Tax optimisation for ETF investing

without quantifying, there is a difference in source taxes that the fund has to pay to the respective government. here IE is said to be better than US. You’d need to mak some comparisons on L1TW for both funds
apart from that nothing comes to my mind

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I still don’t understand why some non-swap based ETFs with US stocks are based in LU like this one

UBS ETF (LU) MSCI World Socially Responsible UCITS ETF

](https://www.ubs.com/ch/en/asset-management/etf-institutional/etf-products/etf-product-detail.ch.en.lu0629459743.basedata.html)

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The ETF you mention includes US stock but also other countries stock. (FR, DE, CH,…).
Why do you think that LU is not a good base for such ETF?
Do you think that US or IRL would be better?
US is definitely not a good choice because there would be US withholding tax on all non US dividends.
IRL would be slightly better than LU (There is a small wealth tax on ETF in LU) but it is marginal.

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If I remember correctly LU doesn’t have the reduced withholding for US, so you lose 30% instead of 15%.

Thanks for the answers. I also had a deeper took at nugget’s witholding tax comparison spreadsheet as well as the boglehead wiki. It confirms that for ETFs holding only US stocks, buying US domiciled one is a no brainer for a Swiss resident.

For ETFs holding non-US stocks, it is like nugget wrote, it depends and needs to be calculated. E.g., for a Vanguard emerging market, while its TER is higher, the UCIT version has an overall lower TWR. So one need to calculate it.

Little message for nugget. In your spreadsheet, for the ETF FTSE EM ETF (US), I had a look at the source, which is the 2018 annual report. However, from there, I do not get where you got the numbers to calculate the L1TW witholding tax. Could you explain it? Also, why is the MSCI EM IMI TWO 0%? I assume it is just that you did not find a proper source to get the L1TW?

As I understand it, Luxembourg has a double taxation treaty with the U.S. that does provide for a reduced withholding tax of 15% on U.S. dividends - however the treaty provision crucially does not apply to Luxembourgish funds.

Hey @ecthe,
thanks for taking a closer look!
i have no idea what i calculated back then, my guess now is that i compared the total influx of dividends and the total outflux of dividends.

the 0% i am with you, probably i just didnt find a credible source.

Hi nugget,

Thanks for the answer. I would have another question. In the Tax Withholding Ratio (TWR) the TER is already included. Therefore, I am wondering what is the TC (total cost I assume?) that you calculate. Because in the end, isn’t the TWR already the total cost of the ETF?

Hey guys,

much useful has been said in this thread about the tax optimal way to invest into ETF. Does anyone have a reference to the tax law confirming that specifically for ETF:

L1TW can not be reclaimed (as tax credit in the Swiss via DA-1)
L2TW however can be

I’m asking since the official working on my tax statement does not seem to know the full details and I would like some reference for the argumentation.

Thanks a lot,
Sunny

I doubt such a law exists. This is specified in treaties signed half century ago, prone to ambiguities and interpretations and likely don’t cover your case at all. So in principle you are asking them to apply US-CH treaty but to a fund domiciled in IE, the open question is whether this is possible. They do treat funds on a look through basis when taxing reinvested dividends, so maybe they could do the same for tax treaties I don’t know, but I doubt this is specified clearly in any single law.

Ask the tax office, in particular the division handling DA-1 requests, by letter with your concern to get an official opinion, they should give it to you and for free. They are the ones who will process your request anyway. If you disagree with them and have money for a fight, there’s always court, then district court and finally federal court where you could settle the issue once and for all. You do not need to bring an expert lawyer to the court and find the full legal basis yourself here unlike in US, that’s the court’s job here.

You can point them to the CH-US treaty, and can attach your 1042-S that shows the tax withheld by the US (which should be recoverable).

Personally never had any issue getting them back.

The problem as I understand is he wants to claim US withholding tax paid to IE/LU funds that paid him. There would be no 1042-S for him to show.

I think this still refers to U.S. domiciled funds, given his previous posting above from March 5 in this thead.

I was talking about his q “L1TW can not be reclaimed (as tax credit in the Swiss via DA-1)”

For the second one, yes, just point them at the treaty obviously.

At the moment I still have IE funds held at a German broker. I noticed that they give me a yearly statement of L1TW and L2TW (the latter being zero for the IE fund). When asking the tax authorities about whether I could reclaim L1TW, they just gave me a generic answer that I should be able to reclaim withholding tax on U.S. investments. They did not bother going into the details I asked on L1TW vs. L2TW. So I was wondering what the law says… Anyway this year, I’ll try to reclaim L1TW, if this does not work I’ll switch to U.S. funds this year and will try to reclaim L2TW next year.

The dual-taxation treaty doesn’t allow you to reclaim taxes withheld by a third-party.

Most likely it doesnt say anything or just some vague generic stuff that’s subject to interpretations, did you read what I wrote you above? You want a definite answer, claim the refund, get rejection, sue them and then the court will interpret the treaties and laws for you and settle this issue definitely. You might lose and have to pay their legal fees though, that’s the risk for you. This is a loser-pays country.

Yeah, but my thinking is that they do already treat ETF and mutual funds on a look through basis when taxing reinvested dividends. So possible analogously they might have to consider the treaties also on a look through basis when refunding withholding taxes.

Thanks guys, I’ll give it a shot and reclaim it. If it gets rejected I will surely not go to court but buy US funds instead going forward (to sue them is not worth the time and money spent given the existing “workaround “ of switching to US funds).

Btw, reclaim is a bit of a strange word here, essentially just trying to avoid double taxation. Personally I don’t see why it should matter where the tax is withheld (ie at the level of the investor or the fund manager), as ultimately it is passed on to the investor anyway.

Since you personally weren’t taxed by the US (an irish domiciled fund that you hold was), I’m not even sure why you’d even try, just switch to US funds.

I personally did not receive the dividend either (an IE domiciled fund did and reinvested it), but need to pay tax on it. So I think there is a case, that’s why I’ll give it a try.

Other reasons not to switch to US funds directly: (i) it’s less hassle to keep the funds (ii) I try to do as few trades as possible (around 4 per year), (iii) I also would not have a definite guarantee that I can reclaim TW for US funds, (iv) for 2018 tax it is anyway to late and (iv) I’m curious to see how the tax authorities handle this request :wink:

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