Practical advice for first time investor (best structure etc.) [Germany ex-pat]

For residents of the United Arab Emirates.
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Topic Author
ChocolateFactory
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Joined: Sun Apr 26, 2020 7:57 am

Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by ChocolateFactory »

I'm a German citizen and digital nomad (i.e. working while traveling the world) in the process of moving to Dubai.

I currently hold about € 20k in individual stocks and ETF's (iShares) with a German broker + USD ~50k worth of foreign cash (neither USD nor EUR).
I opened the brokerage account several years ago, when I still lived in Germany, but haven't used it until recently. I have no idea where the ETF's are domiciled, I didn't realize it made a difference.
Once I am properly set up in Dubai, my plan was to open a proper brokerage account and close the German brokerage account (their fees are too high). So far I have always held off on that because I was unsure how to fill out the required IRS paperwork (W-8BEN?), as long as I didn't have a proper "home".

I understand that most people in this forum prefer ETF's, but I'd like to invest into individual stocks and play with options as well - simply because I'd like to learn and I also like the excitement. I might also want to accept shares as payment from some startup clients I work for in the long term, and maybe also invest into real estate (I have no idea where though).
My income of roughly USD 150k per year is mostly foreign currency (neither USD nor EUR)
1. I guess it will make the most sense to just convert it into USD/EUR immediately to invest it, instead of waiting for a favorable exchange rate?

Most people here seem to recommend Interactive Brokers because of their low fees. But from what I've seen, their user interface is quite complex and not exactly modern.
2. Are there any good alternatives to IB in terms of usability (including mobile app) and fees?
Saxo Bank is considerably more expensive? As mentioned, I'd also like to do some active trading. Will it be easy to transfer my assets from the German brokerage account? Or would it make more sense to just sell all shares?

3. Can it make sense to invest through some structure like an investment company or trust, instead of as an individual?
Or is that irrelevant, as long as I'm not a millionaire? If it makes sense, I'd rather set things up properly from the beginning. Also considering the possibility I might not be living in Dubai forever. Or would I still be able to transfer my assets into a trust or investment company later?

4. Does it make sense to invest into individual US stocks at all, considering the 30% withholding tax on dividends and the estate tax risk?
Or can you avoid that risk by trading on a stock exchange outside the US?

5. When you open a brokerage account (IB or some other broker), what kind of documentation do they typically ask for in terms of tax residence?
Is a residency visa good enough? Rental agreement? Utility bill? UAE-issued tax certificate?

6. Finally, I guess I should completely avoid US-based brokers like Schwab?

Thank you!
DJN
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Joined: Sun Nov 19, 2017 11:30 pm

Re: Practical advice for first time investor (best structure etc.)

Post by DJN »

Hi,
you are non-US and maybe start by looking at the Bogleheads Wiki here: https://www.bogleheads.org/wiki/Outline ... _domiciles
There is also a section on Bogleheads for investors resident in the UAE, you should find that easily.
I wouldn't bother with individual share picking, its extra risky and most people here would suggest that you should stick to passively managed index funds with lowest possible fees. First step is to choose your allocation between fixed income and equities.
I would use IBKR its just fine and will allow you flexibility as an expat. Saxo is definitely more expensive. There is also deGiro and Internaxx / Swissqoute. I think IBKR is the most convenient and cheapest as long as you invest in excess of $100,000.
I cannot see any point in setting up a separate structure to invest through.
The IBKR site tells you what documents you require. Its relatively straightforward.
I would avoid any entity which operates from the US.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Topic Author
ChocolateFactory
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Joined: Sun Apr 26, 2020 7:57 am

Re: Practical advice for first time investor (best structure etc.)

Post by ChocolateFactory »

Thanks. I've read the wiki, that's how I found out about all this dividend and estate tax stuff.
I'm not quite at $100k yet, but hopefully I'll get there by the end of the year.

With IBKR, will I need make sure I will be signed up for their European branch? Or is that irrelevant?
Thank you, I found what documents IBKR requires now. That should be really easy.

