Bond and bond ETF taxation as a non-US resident

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Topic Author
culturedcommenting
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Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

Hello,

having recently become a non-US resident I am looking to switch my ETF holdings to something more tax efficient. I am located in a tax-free jurisdiction with no tax treaty with the US. I have read and believe I understand the advantages of Ireland domiciled ETFs, at least for equities holdings. What about bonds? If my understanding is correct, interest income from owning bonds should be tax-free (no withholding), but what if I hold a bond fund instead, whether US or Ireland domiciled, would there be a withholding in that case?

Thank you very much!
TedSwippet
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

culturedcommenting wrote: Thu May 26, 2022 2:39 pm ... having recently become a non-US resident I am looking to switch my ETF holdings to something more tax efficient. I am located in a tax-free jurisdiction with no tax treaty with the US. I have read and believe I understand the advantages of Ireland domiciled ETFs, at least for equities holdings. What about bonds? If my understanding is correct, interest income from owning bonds should be tax-free (no withholding), but what if I hold a bond fund instead, whether US or Ireland domiciled, would there be a withholding in that case?
Assuming you are not a US citizen and not a green card holder, I think this wiki section answers your question:

Nonresident alien taxation : Interest distributions paid as dividends - Bogleheads

Depending on the fund's contents you might lose something to US tax with a US domiciled bond fund, but no matter what it holds you should never lose anything to tax with an Ireland domiciled one. That is, the best case with a US domiciled ETF is the same as the normal case with an Ireland domiciled one.

Beyond this, how much are you planning to invest? If above $60,000, then even if the above isn't sufficient, US estate tax considerations will drive the decision further towards Ireland and away from US domiciled ETFs.
Topic Author
culturedcommenting
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Re: Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

TedSwippet wrote: Thu May 26, 2022 4:09 pm
culturedcommenting wrote: Thu May 26, 2022 2:39 pm ... having recently become a non-US resident I am looking to switch my ETF holdings to something more tax efficient. I am located in a tax-free jurisdiction with no tax treaty with the US. I have read and believe I understand the advantages of Ireland domiciled ETFs, at least for equities holdings. What about bonds? If my understanding is correct, interest income from owning bonds should be tax-free (no withholding), but what if I hold a bond fund instead, whether US or Ireland domiciled, would there be a withholding in that case?
Assuming you are not a US citizen and not a green card holder, I think this wiki section answers your question:

Nonresident alien taxation : Interest distributions paid as dividends - Bogleheads

Depending on the fund's contents you might lose something to US tax with a US domiciled bond fund, but no matter what it holds you should never lose anything to tax with an Ireland domiciled one. That is, the best case with a US domiciled ETF is the same as the normal case with an Ireland domiciled one.

Beyond this, how much are you planning to invest? If above $60,000, then even if the above isn't sufficient, US estate tax considerations will drive the decision further towards Ireland and away from US domiciled ETFs.
Thank you, I think I had missed that section in the documentation page. So it now seems to me that from a tax perspective, holding US Treasury bonds is equivalent to holding a US-domiciled ETF that contains US Treasurys, and also equivalent to holding an Ireland-domiciled ETF that holds US Treasurys. In each case, no taxes for me.
Topic Author
culturedcommenting
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Re: Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

Where can I find a list of Ireland-domiciled ETFs that are preferred by bogleheads (broad-based funds with low ER)?
Rosales
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Re: Bond and bond ETF taxation as a non-US resident

Post by Rosales »

culturedcommenting wrote: Thu May 26, 2022 4:30 pm Where can I find a list of Ireland-domiciled ETFs that are preferred by bogleheads (broad-based funds with low ER)?
justetf.com
VWRA & chill
TedSwippet
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

culturedcommenting wrote: Thu May 26, 2022 4:30 pm Where can I find a list of Ireland-domiciled ETFs that are preferred by bogleheads (broad-based funds with low ER)?
A couple of wiki pages contain some suggestions:

- Simple non-US portfolios - Bogleheads
- Building a non-US Boglehead portfolio - Bogleheads

There's also an uncurated 'master list' of (most of) the Ireland domiciled ETFs mentioned in the wiki:

- List of non-US domiciled ETFs - Bogleheads
international001
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

culturedcommenting wrote: Thu May 26, 2022 2:39 pm Hello,

having recently become a non-US resident I am looking to switch my ETF holdings to something more tax efficient. I am located in a tax-free jurisdiction with no tax treaty with the US. I have read and believe I understand the advantages of Ireland domiciled ETFs, at least for equities holdings. What about bonds? If my understanding is correct, interest income from owning bonds should be tax-free (no withholding), but what if I hold a bond fund instead, whether US or Ireland domiciled, would there be a withholding in that case?

