Non-US citizen: Best investing options from Switzerland

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Topic Author
ramaj
Posts: 18
Joined: Sat Dec 28, 2019 12:14 am

Non-US citizen: Best investing options from Switzerland

Post by ramaj »

Hello,

My wife and I reside in Switzerland and work for the UN. I am a US citizen and invest in a mix of index ETFs (iShares) using my Fidelity brokerage. My salary is paid in USD - most is automatically transferred to my Bank of America account in the US so that I can pay my credit card bills, mortgage (I have an investment property that I rent) and invest in my ETF portfolio on a regular (quarterly) basis. I have a US-based tax preparer. So all good for me.

My wife, on the other hand, is a French-German national and has lived in Switzerland for years. While her salary is based in USD (as are all UN salaries) it is automatically converted to CHF for her. Over the years, she has managed to save a tidy sum in CHF but has never moved her savings out of her savings account.

After reading up a bit and speaking to some advisors, we decided the best course of action for her was to open a global account with a US-based brokerage (in this case, Charles Schwab), convert her savings into USD (via TransferWise, which I found to have the best exchange rate and fees), and invest in US-based ETFs. So every quarter we transfer a part of her salary and a part of her savings in USD to Schwab and invest in ETFs. I use the same approach as with my investments, i.e., iShares ETFs that cover the broad indexes - total US stock market, total developed markets ex-US, total emerging markets, total US bond market, total international bond market. As a non-resident / non-citizen, she is only subject to the 15% tax on dividends. Since this is not necessarily retirement savings (we each pay into a UN pension) and is what we consider 'general savings', we are pretty conservative (60% stocks, 40% bonds - I am 49 and my wife is 37, FYI).

I wonder if anyone on this forum has any experience / advice in this regard. Does this seem like a logical approach? Are there better options, e.g., ETFs domiciled outside of the US such Luxembourg or Ireland, using a Swiss-based brokerage, etc?

Thank you!
Jordan
TedSwippet
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Re: Non-US citizen: Best investing options from Switzerland

Post by TedSwippet »

Welcome.
ramaj wrote: Sun Jan 10, 2021 12:08 pm After reading up a bit and speaking to some advisors, we decided the best course of action for her was to open a global account with a US-based brokerage (in this case, Charles Schwab), convert her savings into USD (via TransferWise, which I found to have the best exchange rate and fees), and invest in US-based ETFs. So every quarter we transfer a part of her salary and a part of her savings in USD to Schwab and invest in ETFs. I use the same approach as with my investments, i.e., iShares ETFs that cover the broad indexes - total US stock market, total developed markets ex-US, total emerging markets, total US bond market, total international bond market. As a non-resident / non-citizen, she is only subject to the 15% tax on dividends.
For Swiss residents, US domiciled ETFs can be a decent choice where the ETF holds US stocks. Switzerland has decent income tax and estate tax treaties with the US, so your wife faces a 15% tax on dividends, best case fully creditable against local income tax, and few problems with US estate taxes should the worst happen, at least up to whatever the current exclusion is for US citizens.

For ETFs that hold non-US stocks, the picture is more mixed. The US will tax dividends paid by US domiciled ETFs at 15%, even though the dividends themselves, as received by the ETF, are not US source. In contrast, an Ireland domiciled ETF holding the same non-US stocks would pay your wife the entire dividend, without any other tax withholding. If her local tax rate exceeds 15%, and if she can claim a full credit for the US tax paid, using a US domiciled ETF would be a wash. Otherwise, an Ireland or other non-US domiciled equivalent ETF wins.

For bonds, non-US domiciled ETFs are likely to be better overall. The US allows US sourced bond dividends to flow to through US domiciled ETFs and to non-US investors with a tax withholding exemption, but offers no exemption for non-US sourced bond dividends. So for anything other than something that holds purely US bonds, a non-US domiciled ETF will be preferable.

Full details in the wiki:

Outline of non-US domiciles - Bogleheads

A couple of additional notes. As a mixed nationality couple, you will need to pay special attention to US estate tax and gift tax laws. The usual unlimited marital exemptions don't apply where the receiving spouse is not a US citizen. And the US/Switzerland estate tax treaty is elderly and has some significant holes in it. Mostly these revolve (I think; not Swiss) around credits for non-US estate taxes paid, and they may not affect you since one of you is a US citizen, but worth checking. Special care may be needed if/when you have children.