Well, as far as I've understood, an investment company should be able to use treaty benefits (provided it fulfills the criteria for that).
So that even if I invest in individual stocks, the company would be paying 15% taxes on US-sourced dividends.
And the idea with the trust of course would be to avoid the estate tax.
But of course none of that really matters, as long as I'm not investing large sums of money. I was just wondering if it could make sense to do everything "right" from the start.
DJN
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Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by DJN »

Hi,
from memory when you sign up for IBKR your current jurisdiction will decide which "branch" of IBKR you will use. I think that the UAE uses the US? Anyway when you return to Germany or wherever you will be asked to transfer to the appropriate IBKR location.
You will be able to invest up to $60,000 in US domiciled entities without worrying about he estate tax. After that your estate would have an issue.
I am not convinced of using a company, remember that you will have administrative costs and depending on the location you will also be liable for whatever rate of personal tax from the income you take out of that entity especially in EU.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Topic Author
ChocolateFactory
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Joined: Sun Apr 26, 2020 7:57 am

Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by ChocolateFactory »

If UAE residency means my shares will be managed by the US branch, would I still be able to purchase Ireland-domiciled ETFs? Would there be any negative consequences (tax-wise or otherwise) from using the US branch instead of the UK one?

Yes, exactly, there would be administrative cost etc. - that's why I also think that it probably would not make sense at this point because the costs of the structure would easily exceed the savings in dividend withholding tax.
But if it will get a lot more complicated to transfer the assets once I've built more wealth, maybe it would still make sense to do it right from the start? Or maybe there is some rule of thumb like "As long as your net worth is under 1 million USD, just invest as a private individual"?
DJN
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Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by DJN »

ChocolateFactory wrote: Sun Apr 26, 2020 3:53 pm But if it will get a lot more complicated to transfer the assets once I've built more wealth, maybe it would still make sense to do it right from the start? Or maybe there is some rule of thumb like "As long as your net worth is under 1 million USD, just invest as a private individual"?
Hi,
no problem that I know of in transferring larger amounts such as you describe and more. Lots of individuals over there with lots of lolly to move around. Forget the $1M rule and invest to your hearts content!
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Topic Author
ChocolateFactory
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Joined: Sun Apr 26, 2020 7:57 am

Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by ChocolateFactory »

Thanks.
DJN
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Joined: Sun Nov 19, 2017 11:30 pm

Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by DJN »

viewforum.php?f=26
UAE Bogleheads forum
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Topic Author
ChocolateFactory
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Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by ChocolateFactory »

Yes, that's where I posted...?
joewest
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Joined: Sun Apr 19, 2020 12:57 am

Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by joewest »

I am also new to the Boglehead community and spent my entire COV19 time in quarantine looking at Index fund/ ETF investing.... this included online trading platforms. All I can do is share the below experience with you...

It seems Interactive Brokers is the best from a price perspective (and trust me, I looked at many of them). The issue with the comparisons online is that many of the websites gets sponsored by these platforms and they write rosy reviews). But IB does come with some challenges as well (below my advice/ experience):
a) IB does not offer the IB lite version for Non-US citizens (so inactivity fee is $10 per month, but waved if you have more than $100,000 in your account). This means you will use the IB Pro platform with a lot more functionality than really needed.
b) opening an account is a hassle. I opened an account and then realized i didn't open a joint account (issue because if something happens to me my wife will have an issue getting the cash), so i had to close the account, transfer the money back to the UAE, only to open a correct account again and then transfer money back to the IB Citibank NY account.
c) i started by transferring $1,000 to make sure i pay the "school fees" before i transfer big amounts (thank goodness i did). When the money arrived in my IB account it was $973 because of all the bank and currency conversion charges (even though i also bank with Citibank). Now I am using XE Money Transfer and on the next transfer of $1,000 i received $990 (flat fee charged by Citibank/ IB for receiving cash of $10). Make sure you transfer your AED to the XE Money transfer account also in AED, XE do the rest (and i highly recommend them because of the conversion rates they give on conversion and their phone support). Now i have a XE account and do everything online
c) IB customer service/ support was frustrating. I waited a very long time to connect with somebody to help me (for me 33 minutes) before i dropped off. Then i started calling IB support numbers in Europe (when the US was sleeping) and had much better luck. When i eventually got somebody on the line, they were very helpful and professional. The iBot and online help functions was difficult to use at first (because i didn't know how to ask my questions).
d) IB is not easy to use... initially. So I opened the account and then watched the short videos they have in the education website. This helped me to get an orientation. IB also opened a "paper account" for me where I could simulate buying and selling which helped a lot to learn the platform.
e) The big question for me was to understand the tax implications. This included estate tax, dividend tax, income tax, withholding tax etc. The Boglehead website had great resources on this to help me. In the end i settled for Ireland (so everything i plan to buy will domiciled in Ireland) and I made sure my IB account shows that i will be trading in the United Kingdom (vs USA). You can still buy into the US, but instead of paying 30% dividend tax you will pay 15% and you will pay no estate tax (or at least for me) versus the 40% (if i had an account in the US).
f.) I am currently exploring what to buy, but no decision yet (but they will be Ireland domiciled). At this point i want to believe Warren Buffet "never bet against Americ", so i am leaning towards Vanguard products. I attach a website that helped me: https://mrsmoneyhacker.com/my-irish-etf-portfolio/