Thank you very much!
I think everybody missed the most important point. You should not have bonds in US ETFs because they are priced in USD. This adds lots of volatility to your portfolio. Buy an bond ETF with US bonds if you want, but hedged to your local currency (in the list TedSwippet gave you, there are many hedged to GBP or EUR, if your currency is more exotic than that, sorry, bad luck)

A bit off-topic, but the exception may be to hold a small amount of long term treasuries (like VGLT)
international001
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

TedSwippet wrote: Thu May 26, 2022 4:09 pm Depending on the fund's contents you might lose something to US tax with a US domiciled bond fund, but no matter what it holds you should never lose anything to tax with an Ireland domiciled one. That is, the best case with a US domiciled ETF is the same as the normal case with an Ireland domiciled one.
Ted, don't you have later to pay taxes on your residency country on top? i.e. if it's an Ireland ETF for a $100 distribution, the US gets $15 by treaty, Ireland gets nothing, but if your residency country has a 25% tax, it gets ($100-$15)*25%. So your effective tax rate is 36.25%

Also a small note from other threads. If I remember right, this is specific for Irish ETFs (that pay 15%). Irish funds and ETFs/funds in other countries like Luxemburg pay 30%
TedSwippet
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

international001 wrote: Thu May 26, 2022 5:22 pm
TedSwippet wrote: Thu May 26, 2022 4:09 pm Depending on the fund's contents you might lose something to US tax with a US domiciled bond fund, but no matter what it holds you should never lose anything to tax with an Ireland domiciled one. That is, the best case with a US domiciled ETF is the same as the normal case with an Ireland domiciled one.
Ted, don't you have later to pay taxes on your residency country on top? i.e. if it's an Ireland ETF for a $100 distribution, the US gets $15 by treaty, Ireland gets nothing, but if your residency country has a 25% tax, it gets ($100-$15)*25%. So your effective tax rate is 36.25%

Also a small note from other threads. If I remember right, this is specific for Irish ETFs (that pay 15%). Irish funds and ETFs/funds in other countries like Luxemburg pay 30%
You're thinking of equity ETFs here.

Bond interest is a special case. Where an ETF contains US bonds, the ETF can pay that interest to nonresident alien holders as a portion of the dividend without the 30% US withholding tax (or 15% or other treaty rate). This doesn't apply for interest received from non-US bonds, though. Here, a nonresident alien loses 30% (or treaty rate) to US tax. But of course, an Ireland domiciled ETF pays nothing to the US on bond interest it receives from US bonds, nothing to other countries, and pays out its dividend to an investor without any further US or Irish tax withholding.

The Ireland/Luxembourg thing you mention is again related to equity ETFs. Ireland domiciled ETFs can use their treaty to reduce US tax on dividends from US stocks to 15%; Luxembourg domiciled ones cannot, and so suffer the full 30%. That is, unless they indulge in futures, options, and so on to mitigate or eliminate that. ETFs in neither country should suffer US withholding tax on bond interest, because the US does not tax interest paid to nonresident aliens and (by extension) non-US domiciled funds.

Of course, after all of the above there may be local country tax. However, the topic author specifically asked about only bond ETFs, and lives in a tax-free jurisdiction.
Last edited by TedSwippet on Fri May 27, 2022 1:59 am, edited 1 time in total.
TedSwippet
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

international001 wrote: Thu May 26, 2022 5:15 pm I think everybody missed the most important point. You should not have bonds in US ETFs because they are priced in USD. This adds lots of volatility to your portfolio. Buy an bond ETF with US bonds if you want, but hedged to your local currency (in the list TedSwippet gave you, there are many hedged to GBP or EUR, if your currency is more exotic than that, sorry, bad luck)
Certainly a point to consider. Unhedged US bonds should however be perfectly fine for countries where the local currency is pegged to USD, for example Hong Kong. Where there is no version hedged to the local currency though, unhedged will have to do.
Topic Author
culturedcommenting
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Re: Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

Yes, I am planning to switch my US-based equity ETF to Ireland-based ones. For bond ETF I wasn't sure if it was necessary but TedSwippet kindly clarified it for me.