Also, a fair few non-US domiciled ETFs trade in CHF on the Swiss stock exchange, for example Vanguard's VWRL. As a general rule then, unless there's a specific benefit (and not just a lack of disadvantage) in using US domiciled ETFs, for your wife, using these would likely be both cheaper and more convenient, eliminating CHF to/from USD forex costs. You can find more ETF ideas in the wiki, for examphe:

Building a non-US Boglehead portfolio - Bogleheads

Finally, I've assumed here that not only is your wife not a US citizen or other type of US 'taxable person', but also that you do not file your US taxes as Married Filing Jointly. Any of these would drag all of her income and assets into the whole panoply of ugliness that is US tax for US expats.
Topic Author
ramaj
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Joined: Sat Dec 28, 2019 12:14 am

Re: Non-US citizen: Best investing options from Switzerland

Post by ramaj »

Thanks! I will take a look at the resources you provided and might come back with some questions.
SteveDB
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Re: Non-US citizen: Best investing options from Switzerland

Post by SteveDB »

@ TedSwippet, thanks for the detailed info.
I have an analogue situation, EU person living in Switzerland. I have just opened a non Swiss broker account (IB) to save on expensive Swiss banks fees and stamp duty fees.

I was debating btw VT and VWRL. The first cost 0.08% vs 0.22%. Having marginal tax rate greater than 15%. To me it seems that make most sense to go for VT as long as I can purchase from here. Then, when I get into full retirement or my health deteriorates, I can sell VT for another vanguard non-US domiciled ETF to avoid any tax estate issues to my heirs. (In Switzerland there is no capital tax gain, or at least no yet)

Does it make sense or do you see any flaw? Many thanks in advance!
TedSwippet
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Re: Non-US citizen: Best investing options from Switzerland

Post by TedSwippet »

SteveDB wrote: Sun Jan 17, 2021 4:12 pm I was debating btw VT and VWRL. The first cost 0.08% vs 0.22%. Having marginal tax rate greater than 15%. To me it seems that make most sense to go for VT as long as I can purchase from here. Then, when I get into full retirement or my health deteriorates, I can sell VT for another vanguard non-US domiciled ETF to avoid any tax estate issues to my heirs. (In Switzerland there is no capital tax gain, or at least no yet)

Does it make sense or do you see any flaw? Many thanks in advance!
No flaws that I can see, on the information given. The only thing to be aware of is that not all deaths come in full retirement or when health deteriorates (put bluntly but morbidly, you might not get any warning!).

What is your EU 'home country'? If it too has a US estate tax treaty, there would be no need to sell if you move back there from Switzerland. It's only buying US domiciled ETFs that is problematic in the EU (thanks for nothing, PRIIPs!). Holding and selling them should pose no difficulties.
SteveDB
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Re: Non-US citizen: Best investing options from Switzerland

Post by SteveDB »

Thank you! Home country would be Italy but with wife we are still deciding where to retire.

Thank you for the advice, true none plans own final days :-), need to give some more thoughts and now that you raise perhaps thinking through some additional insurance as main breadwinner.
Topic Author
ramaj
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Re: Non-US citizen: Best investing options from Switzerland

Post by ramaj »

After doing more research I am still confused. My wife does not pay income tax in Switzerland because she works for the UN. I do not know if this helps or hurts the case of investing in US domiciled funds. Furthermore, my understanding is that funds domiciled in Ireland do not charge any dividend tax on non-US stocks and non-US bonds, whereas now my wife is paying 15%. To summarize:

Pros of investing in US domiciled funds for Swiss residents
- Cheaper and greater variety. Easier to put together a complete portfolio.
- 15% dividend tax across the board
- US - Swiss estate tax treaty in place

Cons of investing in US domiciled funds for Swiss residents
- Some non-US domiciles (e.g., Ireland) do not charge any dividend tax on non-US stocks and non-US bonds
- Avoid issues regarding US estate tax

Also, I looked at some of the suggested non-US domiciled ETFs and sample portfolios and found them limited in terms of variety, expensive (higher expense ratios), and complicated (hedged vs unhedged, multiple currency options, distributing vs accumulating).

