice but the they never said that they would compensate for „any“ tax applied by US.
For the mortgages -: I think it’s the deduction calculation which changes and hence the X% also changes.
P.S -: this whole discussion also sheds light on topic of the absolute advantages of US ETFs. Investors should make sure that US ETFs and probable jurisdiction of IRS is worth it. For some the advantages might be diminished
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Basically, if you deduct any sizeable amount of loan (or your average tax rate is really really low) and you are not an exclusively US/CH investor, it‘s probably better to use ucits funds.
Or you completely split it:
US funds for US stocks, will always be equal or likely better than ucits.
For ex-US Ireland or Luxembourg will more than likely be significantly better.
A tax optimized Portfolio in my opinion then also includes significant home bias. The tax advantage is undeniably there.
Going by market cap and proxying some ex-US with swiss stocks, might look something like this:
- 60% US domiciled US stocks
- 15% Swiss domiciled swiss stocks
- 15% EXUS/equivalent
- 10% ucits emerging markets
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Back to WHT taxes on fund level, this document lists all treaties with exemption for pension investment (cf in column Sonderfälle).
Besides the often mentioned US and JP, there’s previously established CA, AU and few others, but just some smaller ones in EM or Europe.
Big questions remains whether the fund we discuss about or in scope of that exemptions.
This in particular for CA. US is clear and has no tax leakage, anyway. APAC very little.
In my understanding, there should be no leakage. In Helix’s example, it does.
I did start with a ranking on where to put individual markets (taxable vs 3a/VB), limited to 3 categories
- Difference in TER
- L1 tax leakage
- personal tax (income and withdrawal)
- (well 4, I’ll add personal preference to keep things neat)
Not suprising, the high-dividend payers win on taxes, up to 0.5% to 0.7% benefit.
Cost difference is smaller, winner is APAC with a relative 0.14% advantage.
Tax leakage mostly makes little difference in the pecking order, except for cases like CA which could change from a top position to a low one.
Difference for things like stamp duty, or timing effects of WHT reclaims should be in the 0.0x% range, so I skip them.
Keep in mind the topic is optimisation and sometimes the journey is the reward. Whether the result will be anything too suprising or meaningful for an investment allocation decision for most investors is a different topic, no need for anyone to mention that again…
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Just to add that MSCI world value weighted has dividend yield 1% higher than MSCI world. 2.86% vs 1.77%. There finpension does offer the CSIF MSCI world value weighted ex CH pension fund in 3a. The TER is 0.12% or so.
It may be interesting to hold in 3a. MSCI Index PDF
~ 65% in US and Japan
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Anyone care to confirm these calculations are correct?
You’re missing the consideration of deductions.
If your VT dividend is your only investment income, no debts, 300 wealth management fees deducted, you get
- 1000 DA-1 income - 300 deductions = 700 max amount
- 700 * 16.5% = 115.5 max reclaim
Just to add, you still fill out 1000 income, 150 reclaim.
You’ll get a letter a few weeks or months later with that calculation to confirm / correct your reclaim.
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Great, thank you.
What if I had, say CHF 500, additional dividend income without WHT (like an Irish ETF)?
The deductions are allocated accordingly to the DA-1 part: 300 * 1000/1500 = 200.
1000 - 200 = 800 * 16.5% = 132 max reclaim
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I always thought the proportions are based on tax value of assets . But it seems you are saying the proportion is based on income from those assets?
Just to be clear , let’s use following example
DA-1 assets -: 50,000 , income 1000 CHF
UCITS ETFs -: 50,000 , income 500 CHF
Management fees = 0.3% of 100,000 = 300 CHF
Management fees related to DA1 would be 150 CHF
Shouldn’t max claim be
1000 - 150 = 850 * 16.5% = 140.25 CHF?
I guess it’s because it doesn’t matter if you got CHF 1 dividend from an investment of CHF 10 or 10’000, as you don’t pay income tax on invested assets, but on dividends.