UCITS vs US: Can you check my Maths please?

For residents of the United Arab Emirates.
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Topic Author
boglehooligan
Posts: 96
Joined: Mon Mar 23, 2020 11:38 am

UCITS vs US: Can you check my Maths please?

Post by boglehooligan »

Not sure if my calculations are completely accurate but comparing 2 very similar ETFs that track S&P500 VUSD (Ireland) and VOO (US) the numbers suggest that it still makes sense for a GCC national living in the GCC to trade in the US?

Expense Ratio
VUSD Ireland: 0.07%
VOO US: 0.03%

Dividends at time of writing
VUSD 1.47%
VOO 1.74

Dividends Withholding Tax
VUSD 15%
VOO 30%

Net dividend minus Withholding Tax
VOO 1.21%
VUSD 1.24%

Dividend conclusion: Both are quite similar

If US10,000 initial investment
And annual contributions of USD24,000 for 30 years
Assuming 8% rate of return

After-fee investment value VOO: $2,779,044
After-fee investment value VUSA: $2,757,368
Fee savings if invested in VOO: $21,676

Cost of trading VOO $0 (using US brokers)
VUSA is unavailable to trade on US platforms and minimum charge would be USD14 OR 0.30% (whichever is higher).

Capital Gains Conclusion
Had those trading fees been invested in VOO, $8,038 would have been added to your gains, therefore, bringing your total gains to $2,787,082 and saving a total of $22,836


Regarding US estate tax, would it be simpler to share your password with your partner? But setting that aside i hear that you can create a commercial registration locally that will shield you from estate tax. If you know of anything please do let me know
TedSwippet
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Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: UCITS vs US: Can you check my Maths please?

Post by TedSwippet »

boglehooligan wrote: Sun Oct 18, 2020 9:28 am Dividends at time of writing
VUSD 1.47%
VOO 1.74%
I think you are missing the fact that the 1.47% dividend paid by VUSD is already net of 15% US tax, since this US tax is paid internally by the ETF.
boglehooligan wrote: Sun Oct 18, 2020 9:28 am Dividends Withholding Tax
VUSD 15%
VOO 30%
Give the above, these numbers become VUSD 0%, VOO 30%. So, VOO pays you 0.7 * 1.74% = 1.22% in dividends annually, and VUSD pays you 1.47% annually. On dividends, VUSD wins by 0.25%/year.

More here, including example calculations:

Nonresident alien investors and Ireland domiciled ETFs - Bogleheads
Topic Author
boglehooligan
Posts: 96
Joined: Mon Mar 23, 2020 11:38 am

Re: UCITS vs US: Can you check my Maths please?

Post by boglehooligan »

Ok thank you TedSwippet :happy - for letting me know that UCIT dividends that are displayed is net
TedSwippet
Posts: 5166
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: UCITS vs US: Can you check my Maths please?

Post by TedSwippet »

boglehooligan wrote: Mon Oct 19, 2020 10:12 am Ok thank you TedSwippet :happy - for letting me know that UCIT dividends that are displayed is net
No problem. This is really only clear once you understand how a UCITS ETF holding US stocks has to operate internally.

Out of interest, how does this affect the final outcome of the projections you made, USD10,000 initial, then USD24,000/year for 30 years and assuming an 8% rate of return? Just curious to see how these come out when you use corrected input numbers. The 0.3% trading fee for the UCITS ETF is annoying -- not sure if you can reduce that somehow? -- but remember that you would only pay this once, on purchase. In contrast, the 0.25% extra US tax drag from VOO you would have to pay every year, so worse than a one-off 0.3%.

Also, using UCITS or any other non-US domiciled ETF will shield you from US estate tax, so you no longer have to worry about tricks like hoping that sharing passwords with a spouse will avoid tangling with US estate tax return, or setting up an intermediate holding company to insulate you from the IRS. A non-US domiciled ETF structure will itself insulate you from the IRS, so that is really all the protection you need here. If using a US broker, you have to be aware not to hold more than USD60,000 in cash at any point, but other than that, you should be okay. A broker account is not the place to hold large cash balances anyway.
Topic Author
boglehooligan
Posts: 96
Joined: Mon Mar 23, 2020 11:38 am

Re: UCITS vs US: Can you check my Maths please?

Post by boglehooligan »

Im going back to the drawing board to do my numbers all over again :oops: but this time with my complete US ETF portfolio converted to UCITS.

Once completed i will come back here and share my findings.