Frustrating but it just seems to me that if one is based in Switzerland it is more straightforward to invest in US domiciled funds in USD and accept the 15% tax on non-US bonds and non-US stocks vs the complexity of navigating a non-US domicile, dealing with far less choice, and paying higher fees. I can't imagine the difference between the two options is that great in terms of overall cost. Or am I way off?!
boboli
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Re: Non-US citizen: Best investing options from Switzerland

Post by boboli »

I hope its allowed to post links of extern homepages.
https://forum.mustachianpost.com/t/tax- ... vesting/67

I found this the best summary of tax optimisation for etf investing for swiss residents.

There is also an excel with the total cost of different vanguard ETF in perspective of switzerland
Last edited by boboli on Mon Feb 15, 2021 6:20 pm, edited 1 time in total.
TedSwippet
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Re: Non-US citizen: Best investing options from Switzerland

Post by TedSwippet »

ramaj wrote: Mon Feb 15, 2021 3:18 pm After doing more research I am still confused. My wife does not pay income tax in Switzerland because she works for the UN.
A somewhat unique position. See below for warning.
ramaj wrote: Mon Feb 15, 2021 3:18 pm Pros of investing in US domiciled funds for Swiss residents
- Cheaper and greater variety. Easier to put together a complete portfolio.
- 15% dividend tax across the board
- US - Swiss estate tax treaty in place
Cheaper may not be meaningfully cheaper. For example, VOO's TER is 0.03%, and VUSA's 0.07%. Superficially, that's more than twice the fee. However, on $100,000 the difference is $40/year.

Surely the "15% dividend tax across the board" is a con, not a pro. For non-US domiciled ETFs, you'd pay 15% dividend tax for US source dividends, but nothing for non-US source dividends.

Tax treaties are slippery things, so you'll want to be doubly certain your wife is covered. These things often hinge on whether or not one is a taxable resident of the treaty country. For example, from the US/Switzerland treaty:
ARTICLE 4
Resident
1. For the purposes of this Convention, the term "resident of a Contracting State" means:
a) any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, nationality, place of management, place of incorporation, or any other criterion of a similar nature ...
Again, your wife's situation is unique. The above seems to call into question whether or not she can use the US/Switzerland tax treaty to get a 15% rate on dividends from US domiciled ETFs. Without a treaty, the rate is 30%.
ramaj wrote: Mon Feb 15, 2021 3:18 pm Also, I looked at some of the suggested non-US domiciled ETFs and sample portfolios and found them limited in terms of variety, expensive (higher expense ratios), and complicated (hedged vs unhedged, multiple currency options, distributing vs accumulating).
Many of these things are non-issues. You want to build a simple index tracking portfolio, so a vast variety of things is no use to you; all you need is a small handful of the right things (and they exist; a lot of people here are using them just fine). The expenses may be higher, but not always meaningfully so, and they're gradually coming down. You can ignore hedging if you don't want it; just factor that out. Likewise accumulating ETFs if they don't gain you anything. And the multiple trading currency options are there to help you avoid forex drag when changing CHF or whatever into USD or whatever when you could simply buy the ETFs you want directly with CHF.
ramaj wrote: Mon Feb 15, 2021 3:18 pm Frustrating but it just seems to me that if one is based in Switzerland it is more straightforward to invest in US domiciled funds in USD and accept the 15% tax on non-US bonds and non-US stocks vs the complexity of navigating a non-US domicile, dealing with far less choice, and paying higher fees. I can't imagine the difference between the two options is that great in terms of overall cost.
Suppose a portfolio of 60:40 stocks/bonds. And suppose 60% of stocks and 60% of bonds are US. If your wife holds US domiciled ETFs she will (best case, where treaty applies) lose 15% of all stock dividends, say 2% * 15% = 0.3%, and perhaps 0.12% in bond dividends (from the non-US portion), total 0.42% US tax drag. If she holds non-US domiciled ETFs she will lose 60% of that 0.3% drag, so 0.18%, and ideally nothing in bond dividends. The difference is 0.24% (again perhaps best case). So unless Ireland domiciled equivalent ETFs are that much pricier overall, they win over US domiciled ones.