Regarding currency, I am happy to use USD as a base currency for my portfolio as most of my expenses are made in USD or currencies pegged to it, and I'm willing to manage currency risk for other countries separately.

Regarding local taxes, there shouldn't be any (no income, capital gains, dividend, etc. taxes).
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

culturedcommenting wrote: Thu May 26, 2022 5:43 pm Regarding local taxes, there shouldn't be any (no income, capital gains, dividend, etc. taxes).
Your choice to disclose, but you know everybody must be really curious what kind of heaven you live in :happy
international001
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

TedSwippet wrote: Thu May 26, 2022 5:36 pm You're thinking of equity ETFs here.

Bond interest is a special case. Where an ETF contains US bonds, the ETF can pay that interest to nonresident alien holders as a portion of the dividend without the 30% US withholding tax (or 15% or other treaty rate). This doesn't apply for interest received from non-US bonds, though. Here, a nonresident alien loses 30% (or treaty rate) to US tax. But of course, an Ireland domiciled ETF pays nothing to the US on bond interest it receives from US bonds, nothing to other countries, and pays out its dividend to an investor without any further US or Irish tax withholding.
Thanks Ted.
I always learn something new from you.
So would this be derived from the Ireland-US treaty
Interest
1. Interest arising in a Contracting State and beneficially owned by a resident of the other
Contracting State may be taxed only in that other State.
Treaties with other countries are different. I checked US-Spain and it seems US would keep 10%
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culturedcommenting
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Re: Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

international001 wrote: Fri May 27, 2022 5:59 pm
culturedcommenting wrote: Thu May 26, 2022 5:43 pm Regarding local taxes, there shouldn't be any (no income, capital gains, dividend, etc. taxes).
Your choice to disclose, but you know everybody must be really curious what kind of heaven you live in :happy
The kind that has great weather and friendly people :wink:
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

international001 wrote: Fri May 27, 2022 6:17 pm ... So would this be derived from the Ireland-US treaty
Interest
1. Interest arising in a Contracting State and beneficially owned by a resident of the other
Contracting State may be taxed only in that other State.
Treaties with other countries are different. I checked US-Spain and it seems US would keep 10%
The US/Ireland treaty says neither country may tax interest paid to residents of the other treaty country, Article 11 paragraph 1. The US/Spain treaty says that a country may tax interest paid to its residents by the other country, Article 11 paragraph 1, but the tax may not exceed 10%, Article 11 paragraph 2.

Note however the underlined "may" in the sentence above. "May" does not mean "will". As a general rule, the US does not tax interest paid to non-residents; specifically, it exempts interest that is not connected with work or employment or running a business in the US. So there should be no need for a non-resident alien person (or entity) resident in Ireland to claim treaty rights. And no loss of 10% to the US for a person (or entity) in Spain receiving US source interest.
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

Great info to know. So in practical terms, US does not tax interest to non-residents.

I guess you need to know more than the treaty. Spanish treaty seems to use the same wording for dividends (shall not exceed 15%) and interests (shall not exceed 10%), but dividends are actually taxed.

For practical terms, how do you differentiate from dividends and interests when you receive a 1099? Interest from bond funds are marked as non-qualified dividends and included on line 1a on the 1099
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

international001 wrote: Sat May 28, 2022 5:46 pm For practical terms, how do you differentiate from dividends and interests when you receive a 1099? Interest from bond funds are marked as non-qualified dividends and included on line 1a on the 1099
Nonresident aliens don't receive form 1099. Instead, the payer sends one or more form 1042-S. Box 1, Income Code, indicates the precise type of income.
international001
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

