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about to take the plunge for the 1st time

Investment discussion for beginners. Why you should invest your money, get help getting started
GeoffF100
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Re: about to take the plunge for the 1st time

#118194

Postby GeoffF100 » February 14th, 2018, 4:29 pm

Thank you very much for that hiriskpaul.
To see Vanguard's Irish domiciled ETFs, go to vanguard.co.uk. Select the Financial Advisers tab for more detailed information of their products. VWRL is a similar ETF to VT. Dividends collected by VWRL will have had withholding taxes deducted according to various tax treaties between Ireland and the domicile of the companies. For US shares, this will be 15%. Dividends paid out by VWRL will be done without withholding taxes, because Ireland does not levy withholding taxes on ETFs - one of the reasons ETFs are domiciled there. But of course, you may pay tax on those dividends.

You appear to be right about this. The big one for me is Vanguard Developed World ex UK. For OEICs, I found:

http://www.mandg.ch/en/qualified-invest ... tructures/

This says:

"Due to the wide range of tax treaties in place with the UK, withholding tax on investment income is often reduced."

So it appears that the double taxation treaties apply irrespective of the tax status of the investor in the fund.
The $1000 is also subject to UK income tax, which is 7.5% for basic rate taxpayers, but basic rate taxpayers can offset the 15% withholding tax ($150), gone to the IRS, against the tax liability $75. In effect this discharges the UK income tax liability.

That is fair enough for a US based ETF. It is just like any other US stock. A UK based OEIC also pays withholding tax too. My dividend slips from Vanguard do not list the withholding tax, and there is no box for it in the Unit Trusts and OEICs section of the tax return. As far as I am able to tell, the withholding tax paid by my Vanguard fund cannot be offset against UK dividend tax.

umeca74
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Re: about to take the plunge for the 1st time

#118204

Postby umeca74 » February 14th, 2018, 5:04 pm

so to recap this mini-tax-course, US exchanges automatically deduct dividend tax before passing them on, whereas UK exchanges do not (themselves). Are you sure this applies to overseas (out of UK) customers?

do you know of any other major exchange that automatically deducts dividend tax? I checked some of the tickers you recommended and they are listed both in UK, Dutch and Swiss exchanges.

JohnB
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Re: about to take the plunge for the 1st time

#118211

Postby JohnB » February 14th, 2018, 5:28 pm

As well as the country of domicile, you also need to be aware of the reporting country. A UK reporting fund allows fund capital gains to fall under the capital gains tax rules, if reporting elsewhere, they are treated as income, and subject to income tax.

Most of the passive funds I've seen are Ireland domiciled, UK reporting, which is what you (UK taxpayer) want. My Vanguard, Fidelity, and Ishares ETFs all are, covering FTSE, Europe and Japan. Not got any US ETFs, for that very reason.

See http://www.morningstar.co.uk/uk/news/69 ... stors.aspx

hiriskpaul
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Re: about to take the plunge for the 1st time

#118216

Postby hiriskpaul » February 14th, 2018, 5:36 pm

umeca74 wrote:so to recap this mini-tax-course, US exchanges automatically deduct dividend tax before passing them on, whereas UK exchanges do not (themselves). Are you sure this applies to overseas (out of UK) customers?

do you know of any other major exchange that automatically deducts dividend tax? I checked some of the tickers you recommended and they are listed both in UK, Dutch and Swiss exchanges.

There is no withholding tax on UK listed shares, including ETFs. It does not matter whether the investor is UK or overseas resident. This is one of the attractions of the London Stock Exchange for foreign companies.

No idea what regulations are for other European exchanges. You might want to ask about this on the Expats board.

hiriskpaul
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Re: about to take the plunge for the 1st time

#118217

Postby hiriskpaul » February 14th, 2018, 5:38 pm

JohnB wrote:As well as the country of domicile, you also need to be aware of the reporting country. A UK reporting fund allows fund capital gains to fall under the capital gains tax rules, if reporting elsewhere, they are treated as income, and subject to income tax.

Most of the passive funds I've seen are Ireland domiciled, UK reporting, which is what you (UK taxpayer) want. My Vanguard, Fidelity, and Ishares ETFs all are, covering FTSE, Europe and Japan. Not got any US ETFs, for that very reason.

See http://www.morningstar.co.uk/uk/news/69 ... stors.aspx

Vanguard's US listed ETFs are all UK reporting. By no means all ETFs are though - iShares are notably absent.

Alaric
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Re: about to take the plunge for the 1st time

#118218

Postby Alaric » February 14th, 2018, 5:38 pm

umeca74 wrote:do you know of any other major exchange that automatically deducts dividend tax?


