UAE Resident Questions - ETFs, estate tax and the like

For residents of the United Arab Emirates.
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Topic Author
Joekh06
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Joined: Fri May 15, 2020 2:15 pm

UAE Resident Questions - ETFs, estate tax and the like

Post by Joekh06 »

Hello!
I’ve been investing in US securities for the past 3 years through Schwab as an international investor and only recently came across topics related to NRAs and non-US domiciled ETFs. I know - but better late than never.

I’m based in the UAE and of Lebansese/Colombian nationality.

I’ve done a lot of research but i still have some questions that are open and i’m hoping some people on here can help clarify.

1. In terms of stocks specifically, those are exempt of capital gains tax.

2. I understand the taxes on dividends imposed on US-domiciled ETFs and the benefits of European/Ireland domiciled ETFs. One question that came up during a discussion with some friends was about the volume traded on such ETFs compared their US counterparts - are they equally liquid or does that point put non-US domiciled ETFs at a disadvantage?

3. Im not clear on the estate tax discussion related to $60K cash holding. As far as ive understood the main challenge for NRAs from a tax perspective is specific to dividends on stocks and ETFs. Is it correct to assume that stocks that dont pay dividends purchased through a US broker are exempt from this taxation discussion relevant to NRAs iNvesting In the US?

4. On the discussion of ETFs, it seems there is no replacement of VTI domiciled in Ireland. If you wish to invest in something likeable to VTI but domiciled outside the US, what would you recommend?

5. My current broker is Schwab but a lot of people opt for IB. I was turned off by IB based on management fees for accounts under $100K. Schwab does not trade in EU domiciled ETFs however. What’s the sentiment for a broker for a UAE investor?

I hope i havent asked too many questions on here im new on here and tried to get this clarity through the forum/online but just needed some confirmations. Glad i fell on this site though!

Thanks a lot!
Joe
DJN
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Re: UAE Resident Questions - ETFs, estate tax and the like

Post by DJN »

Hi,
there is no capital gains tax applicable while you are tax resident in the UAE. (that might change if they get "desperate" for cash). They introduced VAT recently and there are undoubtedly more taxes in the pipeline.
Does Lebanon have a tax treaty with US? How does Lebanon treat its non resident citizens from a taxation point of view?
As a resident of UAE you are best to invest in UCITS etfs domiciled in Ireland.
The volumes on the main iShares and Vanguard ETFs are fine.
If you die with more than $60,000 in your account of US assets your estate will be liable to a high level of tax.
See this section of Bogleheads Wiki for non-US investors and the most recommended portfolios:
https://www.bogleheads.org/wiki/Outline ... _domiciles
I much prefer IBKR and if you are living and working in the UAE you should be looking to bust that $100,000 limit!
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Topic Author
Joekh06
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Joined: Fri May 15, 2020 2:15 pm

Re: UAE Resident Questions - ETFs, estate tax and the like

Post by Joekh06 »

Thanks a lot DJN!
Lebanon does not have a tax treaty with the US so from that perspective it’s also fine.

A few clarifications please:

1. More than $60K in US assets, does that mean my whole portfolio will be taxed? I read in some forums a discussion about cash vs equities. Just so I’m clear if you are invest in let’s say $100K in a US stock, that $100K would be taxed upon death or any cash sitting at the broker is taxed? Wouldn’t you be able to transfer ownership of any equity to someone else?

2. What happens when you move? For example let’s say i invested given my current scenario in the UAE being a Lebanese national. Eventually I move to a country where there exists a tax treaty with the US. Would i then be taxed even if the investments happened before the move? When would you be taxed? When you liquidate the assets directly? Or when you transfer any gains to your local account?

3. Does a UCITS equivalent of VTI exist? Most of my research has brought back S&P 500 ETFs.

Thanks again for your help and clarity.
Joe
TedSwippet
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Re: UAE Resident Questions - ETFs, estate tax and the like

Post by TedSwippet »

Joekh06 wrote: Sat May 16, 2020 8:17 am 1. More than $60K in US assets, does that mean my whole portfolio will be taxed? I read in some forums a discussion about cash vs equities. Just so I’m clear if you are invest in let’s say $100K in a US stock, that $100K would be taxed upon death or any cash sitting at the broker is taxed? Wouldn’t you be able to transfer ownership of any equity to someone else?
The US will tax any 'US situs' assets you hold above just $60k, starting at 26% and rising to 40%. So on the example you give, $100k in US stock, your heirs might face US estate tax of around $11k. The most common way to avoid this threat is to keep your 'US situs' assets below $60k. Transferring these assets to a spouse or heirs after you die will be too late. The US charges its estate tax on everything you own that is 'US situs' on your date of death.

