Bond ETF: How to identify low tax witholding

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Topic Author
bloodymeli
Posts: 4
Joined: Fri Jun 02, 2023 3:43 pm

Bond ETF: How to identify low tax witholding

Post by bloodymeli »

Hi,

I'm a non-US investor (with a tax treaty of 25% withholding). I'm using an international / US broker (Interactive brokers).
I was under the impression that all dividends are taxed at 25% under this tax treaty.

I've recently noticed that the dividends from USHY (US bond ETF) are taxed at a much lower rate (~3%). How can I identify ETFs that have low tax withholding?
I've also noticed that there is no tax withholding with dividends from VHYD (Ireland-distributing domiciled ETF). Is it the case that there is no tax withholding for all Ireland-domiciled ETFs?

What is the withholding rate for US treasuries?

Best,
Eli
daviddem
Posts: 275
Joined: Wed Jul 06, 2016 12:53 pm

Re: Bond ETF: How to identify low tax witholding

Post by daviddem »

Read the wiki for non US investors. All of it.

Long story short, if you are a US non resident alien, you most likely will want to invest in Irish ETFs, NOT US-domiciled ones. Not only because of withholding tax, but also because of estate tax.

https://www.bogleheads.org/wiki/Non-US_ ... _tax_traps
https://www.bogleheads.org/wiki/Nonresi ... ciled_ETFs
Topic Author
bloodymeli
Posts: 4
Joined: Fri Jun 02, 2023 3:43 pm

Re: Bond ETF: How to identify low tax witholding

Post by bloodymeli »

Thanks. I have read it.
I'm planning to hold less than 120K USD in a joint US-based account, so my question still holds with respect to bond ETFs: how can I tell the withholding tax rate?

Also, Are US-based bond ETFs have a lower withholding tax than Irish-domiciled ETFs?
For example, The USHY etf has a withholding tax rate of 3-4%, due to ROC taxation (whatever that is). Will an Irish-based ETF holding the same underlying stocks will have a 3%-4% withholding tax, or 15% as other Irish-domiciled stocks?
daviddem
Posts: 275
Joined: Wed Jul 06, 2016 12:53 pm

Re: Bond ETF: How to identify low tax witholding

Post by daviddem »

I found this wiki article mentioning ROC

Basically, part of the distributions of that fund are considered ROC and therefore not taxable (and therefore withholding tax does not apply to that portion of the distributions).

I don't know whether part of the distributions of your USHY ETF are considered ROC. You would have to dig in the annual reports of the fund to find out. If it does, it stands to reason that an Irish ETF with the same underlying assets would only pay 15% tax on the taxable portion of the income, so the fund would still be paying less tax than you would owning the US version.

Regardless of that, it is likely that the USHY ETF is considered a US Situs asset, and therefore would be subjected to up to 40% US estate tax in case you die.

edit: there is another wiki article mentioning ROC

edit: according to this, distributions of USHY do not have a ROC component
TedSwippet
Posts: 5181
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Bond ETF: How to identify low tax witholding

Post by TedSwippet »

bloodymeli wrote: Fri Jun 02, 2023 3:51 pm I've recently noticed that the dividends from USHY (US bond ETF) are taxed at a much lower rate (~3%). How can I identify ETFs that have low tax withholding?
US source interest income paid as a dividend escapes the normal US dividend withholding tax. Details here:

Nonresident alien taxation - Bogleheads

Note that this exemption applies only to US source interest. Non-US source interest (such as that paid out by BNDX) would nevertheless suffer an entirely unnecessary US dividend tax withholding. For this asset class especially, US tax rules strongly motivate you to avoid US domiciled funds and ETFs.
bloodymeli wrote: Fri Jun 02, 2023 3:51 pm I've also noticed that there is no tax withholding with dividends from VHYD (Ireland-distributing domiciled ETF). Is it the case that there is no tax withholding for all Ireland-domiciled ETFs?
Fully described here:

Nonresident alien investors and Ireland domiciled ETFs - Bogleheads

Ireland domiciled ETFs pay a 15% US dividend tax internally on dividends they receive from any US stocks they hold. After that, there is no further dividend tax withholding, either US or Irish, on the ETF's own dividend payments to investors. Notice in particular that 15% on part (US stocks only) of your stock assets allocation is significantly lower than the 25% you currently lose to the US on potentially your entire stock allocation.

As for US estate tax ... are you absolutely certain your holdings in US domiciled ETFs will never, never grow beyond $60k per holder? Even if yes, are you happy to spend effort and money dealing with the IRS and US nonresident alien estate tax returns if needed in future, and at a difficult time?
daviddem
Posts: 275
Joined: Wed Jul 06, 2016 12:53 pm

Re: Bond ETF: How to identify low tax witholding

Post by daviddem »

This link (from the wiki footnotes) explains it well. But note that it's up to the fund managers whether they enact the required reporting for non-US investors to benefit from the withholding tax exemption. So you still need to research that yourself by digging through the prospectus and/or contacting the fund manager and/or performing a test by purchasing a few shares with your broker and see what withholding tax you are charged. See in the wiki the test that was performed in 2015, where withholding tax was charged on the dividends of several funds, including some for which most of their distributions would qualify as QII and should therefore be exempt. Maybe things have changed since then, but the only surefire way to tell is to test for yourself (and update the wiki accordingly so everyone can benefit).
DoctorE
Posts: 178
Joined: Thu Feb 13, 2014 2:11 am

Re: Bond ETF: How to identify low tax witholding

Post by DoctorE »

When I held IEF, it would get hit with the full withholding tax at IBKR and then would get a refund the next year. Strange system. I no longer have bond ETFs.
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