It doesn't have to be down to the exchange, rather the tax law in the country where the Company or fund is based. In the UK, I think it's now only REITs that deduct tax before distribution, but that's a function of the UK tax system where individuals only incur tax if their dividends or interest exceed their allowances.

hiriskpaul
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Re: about to take the plunge for the 1st time

#118222

Postby hiriskpaul » February 14th, 2018, 5:46 pm

GeoffF100 wrote:That is fair enough for a US based ETF. It is just like any other US stock. A UK based OEIC also pays withholding tax too. My dividend slips from Vanguard do not list the withholding tax, and there is no box for it in the Unit Trusts and OEICs section of the tax return. As far as I am able to tell, the withholding tax paid by my Vanguard fund cannot be offset against UK dividend tax.


That's correct - I know of no way to get back or offset withholding taxes that funds or ETFs have paid. The same is true for ITs. ETF, IT and fund accounts should all detail the withholding taxes they have paid. iShares and probably other fund managers have been known to mitigate some of the European taxes by judicious use of stock lending around ex-div times. Whether they still do or the loopholes closed, I am not sure. Not something they are likely to brag about.

hiriskpaul
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Re: about to take the plunge for the 1st time

#118223

Postby hiriskpaul » February 14th, 2018, 5:48 pm

Alaric wrote:
umeca74 wrote:do you know of any other major exchange that automatically deducts dividend tax?


It doesn't have to be down to the exchange, rather the tax law in the country where the Company or fund is based. In the UK, I think it's now only REITs that deduct tax before distribution, but that's a function of the UK tax system where individuals only incur tax if their dividends or interest exceed their allowances.

Good point, I had forgotten about REITs.

hiriskpaul
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Re: about to take the plunge for the 1st time

#118227

Postby hiriskpaul » February 14th, 2018, 6:04 pm

Possibly worthwhile pointing out that for some investors, non-reporting accumulating funds may be desirable. For someone with high earnings, dividends can roll up free of what would otherwise be high levels of income tax. Later, when investors have lower or no income, the offshore funds can be run down with much lower or no income tax liability.

Various offshore insurance bonds are often sold on this principle. When I looked into this a few years ago, the whole exercise did not seem worthwhile though due to the higher charges on the offshore products. Most if not all of the potential tax savings went to product providers.

SalvorHardin
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Re: about to take the plunge for the 1st time

#118232

Postby SalvorHardin » February 14th, 2018, 6:31 pm

umeca74 wrote:so to recap this mini-tax-course, US exchanges automatically deduct dividend tax before passing them on, whereas UK exchanges do not (themselves). Are you sure this applies to overseas (out of UK) customers?

do you know of any other major exchange that automatically deducts dividend tax? I checked some of the tickers you recommended and they are listed both in UK, Dutch and Swiss exchanges.

Most countries impose withholding taxes on dividends paid by companies and funds listed there to "foreigners". Britain is the main exception in not imposing a withholding tax. A good example is Shell; the Dutch listed shares have withholding tax deducted (they are in the process of changing this), the UK listed shares don't.

I know that the following countries that deduct withholding taxes at source because I receive dividends from them: America, Canada, France, Germany, The Netherlands. For UK taxpayers these withholding taxes can be offset against the UK dividend tax.

A word of caution about American-domiciled funds. American tax law means that foreign investors can be liable for capital gains tax in respect of realised gains made within the fund. This is a highly complex subject; my rule is to never invest in an American domiciled fund.

Also if you haven't completed a W8-BEN form then American withholding tax is 30% rather than 15%.

hiriskpaul
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Re: about to take the plunge for the 1st time

#118245

Postby hiriskpaul » February 14th, 2018, 7:34 pm

SalvorHardin wrote:
umeca74 wrote:so to recap this mini-tax-course, US exchanges automatically deduct dividend tax before passing them on, whereas UK exchanges do not (themselves). Are you sure this applies to overseas (out of UK) customers?

do you know of any other major exchange that automatically deducts dividend tax? I checked some of the tickers you recommended and they are listed both in UK, Dutch and Swiss exchanges.

Most countries impose withholding taxes on dividends paid by companies and funds listed there to "foreigners". Britain is the main exception in not imposing a withholding tax. A good example is Shell; the Dutch listed shares have withholding tax deducted (they are in the process of changing this), the UK listed shares don't.

I know that the following countries that deduct withholding taxes at source because I receive dividends from them: America, Canada, France, Germany, The Netherlands. For UK taxpayers these withholding taxes can be offset against the UK dividend tax.

A word of caution about American-domiciled funds. American tax law means that foreign investors can be liable for capital gains tax in respect of realised gains made within the fund. This is a highly complex subject; my rule is to never invest in an American domiciled fund.

Also if you haven't completed a W8-BEN form then American withholding tax is 30% rather than 15%.