TedSwippet wrote: Sun May 29, 2022 4:08 am
international001 wrote: Sat May 28, 2022 5:46 pm For practical terms, how do you differentiate from dividends and interests when you receive a 1099? Interest from bond funds are marked as non-qualified dividends and included on line 1a on the 1099
Nonresident aliens don't receive form 1099. Instead, the payer sends one or more form 1042-S. Box 1, Income Code, indicates the precise type of income.
So what about if you are US citizen and non-US resident? You get 1099 and you still need to know what is interest and what is dividend, no?
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

international001 wrote: Sun May 29, 2022 6:28 pm
TedSwippet wrote: Sun May 29, 2022 4:08 am
international001 wrote: Sat May 28, 2022 5:46 pm For practical terms, how do you differentiate from dividends and interests when you receive a 1099? Interest from bond funds are marked as non-qualified dividends and included on line 1a on the 1099
Nonresident aliens don't receive form 1099. Instead, the payer sends one or more form 1042-S. Box 1, Income Code, indicates the precise type of income.
So what about if you are US citizen and non-US resident? You get 1099 and you still need to know what is interest and what is dividend, no?
I don't know. The topic author is not a US citizen or resident, and happily, neither am I.
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culturedcommenting
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Re: Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

I have a follow-up question. If I currently own ETF shares that are going to issue a dividend soon (in my case, VTV is issuing dividends next week), wouldn't it make sense for me to sell my shares just before the ex-dividend date to avoid receiving the dividend and therefore avoid the taxes attached to it, then buying back just after the ex-div date? I could temporarily buy SPX futures (no dividends there) in the meantime to keep the market exposure. Only cost of this operation would be paying for bid-ask spreads and market risk while switching positions from VTV to futures and back.
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

culturedcommenting wrote: Fri Jun 17, 2022 12:58 pm I have a follow-up question. If I currently own ETF shares that are going to issue a dividend soon (in my case, VTV is issuing dividends next week), wouldn't it make sense for me to sell my shares just before the ex-dividend date to avoid receiving the dividend and therefore avoid the taxes attached to it, then buying back just after the ex-div date? I could temporarily buy SPX futures (no dividends there) in the meantime to keep the market exposure. Only cost of this operation would be paying for bid-ask spreads and market risk while switching positions from VTV to futures and back.
It might. It's certainly been mentioned on the forum before (if not actually indulged in), although I can't readily find the thread.

Obviously it works best in countries where there is no tax on capital gains. I've considered it for my own situation; the UK does tax capital gains, but it has a decent allowance of just over £12k before the tax kicks in. For me, that allowance would cap the benefit of tax arbitrage by selling and repurchasing to dodge a dividend. I worked out that I could save no more than maybe £100 or so over the year. Subtract from that the cost of trading and out-of-market risk (because I use mutual funds rather than ETFs, timing things to the minute is pretty much impossible), and I've not bothered.

For you, of course, it may be worthwhile. Although ... because of US estate tax issues you probably do not want to hold more than $60k in US domiciled ETFs anyway. A 2% dividend on a max $60k is $1,200, so avoiding that would save you $180 of US tax. That's before subtracting spreads and trading costs. Worth it? Maybe, or maybe not.
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

culturedcommenting wrote: Fri Jun 17, 2022 12:58 pm I have a follow-up question. If I currently own ETF shares that are going to issue a dividend soon (in my case, VTV is issuing dividends next week), wouldn't it make sense for me to sell my shares just before the ex-dividend date to avoid receiving the dividend and therefore avoid the taxes attached to it, then buying back just after the ex-div date? I could temporarily buy SPX futures (no dividends there) in the meantime to keep the market exposure. Only cost of this operation would be paying for bid-ask spreads and market risk while switching positions from VTV to futures and back.
No benefit if dividends are taxed at the same rate than capital gains, no?
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

international001 wrote: Wed Jul 06, 2022 7:01 pm
culturedcommenting wrote: Fri Jun 17, 2022 12:58 pm I have a follow-up question. If I currently own ETF shares that are going to issue a dividend soon (in my case, VTV is issuing dividends next week), wouldn't it make sense for me to sell my shares just before the ex-dividend date to avoid receiving the dividend and therefore avoid the taxes attached to it, then buying back just after the ex-div date? I could temporarily buy SPX futures (no dividends there) in the meantime to keep the market exposure. Only cost of this operation would be paying for bid-ask spreads and market risk while switching positions from VTV to futures and back.
No benefit if dividends are taxed at the same rate than capital gains, no?
But they are not taxed at the same rate. Dividends lose 30% to US dividend withholding tax; capital gains lose nothing.

From the first post in this thread:
I am located in a tax-free jurisdiction with no tax treaty with the US.
VTV is US domiciled. If the topic author holds it across its ex-dividend date, the NAV drops by the dividend percentage, but they will only receive 70% of the dividend paid, with the other 30% lost to US withholding tax. If however, they sell before the ex-dividend date, and buy back after and at the lower NAV, they have effectively avoided receiving the dividend, get to keep all of the resulting capital gain, and so have sidestepped a 30% loss to US dividend withholding tax.

