Tax optimisation for ETF investing


#1

This is a collection of information on taxation of dividends for swiss investors. It’s purpose is to compare different options (for example VT vs. VWRD) on the ETF market from the Witholding Taxation point of view.
[writing in progress]

Content:

  1. Dividend/ Witholding Tax
  2. Accumulating vs. Distributing Funds

1. Divident Tax, a.k.a. Witholding Tax

a general nuisance to investors is witholding taxes. When dividends are distributed at some stock exchange, governments tend to keep a fraction of it for themselves :angry:. typical values are 35% for switzerland, 30% for US and 28% for germany. In case of a fund holding foreign stocks, these taxations are iterated :fearful:. for example, when ignoring all tweaks, a swiss investor holding shares of VT will effectively recieve only (1-0.3)*(1-35)=45.5% :scream: of the dividends UBS distributes to VT. This is significant, as it roughly equates up to 1% cost p.a.! therefore one should consider witholding taxes.
Before you go on, please educate yourself on Level 1 and Level 2 Tax witholding (L1TW and L2TW) here and/ or here. Simply speaking: L1TW is the taxation that applies when companies distribute their dividends to funds (or you, if you hold the shares directly), and L2TW applies when the funds forward their dividends to you.

1.1 Swiss domiciled funds

L1TW is 35% on dividends of swiss domiciled companies and funds, i.e. SPI ETFs or UBS Stocks. (source?) For Swiss residents, this can be (or rather is intended to be) reduced to income tax level via the standard tax declaration. It does not apply to foreign based funds (i.e. IE, US, LU). Declaring these dividends is up to you.

Interesting, Swiss-specific aspect: companies can, besides to distribute dividends, pay out Kapitaleinlagereserven . For you as Swiss investor this works just like dividends, but are not taxed :yum:. the SLI companies tend to do this, typically replacing half of their former dividends with Kapitaleinlagereserven.

1.2 Ireland domiciled funds

For Swiss investors, IE based funds have the charming property of

  • not paying any Witholding tax to the Irish government, i.e. L2TW is zero
  • enjoying a big set of beneficial tax treaties between Ireland and third countries. The most prominent example are the US, where IE based funds get a L1TW of only 15% (instead of the default 30%, see below).

This means, if you (a swiss domiciled investor) hold a US stock (i.e. Apple) through a IE domiciled ETF, you witholding tax loss on dividends is only 15%, i.e. half of the default value.

1.3 US domiciled funds

for dividends distributed by US domiciled companies of Funds to US domiciled investors or Funds, L1WT is zero.

however, for foreign investors (swiss domiciled…), by default, US based funds & companies pay 30% (=L2WT) of witholding Tax from distributed dividends to the US tax authorities. BUT, the swiss-american tax treaty (see below) allows to reduce this to 15% for swiss residents. But it takes some effort to get there: you need to file a W8-BEN form for this. Your broker needs to be a “qualified intermediary” for this. From IB we know they directly do it when you sign up. CT does not support this as this Guide is being written. [info on other brokers is missing]
After successfully reducing your Witholding tax to 15%, you can file a DA-1 (more info) to have this remaining tax accounted for when your income tax is calculated.

hedgehog:

The other 15% are withheld in Switzerland if you’re unfortunate enough to bank with a swiss broker, that’s the “zusätzlicher Steuerrückbehalt”, see: https://www.admin.ch/opc/de/classified-compilation/19981781/index.html#a11. DA-1 should let you reclaim both. Unlike with IE, LU, and other european funds, where 15-30% of the original dividends are irrecoverably lost along the way. The 0% withholding you’re seing with IE is after those dividends were already lost.

