Why are U.S. ETFs the most tax-efficient investment strategy?

Several times I have read on the blog or forum that US ETFs are the most tax efficient investment strategy. But why?

Thanks to the double tax treaty, 15% instead of 30% withholding tax (Quellensteuer) is levied on US ETF dividends, but you can claim it back in your Swiss tax return via DA-1. However, the same applies to Swiss stocks or ETFs, whose 35% withholding tax (Verrechnungssteuer) can be reclaimed in full. Both US and Swiss dividends are subject to income tax (Einkommenssteuer). The capital gain is not taxed directly, but due to the higher wealth, a higher wealth tax is also due (Vermögenssteuer).

In which respect are US ETFs more tax efficient? And superior to dividend stocks, for example? What have I forgotten?

Source (in German though): https://finpension.ch/de/das-beste-fondsdomizil-fuer-schweizer-anleger/

Many thanks in advance!

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it’s most efficient for the u.s. part of an etf’s holdings, not most efficient in general. and it’s comparing to other etf domiciles, not direct stock holdings. let’s say 50% of an etf’s holdings are u.s. stocks and these have an avg dividend yield of 2%. if the etf is ireland-based, you ‘lose’ 15% of 2% of 50%, i.e. 0.15% in total.

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@oslasho has already nailed it.

I love examples, and the link OP posted actually shows a good example (as well as a solid explanation) - see under “Das beste alternative Fondsdomizil für US-Aktien”, comparison of returns of US and IE domicile ETF on S&P500, for a Swiss investor.

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Bearing in mind that the substantial advantages only applieds to dividends from U.S. stocks (@oslasho beat me to it)…

It‘s not about Swiss „Verrechnungssteuer“ tax - it’s about U.S. tax.

U.S.-domiciled funds holding U.S. stocks will effectively receive dividends from them in full. 15% U.S. withholding tax (with W8-BEN) will be withheld when the fund distributes to you - and that can usually be offset against your Swiss income tax.

Europe funds holding U.S. stocks will receive dividends from these companies less 30% (or 15% U.S. for Irish funds) U.S. withholding tax. If it’s a Swiss fund 35% Swiss withholding tax will also be withheld when the funds distribute to you. You can reclaim the latter, but not the U.S. withholding tax paid by the fund.

In short: With the U.S. fund, U.S. withholding tax will only be charged when it pays out (distributes) to you. And you can offset that against your Swiss tax.
With the Irish fund, U.S. withholding tax will be charged when the fund receives dividends - and you can’t claim back or offset taxes paid by the fund n your Swiss tax return.

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This. Same applies to Japan or Canada, in case you invest in those.

You mix up different topics. Withholding tax is one. Another is that dividends are taxed, capital gains are not. So one might decide to go for growth stocks with low dividend payments.
But that’s another risk profile and I wouldn’t make investment decisions like that based on taxation.

I didn’t check the numbers but guess the SMI has a higher dividend yield compare to the US market. But that’s due to of the mix of companies, not the location.

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These are dividend yields from MSCI indices that I summarized few months ago:

MSCI Emerging Markets. 3.75%
MSCI Emerging Markets IMI. 3.32%

MSCI USA IMI. 1.6%
MSCI USA 1.61%

MSCI World ex USA. 3.30%
MSCI EAFE. 3.32%

MSCI Europe. 3.36%
MSCI Europe IMI. 3.33%
MSCI Europe ex Switzerland. 3.43%
MSCI EMU Index. 3.35%
MSCI EMU IMI. 3.37%

MSCI Japan. 2.50%

MSCI Canada. 3.21%

MSCI Pacific ex Japan. 4.53%

MSCI Switzerland. 2.96%
MSCI Switzerland IMI. 2.92%

So the dividend yield of Swiss stocks is actually below average for stocks markets outside of USA.

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Hey @Dr.PI , are these pure dividends from profit? In Switzerland more and more companies share half of the dividend from capital reserves. “Dividenden aus den Kapital­einlage­reserven (KER)”. These are tax free. I wonder if we know from that 2.96% how much is from KER and thus tax free.

According to ICTax, iShares Core SPI distributed 2.58% in gross dividends and 0.24% as KG/KEP in 2022, using the year-end tax value as reference.

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Thanks, haven’t thought of ictax. Since I don’t have taxable swiss securities, I didn’t thought of using it to check the fraction of capital redistribution. Seems low enough not to be a big deal. It can be at maximum 50% of the dividend.

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These are index yield, calculated by MSCI, no taxes whatever applied.

I don’t think there are many other countries that have non-taxable distribution of capital reserves. So I don’t think MSCI cares about it.

From what I remember reading some time ago, this is actually kind of loophole that is getting more and more difficult to use because of the changing regulations. Happy to be corrected.

Correct. Since 2020 only 50% are considered tax-free. Before it was 100%

It is more complicated than that. The general case is that now they have to distribute an other taxable dividend of the same amount from their acumulated earnings if they don’t want their shareholders to pay taxes on 50%, so virtually all companies will use their earnings for an other dividend. That means that their reserves from capital contributions will last twice longer, which is probably why it can give the impression than more and more companies do it. The total tax-free amount distributed will be the same as before.

Some companies can still pay a 100% tax-free dividend from their reserves from capital contributions if they have losses on their balance sheet. Other companies will also reduce the nominal value of the share to distribute it tax-free