By the way, my understanding is that 40% estate tax applies to TOTAL value of your portfolio in your brokerage (not just US$60,000 in cash) Either which way I will eventually need to shift my stocks into UCITS
TedSwippet
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Location: UK

Re: UCITS vs US: Can you check my Maths please?

Post by TedSwippet »

boglehooligan wrote: Mon Oct 19, 2020 11:07 am By the way, my understanding is that 40% estate tax applies to TOTAL value of your portfolio in your brokerage (not just US$60,000 in cash) Either which way I will eventually need to shift my stocks into UCITS.
Not quite. It applies to all 'US situs' holdings in your brokerage, so for you the most likely things would be US stocks, US domiciled ETFs, and cash in a US brokerage account. Holdings that are not 'US situs', so non-US stocks and non-US domiciled ETFs, escape. There is a $60,000 exclusion, so after you've added up everything that is 'US situs', you then subtract $60,000. What remains is taxed at a graduated rate, starting at 26% and reaching 40% once the balance exceeds $1,000,000. The rates are here:

https://en.wikipedia.org/wiki/Estate_ta ... tative_tax

So, for example, say you had $160,000 in US domiciled ETFs and you die. From the table above, the 'tentative' estate tax for amounts above $150,000 but below $250,000 is $38,800 plus 32% of the excess. The excess is $160,000 - $150,000, so $10,000. 32% of that is $3,200. Add to the basic $38,800 gives $42,000. Now subtract a $13,000 "unified credit exemption" (this is the way the $60,000 exemption works) produces a US estate tax liability of $29,000. That is 18.13% of your $160,000.

Not a flat 40% then, but still horrible. Compare with holding $160,000 in non-US domiciled ETFS. If you die, the US estate tax liability is $0. So yes, moving out of US domiciled ETFs and in to non-US domiciled ETFs is something you very much want to do.
Topic Author
boglehooligan
Posts: 96
Joined: Mon Mar 23, 2020 11:38 am

Re: UCITS vs US: Can you check my Maths please?

Post by boglehooligan »

boglehooligan wrote: Mon Oct 19, 2020 11:07 am Not a flat 40% then, but still horrible. Compare with holding $160,000 in non-US domiciled ETFS. If you die, the US estate tax liability is $0. So yes, moving out of US domiciled ETFs and in to non-US domiciled ETFs is something you very much want to do.
Agreed! :happy
Suliman
Posts: 9
Joined: Wed Jan 03, 2024 2:52 pm

Re: UCITS vs US: Can you check my Maths please?

Post by Suliman »

boglehooligan wrote: Sun Oct 18, 2020 9:28 am Not sure if my calculations are completely accurate but comparing 2 very similar ETFs that track S&P500 VUSD (Ireland) and VOO (US) the numbers suggest that it still makes sense for a GCC national living in the GCC to trade in the US?

Expense Ratio
VUSD Ireland: 0.07%
VOO US: 0.03%

Dividends at time of writing
VUSD 1.47%
VOO 1.74

Dividends Withholding Tax
VUSD 15%
VOO 30%

Net dividend minus Withholding Tax
VOO 1.21%
VUSD 1.24%

Dividend conclusion: Both are quite similar

If US10,000 initial investment
And annual contributions of USD24,000 for 30 years
Assuming 8% rate of return

After-fee investment value VOO: $2,779,044
After-fee investment value VUSA: $2,757,368
Fee savings if invested in VOO: $21,676

Cost of trading VOO $0 (using US brokers)
VUSA is unavailable to trade on US platforms and minimum charge would be USD14 OR 0.30% (whichever is higher).

Capital Gains Conclusion
Had those trading fees been invested in VOO, $8,038 would have been added to your gains, therefore, bringing your total gains to $2,787,082 and saving a total of $22,836


Regarding US estate tax, would it be simpler to share your password with your partner? But setting that aside i hear that you can create a commercial registration locally that will shield you from estate tax. If you know of anything please do let me know
difference between us-ETF non-us ETF . Explain
Topic Author
boglehooligan
Posts: 96
Joined: Mon Mar 23, 2020 11:38 am

Re: UCITS vs US: Can you check my Maths please?

Post by boglehooligan »

Hello Suliman,

as a Bahrain,GCC and most expats the correct ETFs to invest are UCITS Ireland domiciled.

For example if you would like to invest in in the SP500 tracker such as VOO we must use VUSD (or VUSA) this is because we avoid 30% taxes on dividends and 40% on estate tax
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