1.4 Luxemburg based funds

[no info so far]

1.5 Witholding tax: US vs. IE based funds for swiss investors

now we leave theory and go where it gets interesting :wink:
this section is based on the very interesting bogleheads article about the same topic. we will

  • calculate the effective Witholding tax as swiss investors for different options
  • and turn it into a total witholding ratio TWR, to compare and add it to the fund’s TER.

to calculate the total witholding tax, we use the following formula, explained in detail here. Remember:

Y = dividend Yield of the fund’s assets
Yr = dividen Yield recieved by swiss investor
L1TW = Level 1 tax rate for those dividends
TER= obvious
L2TW= Level 2 Tax rate between the fund and your broker
TWR = Tax Witholding Ratio

Yr = (1 - L2TW) * ( Y * (1 - L1TW) - TER )

basically, we assume a dividend yield (based on historic yields and multiply it with (1- L1WT) (taxes on the companies’ dividends before they arrive at the fund) to calculate what dividends arrive at the fund. after substracting the fund’s TER we multiply with (1-L2WT) to calculate what arrives at the Swiss investor. If we now take the original dividend yield and substract the TER and what arrived at our broker, we know the full witholding tax that we paid. dividing this by the original Yield Y we find the Tax Witholding Ratio:

TWR = (Y - TER - Yr ) / Y

As the bogleheads article describes quite well how to obtain all these numbers I shall not repeat it here. BUT: let’s do the examples:

find a list of examples here. the reader is encouraged to extend the list :slight_smile:

the two examples of “total world” ETFs and SP500 ETFs make it clear: the TWR exceeds the TER by a factor of 3-10. however, based on this point of view, US and IE domiciled funds are perfectly equal for the total world case, assuming you file the W8-BEN. For the SP500 case, the US version is slightly superior. For the EM funds, the IE version is superior: Irelands tax treaties seem to kick in. Next: check differences in composition…

2. accumulating vs. distributing

according to an article of the NZZ there is no benefit but eventual drawbacks from using accumulating ETFs. The reason is that dividends must be taxed anyways. If the swiss tax authorities cannot figure out what is dividends and what is course gains, simply everything is taxed, including the usually not taxed course gains.
check ICTax if they have your fund listed. if not, send them an email, forum users experienced a rapid positive answer.

pros for accumulating:

  • less hassle with reinvesting
  • cash spends less time not working for you
  • no transaction fees & stamp tax applies on reinvesting (only for assets at swiss brokers, does not apply to IB holdings)

cons:

  • might be tricky with tax declarations, as in some cases their dividend declaration comes only after you must hand in your tax declaraion.
  • in terms of rebalancing, paid out dividends might be favourable
  • after your accumulation phase, spending dividends is favourable over selling shares since because selling induces transaction costs, unlike getting paid dividends

Swiss admin resources

  • Swiss Bundesverwaltung on the Steuersystem, many documents
  • about the Vermögenssteuer (wealth tax)
  • p10: securities as stocks bonds, real estate, and almost everything is subject to wealth tax
  • p11: Pillar 2 and 3 are not subject to wealth tax

(yet) uncategorized

information of divident taxing from canton bern here (thanks to wapiti)
and DA-1 “wegleitung” (walkthrough) from Kanton Zürich here


Interactive Brokers summary and costs
Currencies when trading
Current setup [CT & IE-based funds] vs. moving to Vanguard-US & IB
Goodbye 'No Money, No Clue', Hello FI!
[Guidepost] to the Swiss Mustachian Investment Forum
Interactive Brokers summary and costs
[Broker Choice] Details on brokers
List of mustachian ETFs / Funds
Need portfolio advice
Tax for Accumulating Vs Dividends
Upgrading to the "Weltportfolio" by Gerd Kommer
Tax when buying foreign securities
US vs. IE based funds if you dont qualify for W8BEN
[Broker Choice] Details on brokers
[Broker Choice] Details on brokers
Emerging Markets small caps
How to calculate costs and taxes correctly
#2

Disagree on your general rule for US stocks funds.
Distributing is better than accumulating - AGREE
Domicile IE > LU > US - DISAGREE

No matter what, on US stocks the IRS takes 15% withholding tax on dividends. If your fund is domiciled elsewhere, it’s the fund itself that’s been taxed so you have no way to get that 15% back. You’re going to be taxed again in Switzerland (withhold 35-39%).

If your fund is US domiciled you can reclaim that 15% US withhold on dividends using the form DA-1, then pay your swiss withholding.

US domiciled funds with distributing policy let you save that 15% on dividends. Now, what’s the impact of this? The S&P500 dividend yeld is ~2%. 15% of 2% is 0.3%. US funds let you save that 0.3% of double taxation.