It is an open question as to whether or not the added trading costs, including potential futures trading to cover out-of-market days, might outweigh the benefits of avoiding US dividend withholding tax in this way. (Also, of course, potentially unwise to hold VTV or any US domiciled fund or ETF at all, given the risk of confiscatory US estate taxes for assets above $60k.)
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

Sorry.. I was talking generically, for any given country. In the case of Spain (that I'm familiar with), both dividends and capital gains are taxed at (starting) 19%.

So who is taxing the capital gains in this case? If nobody, then I perhaps would go with BRK that has no dividends at all
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culturedcommenting
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Re: Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

Not sure I understand your last question, but for this strategy to work you will need as a necessary condition that the capital gains tax rate < dividend tax rate.

In general, it is more tax efficient to invest in non-dividend paying assets (since you don't have to pay the dividend tax!)
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

culturedcommenting wrote: Fri Jul 08, 2022 6:44 pm Not sure I understand your last question, but for this strategy to work you will need as a necessary condition that the capital gains tax rate < dividend tax rate.

In general, it is more tax efficient to invest in non-dividend paying assets (since you don't have to pay the dividend tax!)
I agree with that. I guess I didn't understand from your situation which country is taxing capital gains and at which rate.
One reason for investing in non-dividend paying assets is the power of compounding. Another reason may be that capital gains are taxed at lower rate.

BRK is good just for the first reason for many investors US based. There are some threads arguing for it (as a replacement of VTI, even if you loose diversification).
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Re: Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

In general you have to pay capital gains tax in your country of tax residence. In my case there is no such tax. One of the specificities of investing in US equities is the existence of the dividend withholding tax, which you will have to pay no matter what your local dividend tax rate is.
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

culturedcommenting wrote: Sun Jul 10, 2022 7:50 am In general you have to pay capital gains tax in your country of tax residence. In my case there is no such tax. One of the specificities of investing in US equities is the existence of the dividend withholding tax, which you will have to pay no matter what your local dividend tax rate is.
Ok.. lucky you.
Then still consider to have part of your portfolio in BRK, and you'll avoid paying taxes altogether.
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Re: Bond and bond ETF taxation as a non-US resident

Post by galeno »

Same situation as you. Non-US investor w/o US tax treaty.

You will pay ~12.5% DWT on the dividend income from world equities (VWRx). Levels 1 & 2. Last time I checked. If you want to hold 100% US equities (VUSA) it's 15%.

Bond interest income comes thru tax free for levels 1 and 2.
KISS & STC.
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

galeno wrote: Thu Jul 14, 2022 8:56 am Same situation as you. Non-US investor w/o US tax treaty.

You will pay ~12.5% DWT on the dividend income from world equities (VWRx). Levels 1 & 2. Last time I checked. If you want to hold 100% US equities (VUSA) it's 15%.

Bond interest income comes thru tax free for levels 1 and 2.
Level 1 is because the ETF is hold in Ireland? How is bonds are tax free (does the Ireland US allow it)?
In anycase, I think we are talking about capital gains being 0, what I think it is very unique.
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Re: Bond and bond ETF taxation as a non-US resident

Post by internet_explorer »

Hope I'm not hijacking this thread too much, but in the name of diversification, I'm also compiling a list of countries which don't tax non-residents on interest.
So far, I've checked these but if anyone else wants to chime in that would be super
  • USA
  • Australia
  • UK
international001
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

internet_explorer wrote: Fri Jul 15, 2022 12:43 am Hope I'm not hijacking this thread too much, but in the name of diversification, I'm also compiling a list of countries which don't tax non-residents on interest.
So far, I've checked these but if anyone else wants to chime in that would be super
  • USA
  • Australia
  • UK
Hmm.. I'm checking again the link TedSwippet sent. (https://www.irs.gov/individuals/interna ... ndividuals). Where does interest from US treasuries apply? Do you have to pay taxes to US?
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Re: Bond and bond ETF taxation as a non-US resident

