Costa Rica seeking advice regarding Substantial presence test on Ireland domiciled ETFs bought through IBKR

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Topic Author
whiterabbit87
Posts: 15
Joined: Thu Jan 07, 2021 9:38 pm

Costa Rica seeking advice regarding Substantial presence test on Ireland domiciled ETFs bought through IBKR

Post by whiterabbit87 »

Hello Bogleheads currently I am a college student in my home country(Costa Rica) saving for a MBA degree in the U.S.I used to buy U.S domiciled ETFs through TD Ameritrade since my balance would be below 60k.I am now considering moving to IBKR to buy Irish domiciled ETFs.

Country of residence:Costa Rica

International lifestyle:Not sure if I am going to end up moving to the U.S.

Currency:USD

Debt:No debt

Age:30

Investment plan:Save and continuously invest for 5 years(I am planning on joining the MBA program on the fifth year).On the fifth year I am withdraw all of the money and invest in local Certificates of deposit in my home country.By the time I enter the MBA program I will not have any money invested in IBKR or anywhere else.

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Questions:
1.From what I understand IBKR is U.S domiciled which means that it runs under U.S jurisdiction.Since I would be buying Irish domiciled ETF’s I was wondering if I would be at any risk of the substantial presence test once I end up going to get my MBA in the U.S, assuming I go take the degree in person.I understand that the Substantial presence test only applies on us situs assets which I would not be buying, however since IBKR is U.S domiciled I am not sure.

2.If I meet the substantial presence test for the current tax year would I be liable for capital gains of only the current tax year?Or would I be liable for the 3 year period that includes the current year and the 2 years immediately before that.
Last edited by whiterabbit87 on Sat Apr 10, 2021 7:58 pm, edited 1 time in total.
TedSwippet
Posts: 5166
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Costa Rica seeking advice regarding Substantial presence test on Ireland domiciled ETFs bought through IBKR

Post by TedSwippet »

whiterabbit87 wrote: Thu Apr 08, 2021 12:16 pm 1.From what I understand IBKR is U.S domiciled which means that it runs under U.S jurisdiction.Since I would be buying Irish domiciled ETF’s I was wondering if I would be at any risk of the substantial presence test once I end up going to get my MBA in the U.S, assuming I go take the degree in person.I understand that the Substantial presence test only applies on us situs assets which I would not be buying, however since IBKR is U.S domiciled I am not sure.
I think you might be fundamentally misunderstanding the substantial presence test. It applies to you, not to any assets you hold, or accounts you hold with US based banks or brokers. So the 183-day clock only starts ticking on the day you move yourself to the US.

If your plan is to sell everything before moving to the US, you won't have any issues with the US's horrible PFIC tax rules, because you will no longer hold Ireland or any other non-US domiciled funds. The substantial presence test does not reach back in time to before you moved to the US. Leaving you fully in the clear.

All that aside, there is another possible get-out for you. US visas for students, such as F and J, are actually exempt from the substantial presence test. That means that you can (mostly) remain a nonresident alien even though you're actually living in the US. This has some advantages (no tax on worldwide income), but also some disadvantages (no standard deduction on any US earnings you might have, and a flat 30% tax on any US source capital gains you might realise while on this visa).

If you haven't already found it, this wiki page might be useful:

US tax pitfalls for a non-US person moving to the US - Bogleheads
Topic Author
whiterabbit87
Posts: 15
Joined: Thu Jan 07, 2021 9:38 pm

Re: Costa Rica seeking advice regarding Substantial presence test on Ireland domiciled ETFs bought through IBKR

Post by whiterabbit87 »

Thanks so much for all of the insightful information ted, it is really helping me take decisions on my current situation.I was also shocked on how complex the situation is for NRA moving to the U.S.After reading a bit more on the topic I could not find a satisfying answer to the following question.Im sorry if you answered it on the past reply and I did not catch the answer.However would you mind please telling me what you think of this question?

2.If I were to meet the substantial presence test for the current tax year would I be liable for capital gains of only the current tax year?Or would I be liable for the 3 year period that includes the current year and the 2 years immediately before that.


TedSwippet wrote: Thu Apr 08, 2021 2:01 pm
whiterabbit87 wrote: Thu Apr 08, 2021 12:16 pm 1.From what I understand IBKR is U.S domiciled which means that it runs under U.S jurisdiction.Since I would be buying Irish domiciled ETF’s I was wondering if I would be at any risk of the substantial presence test once I end up going to get my MBA in the U.S, assuming I go take the degree in person.I understand that the Substantial presence test only applies on us situs assets which I would not be buying, however since IBKR is U.S domiciled I am not sure.
I think you might be fundamentally misunderstanding the substantial presence test. It applies to you, not to any assets you hold, or accounts you hold with US based banks or brokers. So the 183-day clock only starts ticking on the day you move yourself to the US.

If your plan is to sell everything before moving to the US, you won't have any issues with the US's horrible PFIC tax rules, because you will no longer hold Ireland or any other non-US domiciled funds. The substantial presence test does not reach back in time to before you moved to the US. Leaving you fully in the clear.

All that aside, there is another possible get-out for you. US visas for students, such as F and J, are actually exempt from the substantial presence test. That means that you can (mostly) remain a nonresident alien even though you're actually living in the US. This has some advantages (no tax on worldwide income), but also some disadvantages (no standard deduction on any US earnings you might have, and a flat 30% tax on any US source capital gains you might realise while on this visa).