Be careful though, with holding a US domiciled fund your heirs may incur in US estate tax, but only if your wealth is big enough.

Having said all that, what do I own? An IE domiciled, accumulating S&P500 fund -.-’’ that’s because I invested before doing this research and I’m scared of changing and paying transaction fees.


#3

There is no withhold tax for fund based outside Switzerland

http://www.taxinfo.sv.fin.be.ch/taxinfo/display/taxinfofr/Fonds+de+placement


#4

For the withholding tax on dividends, I believe that the 35% rate comes from the Federal Law 642.21 Art.13.B (FR / DE / IT)

I am curious about the possibility that it: [quote=“nugget, post:1, topic:67”]
can be reduced to income tax level via the standard tax declaration
[/quote]

I will see if I can find something about it.

A thoughtful quote from a book I am reading:
“For all long term investors, there is only one objective — maximum total real return after taxes. (John Templeton)”


#5

this is very simple and applies to all interests/ dividends (savings account, stocks, bonds, etfs,…)
you are simply charged 35% of it (unless below a certain threshold). then, when you declare it as income with yout rax declaration, it bill be added to your taxable income. the 35% verrechnungssteuer you therefore already paid is substracted from you total tax due.


#6

There is no withhold tax for funds/etfs/stocks based outside Switzerland
http://www.taxinfo.sv.fin.be.ch/taxinfo/display/taxinfofr/Fonds+de+placement


#7

do you know where to find these thresholds? Maybe there’s an advantage to stay below them.

Thanks for clarifying, the terms income tax and withholding tax got mixed in my head the other day.
This makes me want to read the books (1 2) from Xavier Oberson on Swiss & International Fiscal Laws but they’re far from cheap.

I personally need to develop a plan B wrt the US estate tax as I have more than 60k on US based assets.
A solution could be to co-own the assets with my partner or someone else in the family in case I make it too early on the darwin awards.
Anyone subject to the US Estate Tax already figured out a plan?


#8

I’m still struggling on this topic in order to understand which option is better…

Let’s take a classic example: iShares MSCI World (I actually have some shares of the Acc version).

If I search on the ESTV (2016) I find that the Acc version ( https://www.ictax.admin.ch/extern/it.html#/security/IE00B4L5Y983/20161231 ) in 2016 is taxed on an income of 0.833 CHF, while the Dist version ( https://www.ictax.admin.ch/extern/it.html#/security/IE00B0M62Q58/20161231 ) in 2016 is taxed on a total income of 0.644 CHF (total of the 4 distributions).

What does it mean ? The Dist version is taxed on a smaller amount while it takes into account that the 4 distributions had been already taxed elsewhere ?
The Dist version has a higher TER (0.50% vs 0.20%): does it make any difference in the above example ?

According to the ictax infos, the Acc version - in 1 Year - increased its value from 41.7 to 45.09 CHF (+3.39 CHF) while the Dist version from 35.29 to 37.81 CHF (+2.52 CHF). The “growth” difference between the two is 0.87 CHF -> more than the sum of the distributions, and therefore more taxed amount for the Acc version.
Thus, from a tax point of view, the situation would seem the same for both investments… what do you think about it ? Am I missing something ?


Tax for Accumulating Vs Dividends
#9

Nope, in CH usually you are taxed the same for Acc or Dis ETF funds. Even if it is internally reinvested (in Acc case), it still counts as Income.

Personally I prefer dividend because in retirement you have to take out 4% to live. If you have a normal World fund with 2% dividend, that means that you have to sell 2% of your shares to generate cash to live on. (4% rule). This 2% will be sold and you pay 0.15% of Stamp Duty Tax on it.

If you have Acc ETF, in Retirement you have to sell 4% of your funds to generate income. And you pay 0.15% stamp duty on the transaction to get the full 4%.

In accumulation phase maybe the Acc fund have some minor advantages, but it does not cancel the large disadvantage of having to sell the whole 4% in retirement. And doing accumulation phase with Acc funds, selling them and buying dis fund in retirement is the worst choice of all.

this of course only has value for retirement in CH, if you are moving away well figure it out yourself :smiley:


#10

Hi @Grog,

thank you for the clarification and the good points.

