Tax optimisation for ETF investing

Lesson 1 of the Internet: never believe anything some random person has written on the internet.

If you look at the actual treaty, you’ll find the following:

(3) For the purpose of the present Convention, each contracting State may determine whether the decedent was at the time ofdeath domiciled therein or a citizen thereof.
https://www.eda.admin.ch/dam/countries/countries-content/united-states-of-america/en/tax1951.pdf

What the US thinks your domicile is is irrelevant, and being registered with a B or C permit in Switzerland is perfectly sufficient to be domiciled in Switzerland.
(Being Swiss has the advantage that you can make use of the treaty without living in Switzerland.)

Oh, and the limit is 11M nowadays, not 5M (but the democrats are threatening to bring it back down… and who knows how far).

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A question regarding L2WT for US-ETFs: IIUC the way it work is you fill in the famous DA-1 to get the already paid (L2WT) withholding tax subtracted from your normal CH income tax - which in the end effect means you get the part back which is higher than your tax bracket. But overall it doesn’t matter if you paid 15% or 30% - if your tax bracket lets say is 12% you either get 3% or 18% back.

So overall it wouldn’t matter “much” how high the L2WT is… the difference would “only” be in the money being “locked” with the “tax system” for a year or so, unproductive, non investable, yes, but in the end you’d pay the same amount of tax overall.

And if that’s the case, then I guess the really relevant part of taxes for ETFs would be L1WT!

Or am I getting something wrong?

PS: IIUC that DA-1 is only for US securities - if you’d hold something domiciled let’s say in Hong Kong or Australia you’d need some other way to reclaim L2WT - but it might exist as well… perhaps it’s just not as common and doesn’t have its own form :wink: ?

I guess this is my main point: if L2WT is reclaimable (up to the CH tax bracket which you pay one way or the other) then it should be removed in the comparison between US and IE ETFs - and we should only be looking at L1WT!

In which case the original comparison is wrong!

Are u referring to Post 1 of this thread? Where is the wrong bit? It says L2WT is zero for IE and reclaimable for US & makes the correct analysis/recommendation IMO.
Yes, I agree, really relevant is L1WT, when L2WT is zero or reclaimable.

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The DA-1 is for any country levying withholding tax that happens to have a dual-taxation agreement with Switzerland, Thurgau have a nice list of those:
http://formular.tg.ch/dokumente/temp/F70DC775-D0F4-D1D0-A00150AFB6DF2F61/2018_Vertragsstaaten_DA-1-2-3_01.01.2018.pdf?CFID=6911430&CFTOKEN=47180888

Hong-Kong isn’t on the DA-1 list… but doesn’t appear to charge withholding tax on dividends.

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Thanks @flumpertrank for the hint! (The link didn’t work for me - but I found the same one here)

You’re right, it does say L2WT is reclaimable for US. But what I find wrong (or misleading) in this context are the conclusions - because if L2WT is reclaimable (leaving aside how complicated that might be) then it should be excluded from the calculation mostly! Because even if with IE L2WT is 0%, you’re still going to have to pay CH income taxes on the dividend (which is of course very individual depending on your tax bracket).

PS: I’m saying “mostly excluded” because one could argue that it would be money (USD) blocked for a couple months, maybe a year. And in that time you have currency and missing time in the market risk. So you could attribute indeed like 10-15% of yearly “cost” of that L2WT after all. BUT only on the part which you wouldn’t pay to the CH tax authorities anyway. So assuming you have a tax bracket which is in the area of 15% or higher, it doesn’t matter still (unless you go with a non-QI and pay 30% L2WT - then you’d have to include this cost imv)

So again: I’d argue L2WT should be ignored for the cost comparison.

Based on that, the following statement is actually wrong, as the TWR is not reflecting your costs accurately:

… if you remove L2WT from the picture, the numbers (taking latest figures for TER / L1WT based on latest annual reports from vanguard.com and vanguard.ch) would be:

       TER     L1WT     TER+L1WT(assuming 2.3% div)
VT    0.10%    5.53%    0.23%
VWRL  0.25%   12.43%    0.54%

VOO   0.05%    0.0%     0.05%
VUSA  0.07%   14.72%    0.41%

VWO   0.14%    9.72%    0.36%
VFEM  0.25%   10.67%    0.50%

(Note that VWO has lower L1WT than VFEM, if I did read the annual reports right - presumably these numbers change over the years, so perhaps it should be assumed they’re equal for the calculation, not sure…)

Based on these numbers the US domiciled funds (VT/VOO/VWO) would always have been better than the corresponding IE ones. There was no case the IE ones were better - which is a disappointment for me actually! I had hoped those holding non-US stocks to be better in IE but that seems not necessarily to be the case…

Now while I’m at it, one final aspect. It looks like for buying US ETFs you really want a broker that is a Qualified Intermediary. From other posts discussing this (including this one) it seems Interactive Brokers, Swissquotes are, while CornerTrader and Degiro aren’t. Is anyone aware of some official list where this could be confirmed? For example, what’s with Saxo Bank? PostFinance? Strateo?