So ... what is a 'US situs' asset? US stocks, including US domiciled ETFs -- no matter what they contain, even if all non-US stocks --, US real estate, US based retirement accounts such a 401k or IRA, and a cash balance in a US based broker are all 'US situs'. Things that are not 'US situs' include non-US stocks, Ireland domiciled ETFs -- even when they contain only US stocks, and even if held as a US based broker --, and a cash balance in a US bank. (If you think some of these definitions make very little sense, you would not be alone; they don't, but this is how things are anyway.)

For you then, avoid holding US stocks or US domiciled ETFs directly. Hold your US stocks through an intermediate company, the simplest way to do this being a non-US domiciled ETF such as one from Vanguard or iShares and domiciled in Ireland. And either avoid US based brokers entirely, or if you cannot do that or it is prohibitively expensive to do so, then make sure to never hold more than $60k in cash at that broker.
Joekh06 wrote: Sat May 16, 2020 8:17 am 2. What happens when you move? For example let’s say i invested given my current scenario in the UAE being a Lebanese national. Eventually I move to a country where there exists a tax treaty with the US. Would i then be taxed even if the investments happened before the move? When would you be taxed? When you liquidate the assets directly? Or when you transfer any gains to your local account?
What happens depends on where you move to. Some countries, probably most, will happily tax you on your entire gains, from purchase to sale, when you liquidate the assets, even if most if not all of the gain occurred before you became resident. In your case, you would almost certainly be best off by liquidating everything before you leave the UAE, so that you hold nothing with a built-in capital gain when you arrive in your new country.

If you move to a country with both a US income tax treaty and a US estate tax treaty, you would then be much safer and better protected from rapacious US taxes, particularly the US estate tax. However, only a handful of countries have US estate tax treaties, primarily western Europe, Canada, Japan, Australia, and South Africa. Unless you move to one of these, you would still want to keep as much distance between yourself and US taxes as it is possible to achieve.
Joekh06 wrote: Sat May 16, 2020 8:17 am 3. Does a UCITS equivalent of VTI exist? Most of my research has brought back S&P 500 ETFs.
Vanguard's VOO is a US domiciled S&P 500 ETF. If you compare it against VTI, you will see that there is very little difference in performance. An S&P 500 index ETF should be perfectly adequate, for example VUSD (Vanguard's Ireland domiciled S&P 500 ETF). Don't forget that you want stocks from other countries too, though. Rather than VUSD, consider all-world ETFs such as VWRD and SWRD instead. More in the wiki, linked by DJN upthread, and some of which it looks like you have already found and read.
Topic Author
Joekh06
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Joined: Fri May 15, 2020 2:15 pm

Re: UAE Resident Questions - ETFs, estate tax and the like

Post by Joekh06 »

Thanks a lot TedSwippet for taking the time to share the detailed response. I feel like a whole new tax world I had no idea about was just unveiled to me...

Based on the details you have a couple of questions from my end and I'll get out of your hair.

1. I have only looked into US-based brokers mainly because in general when I first started educating myself about investing etc, my searches brought up the most recommended brokers which for obvious reasons were US based. Do you have a recommendation of a non-US based broker which competes with the US ones in terms of assets, pricing, overall experience. The US-based ones in general have the best platforms, costs etc... And using a local broker wouldn't really serve that purpose because then one day i'll move and my broker would be in a different country.

2. In terms of capital gains and tax treaties. Is it based on nationality or where you currently reside, or both? I am a bit confused about how it would work if you live a multinational life and move around every couple of years. Let's say today in the UAE there is no tax treaty, then I move to another country that does, and then another country that doesn't. Would I be liable to pay taxes on capital gains made during the time I was living in a country with a tax treaty? Assuming I am investing for the long-term 20+ years it's pretty counter-productive to keep selling off my portfolio before i move somewhere new every couple of years. Or would the solution be to have an account with a non-US brokerage domiciled in a country without a US-tax treaty and grow the portfolio there.

3. On the estate-tax and anything above $60K - assuming you transfer ownership BEFORE you die, that would save you from that correct? Is there such a thing as having your cash owned jointly or having some form of power of attorney that works around this (assuming accidental death vs you being able to plan ahead etc...).

4. On your point regarding stocks from other countries too - in general the literature I have read does not necessarily point in that direction with the mindset that if you're investing in something like the S&P 500, the multinationals/companies listed that make up a big chunk of the index anyway have exposure to the rest of the world so you are anyway benefiting from the global economy by investing in them - without necessarily having to invest in other markets. What are your thoughts on that?