One question: in the accumulation phase, when you get the dividends you usually reinvest them to take advantage of compound interests, thus when you’ll sell (retirement phase) you’ll have the same Stamp Duty tax “problem”, right ?


#11

Not really. In the accumulation phase I reinvest the dividend “manually” with a distributing ETF. This is the disadvantage over the accumulating ETF: my dividends are subjected to the Stamp duty fee while reinvesting. But since they are not so high, we ar talking literally about cents for the moment.

In retirement I will receive 2% of dividends more or less from my ETF.
Example: 1 million ETF, need 40k to live. I receive 20k from dividends every year, for the other 20k I have to sell 20k of ETF shares. So I’ll pay 30 bucks of stamp duty for this 20k.

If I have accumulating ETF, I have to sell 40k of shares and pay 60 chf of stamp duty fee.

Nota bene: historically sometimes ETF index had dividend up to 4%. In those cases with a distributing ETF you won’t have to pay a thing vs the usual 60 chf with an accumulating.

Is very little money, but one thing more to consider. Together with other costs involved while selling (spread buy/ask, transaction fees) in retirement phase in CH right now is better to have distributing ETF. And is really not worth it to accumulate wealth with an acc ETF, then switch by selling and buying again. You’ll lose instantly minimum 0.3% of your whole portfolio for the double stamp duty tax involved in selling and buying.


#12

hey Grog,
did you consider that the 20k dividends are subject to your income tax? at 20k/y, this would be for a married copule in zurich 1.47% or CHF 293 (from income, wealth tax in this case is around CHF 1800). this does not apply to the sale of shares, no?


#13

I’m sorry nugget but we already saw that income for acc or dis is always = dividend, no matter the type of fund. So if you have acc ETF you have the same income as the dis ETF, and pay the same taxes on 20k.

Income is the same in the two cases: acc ETF or distributing ETF report the same amount of Income.

So even with acc ETF you sell 40k of shares to create your own “dividend” for the 4% rule, but when you check your etf online for taxes you still have the internal accumulated dividend to report as income.


#14

sorry i had my head off writing that comment. please ignore it! :rolling_eyes:

we would need some non-dividend-etf to make sense out of my comment


#15

Hey T78a,

do you know where to find these thresholds?

i believe this is a CHF 200 threshold on interest rates on saving accounts, so not applicable to anything related to stocks / bonds / ETF. but again, this is not a veryfied source of information :confused:


#16

The threshold is indeed 200 CHF, you should find it here: Bundesgesetz über die Verrechnungssteuer ( https://www.admin.ch/opc/de/classified-compilation/19650189/index.html ), art 5c

Von der Steuer sind ausgenommen:
a.
b.
c. die Zinsen von Kundenguthaben, wenn der Zinsbetrag für ein Kalenderjahr 200 Franken nicht übersteigt


#17

@weirded this law article is for the witholding tax, not the income tax.

The witholding tax is only for fund based in CH. All european vanguard funds are based in Ireland.


#18

Hi @wapiti, I think the 200 CHF threshold @nugget was referring to in his original post refers to the withholding tax, which - as you correctly state - applies to interests on assets based in CH (like CH stocks or checking and saving accounts, in the old times when they still paid interests…:joy:).
I’m not aware of similar thresholds for the income tax.


#19

@weirded
=> to be precisely correct, this CHF 200 threshold applies to saving accounts, not stocks dividends! the latter are taxed from the first rappen.
Income tax is totally different in calculation. however if you look at the tables, you also find “thresholds” up to which you basically pay no taxes.


#20

@nugget
You are right about withholding tax on stocks (my fault).
About income tax: of course under a certain taxable income you don’t pay taxes (something like i.e. 18k for the federal tax for singles) but in that case you probably have other concerns than choosing the best asset for your investments… :flushed:
Anyhow I think we are going OT towards the original question from T78a which arose discussing about the withholding tax for swiss based funds (you stated: “you are simply charged 35% of it (unless below a certain threshold)”, to which he then asked: “do you know where to find these thresholds? Maybe there’s an advantage to stay below them.”). In the meantime the source for this has been shown. The only mean I know to avoid paying tax(es) at all (withholding tax included) is going (loan + other incomes - deductions) under the minimum taxable income…