As I mentioned, I only started looking into this recently, so I hope this was helpful?
Topic Author
ChocolateFactory
Posts: 8
Joined: Sun Apr 26, 2020 7:57 am

Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by ChocolateFactory »

Thank you, that was very useful!

Have you looked into Transferwise/Revolut for making the transfers instead of XE? Though I must say that XE sounds very good as well.
I haven't moved to Dubai yet (because of the lockdown), but I'm currently not planning on using my AED account much, as long as I don't have local sales (my clients are outside the UAE). Just to avoid the whole currency conversion headache.

I have heard that you can get an account with IB Hong Kong instead of UK if you explicitly apply on their HK website.
Do you know if there is any difference to the UK account?

You can only avoid the issues with withholding and estate tax for ETFs, right? Not if you hold individual stocks?
For a UAE resident, is there a difference between accumulating and distributing ETFs?
The article you linked to was interesting, too. I guess the tax stuff she mentioned is only relevant for people who live in Ireland?
TedSwippet
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Location: UK

Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by TedSwippet »

ChocolateFactory wrote: Sun May 03, 2020 5:39 amYou can only avoid the issues with withholding and estate tax for ETFs, right? Not if you hold individual stocks?
Right. Putting a suitable structure between you and US assets will remove the US estate tax risk, and may also reduce the US tax on dividends. An Ireland domiciled ETF is one such structure. Hold any US assets directly though, and you may be fully exposed to 30% US tax on dividends and also the spectre of confiscatory US estate taxes.
ChocolateFactory wrote: Sun May 03, 2020 5:39 amFor a UAE resident, is there a difference between accumulating and distributing ETFs?
Aside from any small variations in trading costs, due to whether you would trade more or less often with one type compared to the other, no difference in investing returns. This wiki page explains:

Comparison of accumulating ETFs and distributing ETFs - Bogleheads
ChocolateFactory wrote: Sun May 03, 2020 5:39 amThe article you linked to was interesting, too. I guess the tax stuff she mentioned is only relevant for people who live in Ireland?
Right. These weird tax rules on investments, such as deemed sale every eight years, 41% tax rate, and so on, apply only to residents of Ireland. You can ignore them.
Topic Author
ChocolateFactory
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Joined: Sun Apr 26, 2020 7:57 am

Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by ChocolateFactory »

Thanks. What would be such a “suitable structure” to hold the US assets and avoid problems with withholding and estate tax? Is there a solution that doesn’t cost a leg and an arm?
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Practical advice for first time investor (best structure etc.) [Germany ex-pat]

Post by TedSwippet »

ChocolateFactory wrote: Mon May 04, 2020 9:18 am What would be such a “suitable structure” to hold the US assets and avoid problems with withholding and estate tax? Is there a solution that doesn’t cost a leg and an arm?
It would I think be some sort of a trust or corporate structure, probably non-US based. Perhaps even two, one US and one non-US.

Not my area though, I'm afraid, so I'm entirely unfamiliar with the details. Best just to invest into the US through Ireland domiciled ETFs, and so leave concerns over all of this US tax nonsense in the hands of Blackrock's and Vanguard's European ICVC structures.
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