Post by internet_explorer »

international001 wrote: Fri Jul 15, 2022 7:13 pm Hmm.. I'm checking again the link TedSwippet sent. (https://www.irs.gov/individuals/interna ... ndividuals). Where does interest from US treasuries apply? Do you have to pay taxes to US?
It's in the wiki, and didn't look much further. I did not verify with the IRS site directly because the wording is really general (and, not being a tax expert, hard to know if specifically applicable)
Interest distributions paid as dividends
Where a US domiciled ETF receives US source interest on its holdings, and that interest would not have been taxable to a US nonresident if paid directly, the portion of the dividend attributable to this interest is 'portfolio interest'[10] and can be exempted from nonresident withholding.[11] This situation is unlikely in ETFs that hold only stocks, but will be common in bond ETFs, and any mixed-asset ETFs.

Again, for this to occur correctly both the ETF provider and the broker need to be aware of the relevant qualified interest income (QII) regulations.

Also, note that this exemption is particularly narrowly drawn. It does not apply to any non-US source interest or dividends that the ETF receives.[9] This means that a US domiciled ETF containing non-US bonds or non-US stocks suffers the standard 30% or lower treaty rate US tax on dividends. If the investor had instead held the ETF's assets either directly or through a non-US domiciled ETF, they would have paid no US tax.
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

international001 wrote: Fri Jul 15, 2022 7:13 pm Hmm.. I'm checking again the link TedSwippet sent. (https://www.irs.gov/individuals/interna ... ndividuals). Where does interest from US treasuries apply?
The interest exception for NRAs is buried deep in turgid US tax prose. There's a reasonable dissection of the entire mess, including the estate tax trap (because of course there has to be one somewhere!) for treasuries of less than 183 days in duration, in this article:

Nonresident aliens: U.S. estate tax on treasury bills. - Free Online Library

The key appears to be a full and complete understanding of both "original issue discount (OID)" and the "portfolio interest exemption". But honestly, life is too short to waste any of it on that nonsense; dealing with merely the less obscure aspects of the miasma that is US tax is waste enough. So I'll just trust that the AICPA knows what it is talking about.
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

Thanks for shinning a light.

I guess that if you hold a bond fund (of treasuries), all interest is considered as if bonds were > 183 days and non-US residents don't have to pay interest on it.

What about non-residents that are US citizens. They also don't have to pay interest to US (like the 10% max I mentioned for some treaties)? Not a big deal, since the 10% is likely to be lower than what you owe in your residence country, but good to know to no mess up taxes.
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culturedcommenting
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Re: Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

Isn't a US citizen always a tax resident?
TedSwippet
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

international001 wrote: Sun Jul 17, 2022 6:41 pm What about non-residents that are US citizens. They also don't have to pay interest to US (like the 10% max I mentioned for some treaties)? Not a big deal, since the 10% is likely to be lower than what you owe in your residence country, but good to know to no mess up taxes.
No. As culturedcommenting wrote above, US citizens are effectively always US tax residents. The "portfolio interest exemption" is an artefact of IRC section 871. This is the part of the US tax code that applies to nonresident aliens. A US citizen living outside the US is nonresident, but not alien.

As for treaties, the US uses treaty 'saving clauses' to deny its citizens use of vast swathes of a treaty. For US citizens then, full US tax and no 10% maximum rate.
international001
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

Tx for the pointer. Treaty is not enough.

So imagine US-citizen in Spain where interest is taxed at 19%. US income rate 24%
You have to pay 10% to US
You have to pay 9% (19%-10%) to Spain (take foreign tax credit of the amount you are obliged to pay to US by treaty)
You have to pay extra 5% (24%-21%) to US (by resourcing some income from US to Spain and taking foreign tax credit)

Sounds about right?
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

international001 wrote: Wed Jul 20, 2022 7:22 pm So imagine US-citizen in Spain where interest is taxed at 19%. US income rate 24%
You have to pay 10% to US
You have to pay 9% (19%-10%) to Spain (take foreign tax credit of the amount you are obliged to pay to US by treaty)
You have to pay extra 5% (24%-21%19%) to US (by resourcing some income from US to Spain and taking foreign tax credit)

Sounds about right?
Yes, more or less (and when corrected as above), although only for the case where this US source interest would have been US taxable to a resident of Spain who is not a US citizen.