An analysis something along these lines is what you need to do. Only then can you make a judgement about whether or not the actual annual saving in USD, CHF or whatever is worth the effort.
Topic Author
ramaj
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Joined: Sat Dec 28, 2019 12:14 am

Re: Non-US citizen: Best investing options from Switzerland

Post by ramaj »

Thanks, this is really useful information. I will do some additional research and I may post here again!
Tellurius
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Re: Non-US citizen: Best investing options from Switzerland

Post by Tellurius »

ramaj wrote: Mon Feb 15, 2021 3:18 pm After doing more research I am still confused. My wife does not pay income tax in Switzerland because she works for the UN. I do not know if this helps or hurts the case of investing in US domiciled funds. Furthermore, my understanding is that funds domiciled in Ireland do not charge any dividend tax on non-US stocks and non-US bonds, whereas now my wife is paying 15%. To summarize:

Pros of investing in US domiciled funds for Swiss residents
- Cheaper and greater variety. Easier to put together a complete portfolio.
- 15% dividend tax across the board
- US - Swiss estate tax treaty in place

Cons of investing in US domiciled funds for Swiss residents
- Some non-US domiciles (e.g., Ireland) do not charge any dividend tax on non-US stocks and non-US bonds
- Avoid issues regarding US estate tax

Also, I looked at some of the suggested non-US domiciled ETFs and sample portfolios and found them limited in terms of variety, expensive (higher expense ratios), and complicated (hedged vs unhedged, multiple currency options, distributing vs accumulating).

Frustrating but it just seems to me that if one is based in Switzerland it is more straightforward to invest in US domiciled funds in USD and accept the 15% tax on non-US bonds and non-US stocks vs the complexity of navigating a non-US domicile, dealing with far less choice, and paying higher fees. I can't imagine the difference between the two options is that great in terms of overall cost. Or am I way off?!
Accumulating ETFs are actually simpler to manage, if you don’t have to pay any tax on the (internal) dividends!

Different currencies is also a plus. You can have ETFs denominated in CHF or EUR. Nothing really changes, you just save one round trip of currency exchange (for your wife) if ETF is in CHF (and it occurs within the ETF).

Fees are insignificantly higher.

Hedged vs unhedged refers to bonds and is actualy worth looking at. It’s also not only an issue faced by non-US investors (US investors face it too), if you look at international bonds.
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Giddean
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Re: Non-US citizen: Best investing options from Switzerland

Post by Giddean »

TedSwippet wrote: Mon Feb 15, 2021 4:05 pm A somewhat unique position.
Ramaj, very unique indeed and then some more: as there is no one-answer-fits-all-UN, but goes further into the individual member`s own nationality: what applies for their country of nationality and what in connection to Switzerland. In the past, the Federal administration even, had not been able to give a clear answer to an individual`s question about Swiss residency, starting the reply with "probably..." and then having referred the individual to the Geneva cantonal adminstration`s authority, for further interpretations.

Moreover, on Geneva`s official page here, beyond
exemption from salaries, emoluments and allowances paid by the international organization
specifically for UN non-Swiss nationals, it adds
total exemption from income and movable capital
But, on which grounds? As in a generous giveaway? As in that they deem that taxation privilege on other income and movable wealth rests with one`s own home county ? Does it then contradict, or not, with an establishment of a tax residence in Switzerland, as in the OECD`s summary quoted above ? ...the dive goes deep.
I doubt that you will ever get to find an authoritative answer, but if you will, please do announce.. :D  

Some perspectives to look at it from, somewhat interlinked:  
A. What your wifes`own country believes is residency (look at the OECD`s per-country "Information on residency for tax purposes" sheets.
B. What Switzerland believes on the same, i.e., beyond what TedSwippet quoted from the US-CH double taxation treaty, Switzerland`s OECD summary sheet e.g also states
An individual establishes a tax residence (place of abode), irrespective of short interruptions, if a stay of a minimum of 30 days is combined with a gainful activity, or without such activity if the stay lasts a minimum of 90 days.
And then some more.
C. Whether you can establish a baseline of A or B, or both, then consequently to look at the A/B-US treaties.
D. Plus, in your case specifically, that you stated that you`re married and that you are a US citizen, which I figure brings a whole other lot of complexities from what I read on this forum.

I think that the topic with the UN is so unique, that it deserves its own distinct post and title, should you ever want to dig deep into it. The trendy term "digital nomad" that we see often quoted on the internet, sound a child`s play when compared to the nomadic establishment and the divide in identity for people serving the UN.
— i'm an idiot. with brilliant ideas.
Topic Author
ramaj
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Re: Non-US citizen: Best investing options from Switzerland

Post by ramaj »

Thanks Giddean. I will definitely post as I learn more especially about the taxation issue. I will dedicate time this quarter to it.
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