US withholding rate vs Swiss tax rate

Taxes
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From what I understand the DA-1 won’t fully refund if your tax rate is below 15%.

Does anyone if it’s just the regular tax rate (wealth + income) or something special (e.g. only income).

I want to know in which cases, in a place with wealth tax like Zurich would it be better (tax wise) to use a non US global ETF (assuming same TER).

With 3M of VT shares (2% dividend = 60k), it looks like you’d be taxed 17k (11k is wealth tax), which is ~30% of income. So there’s already no chance to be below 15% anyway?

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It’s only about income taxes. Wealth taxes are not relevant at all for the US DA-1 calculation as technically, there is no double taxation on wealth.

In the simple case (VT is the only asset, no debt) the formula for the Swiss tax credit is something like: min(US WHT amount, (dividends - wealth management deduction) * your income tax rate)

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Do I remember correctly: it’s not about the marginal tax rate, but the total tax rate (canton+bund)?

But as I understand, if your WHT refund is less than 15%, it’s still worth holding US funds vs. UCITS up to a certain point. Is there any easy math to this :sweat_smile:?

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That’s correct. Total income taxes divided by taxable income is how the relevant rate is calculated. And due to the wealth management deduction, the income tax rate actually has to be a bit higher than 15% for a full credit. Things get more complicated if you have a mortgage or other debt.

For funds that only hold US stocks, US-domiciled funds are always optimal¹. It’s the ex-US part where UCITS funds are normally better. So the math will depend on the fund but I guess VT is the main interesting one. I haven’t done any real calculations on this. With the high US allocation in VT, I suspect your tax rate would have to be very low for it to be worth it (and TER differences should be considered as well).

¹ That’s assuming we’re talking about funds with physical replication. Synthetic UCITS funds can be better than US-domiciled funds.

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Thanks, yeah I should have mentioned I was thinking of 100% VT here. Surely, optimizing US vs. UCITS would be more optimal.

So basically, as long as VT mainly consists of US, it’s mostly a win except for very low tax rates, even if you don’t get a full WHT refund. I’ll try to do the exact math on this, but will probably mess it up completely :joy:

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See here for the formula used

and here

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I did a quick simulation, using a 60/40 split between US (1.2% dividend) and non-US (3.4% dividend).

Looks like at 5% tax rate, there’s a 0.1% extra loss to tax in favor of UCITS, at 10% tax rate (60k income in Zurich), they’re pretty equivalent. With higher tax there’s less than 0.1% in favor of US domiciled (shrinking as tax rate gets higher, with 0.09% at 15% tax rate and 0.07% at 35%).

It was actually a bit counterintuitive for me, the tax rate where US wins the most is 15%, the advantage then shrinks as tax rises.

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An other option is to use UCITS synthetic ETF.

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Is there a good synthetic UCITS ETF that tracks msci acwi or similar? Haven’t found one yet

Or a good ex-us ucits etf?

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I was actually looking into it: Hybrid replication - innovation ahead for world etfs? - #10 by nabalzbhf

If you don’t care about emerging there’s 3 ETFs with 0.2% TER: https://www.justetf.com/en/search.html?search=ETFS&assetClass=class-equity&region=World&replicationType=replicationType-swapBased&sortOrder=asc&sortField=ter

It’s slightly annoying there’s no All World/ACWI-ex US UCITS, otherwise it would be the obvious choice.

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Check this thread DWS launches Europe’s first world ex-US ETF

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It’s missing emerging though (acwi has emerging)

I was thinking something like VXUS but UCITS.

(It’s also annoying small cap is not covered by most of those)

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About the small caps, especially the very small ones in VT… i checked the holdings and looked at those stocks, websites etc. There is really a lot of crap in there.

Probably the very small caps need an active solution…

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The key question is if globally diversified portfolio really need the small caps or its just unnecessary factor chase which might have seized to exist due to enough literature/additional costs involved.

I understand if someone only invests in S&P 500 , then S&P 600 might be useful. But if one invests in MSCI ACWI, it already kind of includes lot of small companies.

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Small caps overweight is part of a startegy you pursue during recessions not during boom cycles :wink:

See this 2017 WSP article https://archive.is/kaOcH

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But who knows when will recession will come anyway

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I guess it’s a different debate (also we’re talking about small cap neutral rather than overweight here)

Personally I kinda like not having those market cap cutoff index inclusion effect, means that whenever a company moves from small to mid-cap or mid to large cap, you’re not impacted by all the artificial buying of passive index owners. (Similarly if a company moves out of the index, all the passive owners will all try to sell at the same time)

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Well the person said during. Not before. So you don’t need to know when it will come, you just need to buy small cap when the recession is there.

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I see.

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I guess we don’t know the details, but with Trump exploring raising tax rates for foreigners: Donald Trump threatens to double tax rates for foreign nationals and companies synthetic ETFs (and UCITS for non-US) might start making a lot more sense if withholding rates are going up.

Switzerland would be targeted on paper as a country that’s implementing the OECD deal: https://www.efd.admin.ch/en/implementation-oecd-minimum-tax-rate-switzerland (maybe they’ll mostly target big EU countries instead and forget about Switzerland)

edit: looks like he wants to apply 26 U.S. Code § 891 - Doubling of rates of tax on citizens and corporations of certain foreign countries | U.S. Code | US Law | LII / Legal Information Institute which explicitly reference the part of the tax code for tax withholding of US stock ( § 871)

edit2: and since the US-CH tax treaty explicitly references the 15% rate (and I assume other treaties are similarly worded), it could only be implemented by also terminating the tax treaty (which is not unheard of, the most recent one that was terminated by the US is the US-HU treaty). So that would be fun… (it would mean 60% withholding)

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