Tax optimisation for ETF investing

It seems like everyone is talking only about the US taxes. How about other developed countries? If you buy an ETF exUS with Europe and Pacific, what are the taxes on dividends there? What are the greediest countries to avoid?

It’s because the biggest and best ETFs are domiciled in USA. In Europe the most popular domicile for ETFs is Ireland, where the tax is 0%. But the tax is paid on three levels:

  1. tax on the stock of the companies which are part of the ETF (like Apple - US, Nestle - CH, Toshiba - JP, Volkswagen - DE etc)
  2. tax on the ETF (US, IE, CH)
  3. final income tax that you will pay, and the ability to deduct what you already paid in point #2

for a sophisticated approach to the taxation topic, refer to my guide or the bogleheads source of my guide

as Bojack wrote, the majority of ETF is domiciled in US. any US domiciled fund that pays dividend to a swiss resident witholds 15% or 30% (depending on you broker & the W8-BEN issue) of the dividend. on top of that, the underlying assets (stock companies) first pay their dividends to the funds, where 0% is withold in case of US domiciled companies and many different percentages for all the countries that non-US companies are domiciled in.

then comes IE as second important Domicile, because any IE domiciled fund only witholds 0% of dividends paid to swiss residents. Typically IE has better tax treaties with foreign non-US countries than US, so the many different witholding percentages for all world wide non-US companies are on average lower than for US domiciled funds. US domiciled companies withold 15% of dividends when paid to IE domiciled funds.

oh its complex but make a drawing of this :smiley:

there also exist FR & LUX as domicile countries, but i never saw numbers for these, and never actually intereting ETFs.

the very rugh summary of the above is

  • if your fund holds mostly US domiciled underlyings, go for and US domiciled fund
  • if your fund holds mostly non-US-domiciled underlyings, consider the IE domiciled fund
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What I find puzzling is that there is no equivalent to VXUS in Ireland (All World ex-US). You have the VWRL which is no better than VT when you factor in the TER.

You can recreate the “MSCI world ex-US” with MSCI EMU + MSCI Pacific OR MSCI EMU + MSCI Pacific ex-Japan + MSCI Japan.

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Hi @nugget, given the above, why did you chose VXUS/VSS for your ex-US investments (instead of iShares) ? Did you run some numbers ?
I’m still trying to understand which would be the best choice to complement my VTI… :thinking:

sorry for not answering that long :slight_smile:
the question was why i would opt for US-based VXUS/VSS and not some IE-based alternative.
i decided for the US-based versions because

  • they are from vanguard, which i consider is better than for example BlackRock (iShares), “conflict of interest”
  • they have much more positions than comparable ETFs, i.e. are stronger diversified
  • they are super cheap to trade, far greater volumes than IE-ETFs, and larger
  • noone has lower TERs than vanguard

there are a few cons that I, in total, valued less than the pros:

  • bulk risk of having all ETFs with one company (vanguard), in one domicile
  • for non-US ETFs, holding US versions has a chance of being taxwise inferior (for VWO (EM) this is not the case, see the number in the example) to IE ETFs. overall the difference is very small. if i find out that it is till too big, the cost of swiching the ETF is very small.
  • that issue with IRA & ineritance tax, which I believe is solved
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@nugget fantastic summary, thanks. Just to be precise: if I have VWRL IE based with CT, I don’t need to declare any DA-1, because there is nothing to gain, right? My losses are locked in during LW1T

Thanks grog :slight_smile:

I’d say yes, exactly.
one could try an manually calculate the LW1T losses from the fund annual reports and declare them with the DA-1. I have not deen any reports about this working out so far

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Could you please explain what you mean that VWO is better than an IE ETF? From what I read on the forum so far it looks like ETFs which contain not US companies should better be IE as you avoid the unnecessary 15% US tax on dividends. What’s different here?

the difference here is that with the DA-1 procedure and with the CH-US double taxation treaty, both funds will make you end up with the same zero L2TW, and L1TW should be about the same as the latter is defined by the domicile countries of the underlying stocks. at that point, VWO has less TER and more stocks in the basket (=more diversification).
this tranlates into an overall very slight advantage for VWO. Beware, this advantage is really small.

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Then this tax advantage of IE ETFs applies only to European stocks? How about Japan and Pacific, are they better with IE or US?

i’m sorry i never calculated. if you want to dive deep you can do this according to my initial post/ the bogleheads wiki articles. if you do that, please report your findings!

Jeez, I wrote this in some post a few days ago. The Irish ETFs are for all the people who live in a jurisdiction without the bilateral deal with USA. Because then you need to pay 30% withholding tax and cannot reclaim it. That’s like extra 0.60% annual cost, sucks, right?

Here’s a Bogleheads wiki page dedicated to this topic (calculations apply to a domicile without tax treaty):

https://www.bogleheads.org/wiki/Nonresident_alien_with_no_US_tax_treaty_%26_Irish_ETFs

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Many thanks for the information @nugget. Firstly some links seem to no longer be working:

  • “1. Divident Tax, a.k.a. Witholding Tax” > “here” link to bogleheads
  • “1.3 US domiciled funds” > “more info” link to steueramt.zh

Is this still correct? Looking at the examples in the spreadsheet it looks like US TC is 0.19% while IE TC is 0.46% :thinking:

thanks for your feedback
for me the links still work

i probably referred to the view point from taxes, in which case it still is. with TER, they are already different. from the underlyings, too

Hello! First of all let me tell you this is my very first post . I’ve spend some time reading silently this forum and has been tremendously helpful however I wanted to ask you what do you think about this Total Withholding Rate comparison between

(VTI+ VXUS) vs FTSE All-World UCITS ETF

base on the bogleheads article previously mention in this post.

For the VXUS L1TW tax Withholding , the rate 7.5% is an estimation coming from the tax withholding paid by US-domiciled US-listed ETF of [ex-US] developed markets stocks (5-Year average) given as example in the bogleheads article. Dividend Yields are as well an approximation I’ve been looking for VXUS historical dividend values but I was not able to find them.

For a lot of reasons it is my choice of preference US-based ETF VXUS + VTI Vanguard ETF’s instated of IE-based alternative FTSE All-World UCITS but even from tax Withholding point of view VXUS + VTI combo has a lower TWR than FTSE All-World UCITS. Of course, I’m assuming here a Swiss fiscal resident person been able to reclaiming 15% out of the 30% by filing the W8-BEN for example with IB and then remaining 15% being credited for your income tax by filing DA-1 with your Tax authority.

What do you think ?

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The same reasoning applies to my investments :slight_smile:

@nugget Out of curiosity , are you using US-domicilied ETF’s ? If your equities portfolio is similar to the US-domiciled based I posted below , have you been able to calculate the TWR of VXUS and VTI? I would be very interested to know if roughly the TWR of VXUS and VTI is lower than the IE-based counter part .

Hey, I also want to remodel my portfolio that it has VTI + VXUS. Can I ask why do you prefer it over VT?