However, that is not the case for all US source interest. For example, under the "portfolio interest exemption" already thrashed out above, in many cases the US does not generally tax interest paid to to nonresident aliens, for example simple interest paid by US banks. Article 24 paragraph 1(a) of the US/Spain treaty reads:
Where a resident of Spain derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, other than solely by reason of citizenship, Spain shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax actually paid in the United States.
For US bank interest then, or any other interest that the US does not generally tax when paid to nonresident aliens (probably the most common case for interest), the treatment for a US citizen living in Spain is simpler, although with the same end result:
  • You have to pay 19% to Spain
  • You have to pay extra 5% (24%-19%) to US (by resourcing some income from US to Spain and taking foreign tax credit)
Either way, the bottom line is that US citizens living abroad always end up paying the higher of the two countries' tax rates, and can only ever take the lower of the two countries' tax-free allowances. Not exactly encouraging, is it?
Tellurius
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Re: Bond and bond ETF taxation as a non-US resident

Post by Tellurius »

international001 wrote: Fri May 27, 2022 5:59 pm
culturedcommenting wrote: Thu May 26, 2022 5:43 pm Regarding local taxes, there shouldn't be any (no income, capital gains, dividend, etc. taxes).
Your choice to disclose, but you know everybody must be really curious what kind of heaven you live in :happy
OP must be used to speculation, but Monaco comes to mind.
“And how shall I think of you?' He considered a moment and then laughed. 'Think of me with my nose in a book!” | ― Susanna Clarke, Jonathan Strange & Mr Norrell
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

TedSwippet wrote: Thu Jul 21, 2022 2:40 am Either way, the bottom line is that US citizens living abroad always end up paying the higher of the two countries' tax rates, and can only ever take the lower of the two countries' tax-free allowances. Not exactly encouraging, is it?
Of course, that's a given ;-)

Thanks for the correction. I was referring to plain US bank interest we were discussing before. So in essence, non-resident US citizen does not have to pay to US *before* reading the saving clause.

Some additional thoughts:

- For non-resident US citizen, better to hold US-treasuries, so no extra taxation when your US income marginal bracket is higher than the interest rate at which you are taxed in your country of residence.

- All categories are mixed together in form 1116 when asking for the FTC. So you have to be careful with that. I haven't looked it up in detail. I'm not sure if resourcing income is done for the whole category. OR you mixed the resourced income with the actual income. But if you have one section that makes your foreign-income in 1116 go down, then you may not be able to claim the whole FTC.
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

TedSwippet wrote: Thu May 26, 2022 5:39 pm Certainly a point to consider. Unhedged US bonds should however be perfectly fine for countries where the local currency is pegged to USD, for example Hong Kong. Where there is no version hedged to the local currency though, unhedged will have to do.
There are other threads about it. But I think low risk bonds unhedge are mostly a waste. Unless perhaps it's just a small quantity in your AA. You would end up with low risk (that of the bond) and high volatility (that of the currency fluctuation). So stick with (mostly) stocks.
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culturedcommenting
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Re: Bond and bond ETF taxation as a non-US resident

Post by culturedcommenting »

@TedSwippet: do you know if the tax treatment of interest received from US corporate bonds is similar to interest received from US Treasurys (i.e. not taxed in the US)?
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Re: Bond and bond ETF taxation as a non-US resident

Post by Gerrykx »

Hi Ted,

trying to grasp the concept of OID but not sure I fully get it...
"Trust the AICPA" so you mean it's reasonable to assume that for NRA a Treasury with a duration of <183 days can be subject to estate tax correct ?
We are talking about remaining days to maturity right ? ...and regardless it's a T-Bill a Note or a Bond right ?

So in other words, it means if you are a NRA holding UST (any go them Bill/Notes/etc) when the remaining duration is <180 days either you sell it or theoretically you may face Estate Tax. Is my take correct ?

Thank you!