Thanks again for all your support and insights regarding this it's really helping stay informed and potentially having made short-term decisions with big long-term implications :)
Thanks a lot!
Joe
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: UAE Resident Questions - ETFs, estate tax and the like

Post by TedSwippet »

Joekh06 wrote: Sun May 17, 2020 7:43 am1. I have only looked into US-based brokers mainly because in general when I first started educating myself about investing etc, my searches brought up the most recommended brokers which for obvious reasons were US based. Do you have a recommendation of a non-US based broker which competes with the US ones in terms of assets, pricing, overall experience. The US-based ones in general have the best platforms, costs etc... And using a local broker wouldn't really serve that purpose because then one day i'll move and my broker would be in a different country.
Sorry, not really. I'm based in the UK, and so use UK based broker platforms (plural, don't ask why!) that suffice for what I need. Some expats have used Saxo as an alternative to Interactive Brokers, but I've no direct experience of either. If you search the forum for past posts though, you can probably turn up some useful ideas in this direction.
Joekh06 wrote: Sun May 17, 2020 7:43 am2. In terms of capital gains and tax treaties. Is it based on nationality or where you currently reside, or both? I am a bit confused about how it would work if you live a multinational life and move around every couple of years. Let's say today in the UAE there is no tax treaty, then I move to another country that does, and then another country that doesn't. Would I be liable to pay taxes on capital gains made during the time I was living in a country with a tax treaty? Assuming I am investing for the long-term 20+ years it's pretty counter-productive to keep selling off my portfolio before i move somewhere new every couple of years. Or would the solution be to have an account with a non-US brokerage domiciled in a country without a US-tax treaty and grow the portfolio there.
Income tax treaties normally revolve around your residence. Typically that would be more specifically your 'tax residence'. Assuming you live full-time in the UAE at the moment, so more than perhaps six months of any year, say, your residence is very likely the UAE. In contrast, estate tax treaties tend to revolve around your domicile. This is a more slippery legal concept (google it for more), and includes your residence but also your permanent centre of life and future intentions.

So, if you live in the UAE for a year or two but your house and family remain in Lebanon and you will return there, you might be a UAE resident for income tax treaty purposes, but Lebanese domiciled for estate tax purposes. (Not that either of these countries actually has any form of tax treaty at all with the US specifically, so that's just a "for-example"!)

As for capital gains ... capital gains tax to whom? Mostly, you pay capital gains tax to the country you live in, but not to any other. And mostly, you pay them only when you sell an asset. With the exception of real estate, even the US does not (yet?!) apply its capital gains tax to nonresident aliens, no matter whether they live in a tax treaty country or not.

Depending on where you go then, it may be possible to hold investments across a couple of years in a country, never sell while there, and so avoid cashing in. At the moment though, in the UAE you can sell to cash without facing any capital gains tax. And some countries punitively tax certain investment types, often something they view as 'offshore' (for example, the US's appalling PFIC tax regime, for US residents and citizens), so there may be occasions when selling to cash, moving, and then repurchasing equivalent assets in your new home could be the least bad option. Or maybe moving first, then selling and repurchasing -- it all depends on the comparative tax regimes that you are moving between.

Fundamentally, there is no such thing as a fully internationally mobile portfolio, because every country's tax and regulatory regime is different. UCITS ETFs are fine across the EU, but a US tax death-sentence if held in the US. US domiciled ETFs are fine if you live in the US or in one of the few countries with workable US treaties, but (as you've seen) a US tax nightmare if not. And so on. Individual stocks are probably the least troublesome holdings to have and keep if you regularly move countries, but then you have to carry a lot more risk (lack of diversification), trading costs, complexity, and so on, relative to simply holding index funds.
Joekh06 wrote: Sun May 17, 2020 7:43 am3. On the estate-tax and anything above $60K - assuming you transfer ownership BEFORE you die, that would save you from that correct? Is there such a thing as having your cash owned jointly or having some form of power of attorney that works around this (assuming accidental death vs you being able to plan ahead etc...).
Transferring before death would avoid US estate tax. The trick, of course, is knowing exactly when you will die, and then preempting it. Without being morbid, not all deaths come with a few days of warning.

Joint ownership isn't much protection though, because of course, the US congress has already thought of this 'loophole'. On death, all 'US situs' assets in a joint account are 'deemed' to have been owned by the first of the couple to die, unless there is proof of the split in contributions to the joint account. In your case, that proof might be hard because in practice it sounds like most if not all of the account would be funded by you rather than your spouse.
Joekh06 wrote: Sun May 17, 2020 7:43 am4. On your point regarding stocks from other countries too - in general the literature I have read does not necessarily point in that direction with the mindset that if you're investing in something like the S&P 500, the multinationals/companies listed that make up a big chunk of the index anyway have exposure to the rest of the world so you are anyway benefiting from the global economy by investing in them - without necessarily having to invest in other markets. What are your thoughts on that?
I'm not a US based investor, so I prefer to invest in all-world stocks.