And finally, if someone, for some unknown reason, would choose to buy a US ETF with a non QI broker, I read you could file a form to reclaim the “2nd 15%” withheld from IRS. Sounds utterly complicated and unsure to me. But just for the sake of it, has anyone tried this? Is it “doable”?

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@male I agree that the initial table can be misleading when comparing.

That emerging markets have similar L1WT means that the IE domiciled have no advantage over US ones when including personal taxation. That´s a surprise.

For Total world, it´s not a surprise that US domicile is better because it includes over 50% US shares. For a larger global portfolio, you could further optimize by adding more local funds for example US shares in US and Japan in Japan. To me, only makes sense for major markets in your stock allocation.

Maybe someone has numbers of US vs IE for some popular regional funds like Europe ex UK, Asia-Pacific ex Japan or developed world ex-US?

For taxation as hedgehog and flumpertrank confirmed, DA-1 works for all countries with tax treaty and withholding tax. This is called “pauschale Steueranrechnung” in German tax form.
Misleading here can be the second term in DA-1 called “Steuerrückbehalt USA” which applies for the special case if you buy US shares via a Swiss bank.

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That would be indeed interesting!
PS: Is there any ‘developed world ex-US’ (VXUS style) in IE at all? I didn’t find any so far.

Another thing I would like to figure out is how does L2WT look like for LU and DE (Japan or other AsiaPac ones would also be interesting though!) For LU/DE specifically there are some interesting ETFs around - and I’m wondering if they have 0% L2WT for CH based investors like the IE ones…

If anyone has an insight that would be greatly appreciated!

LU and DE are 15% WHT for dividends, which can be fully reclaimed via DA-1.

You find a country list at the tax administration webpage: https://www.estv.admin.ch/estv/de/home/internationales-steuerrecht/fachinformationen/quellensteuer-nach-dba.html

See the document “Vertragliche Begrenzungen der ausländischen Steuern“ available in French and German.

0% at source applies to Hongkong, Indien, Irland, Kuwait, Malta, Singapur, das Vereinigte Königreich (UK) und Zypern.

I don´t know of any attractive developed world ex-US from IE, that was only an example. You could substitute with two ETF, Europe and Asia-Pacific.

I do have interests in IE-domiciled Europe ex UK from Vanguard and Asia-Pacific ex JP from iShares but have not analyzed these for tax efficiency.

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Did someone actually manage to reclaim L2TW with a DA-1 for a US-domiciled etf? I live in Basel Stadt and the tax pc program (Baltax) would not let me choose DA-1 for any ETF, only works for US shares. Anyone willing to share the practicalities of doing this?

Thanks,
Sunny

I already got money last year. This is how I fill it out with the official Zurich web tool.

Note: it fails to look up VT, VTI, VXUS, etc. in ESTV, I have to type all the dividends manually from ESTV.

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Isn’t there an address where we can write to ask for the inclusion of them?

Try to put your ETF as a stock. At the end for taxation is the same, both have specific number. Yes, every tax software in each canton is different even if the name seems the same…

Try this one: https://www.estv.admin.ch/estv/fr/home/die-estv/kontaktformulare/kontakt-dbst.html

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That’s federal. We have an issue with the Zurisoftware. I am not sure there is a common database between them.

The refund is federal but as it’s managed by delegation to Canton. Each on of them have developed their own software and is handling the refund differently.
In Vaud, you have a specific page for DA-1, but you send the whole tax declaration to the same adresse.

I wrote to them and this is what they write back:

Ich würde Ihnen vorschlagen, Ihre Valorennummern, Titel etc. einzugeben ohne das benutzen der Online-Kursliste. Dann können Sie alles selber eingeben und müssen Ihre Valorennnummer nicht einzeln suchen. Um die Online-Kursliste zu deaktivieren, klicken Sie rechts in der Wertschriften-Detailerfassung auf das Kästchen bei ‘Online-Kursliste benutzen’, so dass dieses Kästchen leer wird.
Freundliche Grüsse
Ihre Hotline ZHprivateTax

It’s a completely lazy generic answer. They don’t even want to fix their own bugs…

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I know other people who tried to have them add the “DA-1” bit for VT&friends. IIRC they replied some generic thing that they are not eligible for DA-1.

Maybe it’s just they don’t want to bother computing the exact withholding, since for funds it’s not always 15%, e.g. BND has interests distribution that don’t have withholding.

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I complained further and they said:

Dieser Fall ist uns nur bei Ihnen bekannt. Wir nehmen Ihr Feedback ernst und werden dem nachgehen. Bis dahin, geben Sie bitte Ihre Daten wie schon erwähnt ein.

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The DA1 From in Solothurn-Tax Seems to work and automatically gets the dividends.

Clasic Switzerland XD every canton makes/buys their own software with variing levels of broken.

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