If you haven't already found it, this wiki page might be useful:

US tax pitfalls for a non-US person moving to the US - Bogleheads
TedSwippet
Posts: 5166
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Costa Rica seeking advice regarding Substantial presence test on Ireland domiciled ETFs bought through IBKR

Post by TedSwippet »

whiterabbit87 wrote: Thu Apr 08, 2021 10:33 pm ... I was also shocked on how complex the situation is for NRA moving to the U.S.
It can certainly be a nightmare, depending on your financial situation. I have done it once, and personally would not choose to do it again.
whiterabbit87 wrote: Thu Apr 08, 2021 10:33 pm 2.If I were to meet the substantial presence test for the current tax year would I be liable for capital gains of only the current tax year?Or would I be liable for the 3 year period that includes the current year and the 2 years immediately before that.
Once you pass the substantial presence test, you are liable for US capital gains tax on any worldwide gains that you realise after the date on which your US residency started. Any capital gains that you realised before that date should not be taxable by the US (except for US source gains realised while you are present in the US on an F, J or similar visa that makes you exempt from the substantial presence test).

Many new US residents would file a dual-status return for the year in which they begin passing the substantial presence test and become US tax residents, specifically to keep everything done before that outside of the grasp of US tax:

Taxation of Dual-Status Aliens | IRS

A simple example. Say you sell some ETFs in 2021 and in 2022 you move to the US and pass the substantial presence test. Clearly your 2021 sale is not US taxable. Now, say you sell some ETFs in January 2022 and move to the US in March 2022, H1-B visa (so not J, F, etc). At the end of the year you pass the substantial presence test, and your visa is not one that exempts you from the test. If you file a dual-status return, you can ensure that your January 2022 sale is not US taxable.

Your residency starting date is the trigger point. You would think this would be simple to identify, but of course the US manages to make this complicated (particularly if you transition from an F or J visa to an H visa). The IRS has some examples here:

Alien Residency Examples | IRS

Finally, there may be -- not sure -- some odd rules around switching from a J or F visa to an H visa while remaining in the US. These J and F visas are not my area, so if there are strange rules here, I won't know them. I don't think they allow the IRS to go back in time and retroactively unwind your J or F exemption from the substantial presence test, but if that's your plan, you'll want to be sure. If there is, one thing that should be obvious about US tax by now, it is that it is no way acquainted with logic, common sense, or reasonableness.
Topic Author
whiterabbit87
Posts: 15
Joined: Thu Jan 07, 2021 9:38 pm

Re: Costa Rica seeking advice regarding Substantial presence test on Ireland domiciled ETFs bought through IBKR

Post by whiterabbit87 »

All right ted many thanks for your time and your knowledgeable comments I think I understand better now.Wish you the best.

TedSwippet wrote: Fri Apr 09, 2021 3:17 am
whiterabbit87 wrote: Thu Apr 08, 2021 10:33 pm ... I was also shocked on how complex the situation is for NRA moving to the U.S.
It can certainly be a nightmare, depending on your financial situation. I have done it once, and personally would not choose to do it again.
whiterabbit87 wrote: Thu Apr 08, 2021 10:33 pm 2.If I were to meet the substantial presence test for the current tax year would I be liable for capital gains of only the current tax year?Or would I be liable for the 3 year period that includes the current year and the 2 years immediately before that.
Once you pass the substantial presence test, you are liable for US capital gains tax on any worldwide gains that you realise after the date on which your US residency started. Any capital gains that you realised before that date should not be taxable by the US (except for US source gains realised while you are present in the US on an F, J or similar visa that makes you exempt from the substantial presence test).

Many new US residents would file a dual-status return for the year in which they begin passing the substantial presence test and become US tax residents, specifically to keep everything done before that outside of the grasp of US tax:

Taxation of Dual-Status Aliens | IRS

A simple example. Say you sell some ETFs in 2021 and in 2022 you move to the US and pass the substantial presence test. Clearly your 2021 sale is not US taxable. Now, say you sell some ETFs in January 2022 and move to the US in March 2022, H1-B visa (so not J, F, etc). At the end of the year you pass the substantial presence test, and your visa is not one that exempts you from the test. If you file a dual-status return, you can ensure that your January 2022 sale is not US taxable.

Your residency starting date is the trigger point. You would think this would be simple to identify, but of course the US manages to make this complicated (particularly if you transition from an F or J visa to an H visa). The IRS has some examples here:

Alien Residency Examples | IRS

Finally, there may be -- not sure -- some odd rules around switching from a J or F visa to an H visa while remaining in the US. These J and F visas are not my area, so if there are strange rules here, I won't know them. I don't think they allow the IRS to go back in time and retroactively unwind your J or F exemption from the substantial presence test, but if that's your plan, you'll want to be sure. If there is, one thing that should be obvious about US tax by now, it is that it is no way acquainted with logic, common sense, or reasonableness.
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galeno
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Re: Costa Rica seeking advice regarding Substantial presence test on Ireland domiciled ETFs bought through IBKR

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galeno
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Re: Costa Rica seeking advice regarding Substantial presence test on Ireland domiciled ETFs bought through IBKR

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Last edited by galeno on Fri Apr 09, 2021 6:10 pm, edited 1 time in total.
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galeno
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Re: Costa Rica seeking advice regarding Substantial presence test on Ireland domiciled ETFs bought through IBKR

Post by galeno »

If I were you I'd save my money in laddered USD (not CRC!) CDs at your favorite CR bank. Be aware that CR charges a 10% L3 withholding tax on the interest income.

DO NOT invest your money in any stocks or bonds. Your investment term is too short.

Ladder the CDs so they all mature when you need them.
KISS & STC.
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