US based investors tend to have a more ethnocentric view of the world, which is why you can find this viewpoint among some of them, including from some well-regarded US book authors. This might be okay for US based investors -- after all, the US is more than 50% of world market cap -- but personally I don't really subscribe to it. Not least because for me it could represent a large bet on a single currency that is not my own.
Topic Author
Joekh06
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Joined: Fri May 15, 2020 2:15 pm

Re: UAE Resident Questions - ETFs, estate tax and the like

Post by Joekh06 »

Thanks a lot TedSwippet! I don't know you but you sound like you know a lot about this topic so I will take it :p - and thanks so much for taking the time to go through the answers meticulously, highly appreciated.

Quick recap on main points to make sure i got it right.

1. ESTATE TAX
- If holding at a US broker, avoided by investing in non-US stocks, or non-US domiciled ETFs. In this case even if they are valued above $60,000, no taxes apply.
- A CASH balance at at US BANK is exempt from the $60,000+ threshold. But if you die with $100K in un-invested cash at your US broker, the $40K will be taxed - is this correct?
- If i want to invest in specific US stocks/ETFs, then go through a non-US broker (ie Saxobank as an example).
- The rest of the more morbid part is clear. The part about the joint account being deemed to have been owned first by the person to die first is a cheap shot, I must say!

2. Capital Gains Tax
- Dividends are taxed at 30% if it is a US-domiciled asset (ie US stock or US-domiciled ETF) even if the broker is not in the US.
- The way around this only applies to Ireland-domiciled ETFs where the dividends would be taxed at 15%.
- For US "stock-picking" assuming no tax treaty in the country of residence, there's no option out of the 30% dividend tax since by definition these are US-domiciled stocks.

That's pretty much it for me just to confirm I got it all right.
Thanks again!
Joe
TedSwippet
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Location: UK

Re: UAE Resident Questions - ETFs, estate tax and the like

Post by TedSwippet »

Joekh06 wrote: Sun May 17, 2020 2:04 pm 1. ESTATE TAX
- If holding at a US broker, avoided by investing in non-US stocks, or non-US domiciled ETFs. In this case even if they are valued above $60,000, no taxes apply.
- A CASH balance at at US BANK is exempt from the $60,000+ threshold. But if you die with $100K in un-invested cash at your US broker, the $40K will be taxed - is this correct?
Yes, and yes.
Joekh06 wrote: Sun May 17, 2020 2:04 pm - If i want to invest in specific US stocks/ETFs, then go through a non-US broker (ie Saxobank as an example).
You'd face US estate tax and US dividend tax issues no matter whether you use a US broker or a non-US one. In practice, a non-US one is probably less likely to properly ... ahem .... administer US estate tax compliance, but that doesn't mean that you would be safe.

If you want to invest in US stocks/ETFs, as someone in a country without US tax treaties you have to either accept both the 30% US dividend tax and the risk of US estate tax if your holdings exceed $60k, or you have to use an intermediate holding company to insulate yourself from the IRS. Using an intermediate corporation comes with its own set of issues and expenses. Or you might instead use life insurance to cover any US estate tax issues. However, there are no bulletproof yet straightforward answers.
Joekh06 wrote: Sun May 17, 2020 2:04 pm - The rest of the more morbid part is clear. The part about the joint account being deemed to have been owned first by the person to die first is a cheap shot, I must say!
Indeed.
Joekh06 wrote: Sun May 17, 2020 2:04 pm 2. Capital Gains Tax
- Dividends are taxed at 30% if it is a US-domiciled asset (ie US stock or US-domiciled ETF) even if the broker is not in the US.
- The way around this only applies to Ireland-domiciled ETFs where the dividends would be taxed at 15%.
- For US "stock-picking" assuming no tax treaty in the country of residence, there's no option out of the 30% dividend tax since by definition these are US-domiciled stocks.
Yes. For US domiciled ETFs there are a couple of small exceptions to the 30% dividend tax, for example where a 'dividend' is actually a short-term capital gain (and the broker knows and handles this correctly), and where some or all of the dividend arises from interest paid by US bonds held by the ETF. These exceptions aren't a lot of help overall, though.
Topic Author
Joekh06
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Joined: Fri May 15, 2020 2:15 pm

Re: UAE Resident Questions - ETFs, estate tax and the like

Post by Joekh06 »

Beautiful, thanks a lot TedSwippet!
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