This risk only applies to US closed ended funds. Open endeds, including ETFs, are free of US capital gains taxes.* However, taxes are due on capital distributions and there are open question marks on rolled up income on the few specialist accumulating ETFs, such as leveraged ETFs.

*That is, capital gains taxes arising from disposals within the fund.

umeca74
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Re: about to take the plunge for the 1st time

#118294

Postby umeca74 » February 15th, 2018, 6:45 am

SalvorHardin wrote:I know that the following countries that deduct withholding taxes at source because I receive dividends from them: America, Canada, France, Germany, The Netherlands. For UK taxpayers these withholding taxes can be offset against the UK dividend tax.


very good information, thanks!
what's the dividend automatic taxation level in these countries, around 15%?
I also read that the dutch are thinking of dropping the automatic tax deduction, but it is yet to be implemented

GeoffF100
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Re: about to take the plunge for the 1st time

#118295

Postby GeoffF100 » February 15th, 2018, 6:53 am

Here is a table of withholding tax rates:

https://www2.deloitte.com/content/dam/D ... -rates.pdf

Withholding taxes are applied to interest and royalties as well as dividends.

umeca74
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Re: about to take the plunge for the 1st time

#118312

Postby umeca74 » February 15th, 2018, 8:57 am

fantastic list GeoffF100!
so for internationally-minded trading:

UK/hong kong = excellent
USA/Netherlands = ok (15%)
Germany/France/Switzerland = ouch (25+)

so for euro-denominated instruments, Holland is the wise choice

hiriskpaul
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Re: about to take the plunge for the 1st time

#118366

Postby hiriskpaul » February 15th, 2018, 1:15 pm

umeca74 wrote:fantastic list GeoffF100!
so for internationally-minded trading:

UK/hong kong = excellent
USA/Netherlands = ok (15%)
Germany/France/Switzerland = ouch (25+)

so for euro-denominated instruments, Holland is the wise choice

Geoff's list does not take account of various international tax treaties. For example, Germany/France/Switzerland the withholding tax should be 15% for UK (and Irish) domiciled funds. Funds should claim back any overcharged tax. I am not convinced they all do though. For example, I used to hold an HSBC ETF covering the Canadian stock market, but when I looked at the accounts I concluded that the ETF was losing 25% in dividend withholding taxes, but under the Ireland/Canada tax treaty the rate should be 15%. I switched to an iShares ETF instead, where the rate charged did seem to be 15%.

One of the reasons that share buybacks are more popular in the US and other countries compared to the UK is that dividends are typically taxed for both domestic and foreign investors, but share buybacks are not.

hiriskpaul
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Re: about to take the plunge for the 1st time

#118390

Postby hiriskpaul » February 15th, 2018, 2:44 pm

hiriskpaul wrote:
SalvorHardin wrote:
umeca74 wrote:so to recap this mini-tax-course, US exchanges automatically deduct dividend tax before passing them on, whereas UK exchanges do not (themselves). Are you sure this applies to overseas (out of UK) customers?

do you know of any other major exchange that automatically deducts dividend tax? I checked some of the tickers you recommended and they are listed both in UK, Dutch and Swiss exchanges.

Most countries impose withholding taxes on dividends paid by companies and funds listed there to "foreigners". Britain is the main exception in not imposing a withholding tax. A good example is Shell; the Dutch listed shares have withholding tax deducted (they are in the process of changing this), the UK listed shares don't.

I know that the following countries that deduct withholding taxes at source because I receive dividends from them: America, Canada, France, Germany, The Netherlands. For UK taxpayers these withholding taxes can be offset against the UK dividend tax.

A word of caution about American-domiciled funds. American tax law means that foreign investors can be liable for capital gains tax in respect of realised gains made within the fund. This is a highly complex subject; my rule is to never invest in an American domiciled fund.

Also if you haven't completed a W8-BEN form then American withholding tax is 30% rather than 15%.

This risk only applies to US closed ended funds. Open endeds, including ETFs, are free of US capital gains taxes.* However, taxes are due on capital distributions and there are open question marks on rolled up income on the few specialist accumulating ETFs, such as leveraged ETFs.

*That is, capital gains taxes arising from disposals within the fund.

I juet re-read this and realised I misread what SalvorHardin said. I agree with him and take back my comment. US funds/ETFs do not pay tax on capital gains arising on their portfolio, which is the point I was making. Any tax requirement is instead past to the investor. In practice, if ETFs make a capital gain, this is distributed to investors, just as dividends from the portfolio are. Cap weighted ETFs, such as S&P 500 ETFs, make very little capital gain as the portfolio turnover is so small, so they don't often make capital distributions. For non-US residents, capital distributions are subject to the same withholding taxes as regular dividends.


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