Just for reference other sources do not make any distinction about the days to maturity.. for example: https://advisor.morganstanley.com/miche ... _NRAs_.pdf

TedSwippet wrote: Sat Jul 16, 2022 3:07 am
international001 wrote: Fri Jul 15, 2022 7:13 pm Hmm.. I'm checking again the link TedSwippet sent. (https://www.irs.gov/individuals/interna ... ndividuals). Where does interest from US treasuries apply?
The interest exception for NRAs is buried deep in turgid US tax prose. There's a reasonable dissection of the entire mess, including the estate tax trap (because of course there has to be one somewhere!) for treasuries of less than 183 days in duration, in this article:

Nonresident aliens: U.S. estate tax on treasury bills. - Free Online Library

The key appears to be a full and complete understanding of both "original issue discount (OID)" and the "portfolio interest exemption". But honestly, life is too short to waste any of it on that nonsense; dealing with merely the less obscure aspects of the miasma that is US tax is waste enough. So I'll just trust that the AICPA knows what it is talking about.
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

That Morgan Stanley link has good info, but a bout estate and gift tax. I thought we were talking about taxing interest of US situ assets
Gerrykx
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Re: Bond and bond ETF taxation as a non-US resident

Post by Gerrykx »

Yes sorry @International001 I took the thread a bit OT but Ted was referring also to estate tax trap in his previous comment so it hit my curiosity as I'm struggling (there are many conflicting opinions from different sources) to understand if short duration UST are subject to estate tax for NRA as he mentioned and especially if the duration has to be intended as days to maturity vs "original" duration.. ??
I hope Ted can shed some light..
international001
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Re: Bond and bond ETF taxation as a non-US resident

Post by international001 »

Gerrykx wrote: Mon Oct 17, 2022 8:57 pm Yes sorry @International001 I took the thread a bit OT but Ted was referring also to estate tax trap in his previous comment so it hit my curiosity as I'm struggling (there are many conflicting opinions from different sources) to understand if short duration UST are subject to estate tax for NRA as he mentioned and especially if the duration has to be intended as days to maturity vs "original" duration.. ??
I hope Ted can shed some light..
So you are actually asking about estate tax. I don't see why estate for bonds would depend on maturity same as interest taxation might. You may have more luck with a new thread; this one has been chewed enough for the original topic.
2c
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

Gerrykx wrote: Thu Oct 13, 2022 6:19 am trying to grasp the concept of OID but not sure I fully get it...
"Trust the AICPA" so you mean it's reasonable to assume that for NRA a Treasury with a duration of <183 days can be subject to estate tax correct ?
We are talking about remaining days to maturity right ?
Yes to the first, but no to the second. The remaining days to maturity appears irrelevant; all that matters is the original duration of the bond. From the previously linked AICPA analysis (emphasis is mine):
However, OID is portfolio interest only if the obligation is an "OID obligation"--and obligations payable 183 days or less from the date of original issue (without regard to the period held by the taxpayer) are specifically excepted from the definition of OID obligation (Sec. 871(g)(1)(b)). Therefore, the OID on Treasury bills of 183 days or less is not portfolio interest. Since the interest received on these Treasury bills (i.e., the OID) is not portfolio interest, it is not eligible for the portfolio interest exemption. And since the interest is not eligible for the portfolio interest exemption, the obligations are not deemed to be foreign situs property under the estate tax rules.
Weird and illogical, but that's US tax law for you.
Gerrykx wrote: Thu Oct 13, 2022 6:19 am So in other words, it means if you are a NRA holding UST (any go them Bill/Notes/etc) when the remaining duration is <180 days either you sell it or theoretically you may face Estate Tax. Is my take correct ?
I believe not, based on the above. Just avoid holding any USTs with an original duration of 183 days or less and you should be fine, even when held to maturity.
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Re: Bond and bond ETF taxation as a non-US resident

Post by galeno »

We are NON US investors w/o a US tax treaty. We have been using UCITS ETF bond ETFs for many years. Interest income from these funds comes thru TAX FREE.

If you buy and hold US bonds DIRECTLY there is NO tax on interest income. However if you hold US bonds in a USA domiciled ETF or mutual fund you will pay 30% tax.
KISS & STC.
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Re: Bond and bond ETF taxation as a non-US resident

Post by TedSwippet »

galeno wrote: Thu Oct 20, 2022 4:07 pm ... However if you hold US bonds in a USA domiciled ETF or mutual fund you will pay 30% tax.
This shouldn't happen if the broker is handling NRA withholding correctly:

Nonresident alien taxation - Bogleheads
Interest distributions paid as dividends

Where a US domiciled ETF receives US source interest on its holdings, and that interest would not have been taxable to a US nonresident if paid directly, the portion of the dividend attributable to this interest is 'portfolio interest' and can be exempted from nonresident withholding. This situation is unlikely in ETFs that hold only stocks, but will be common in bond ETFs, and any mixed-asset ETFs.
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