In law, domicile is the status or attribution of being a lawful permanent resident in a particular jurisdiction. A person's domicile is often the determining factor for many legal aspects, including investing and taxation. Investment funds also have a domicile, and here this too determines the applicable legislation, including taxation.
Domicile of a person
In law, domicile is the status or attribution of being a lawful permanent resident in a particular jurisdiction. The domicile of a person will impact which fund that person can and should invest in.
In most countries, the domicile of the investor determines the applicable rules. There are two notable exceptions to this: nationals of Eritrea and the US are taxed by their country independently of where they are domiciled.
A person can remain domiciled in a jurisdiction even after they have left it, if they have maintained sufficient links with that jurisdiction or have not displayed an intention to leave permanently; that is, if that person has moved to a different state but has not yet formed an intention to remain there indefinitely.
Domicile from a US standpoint
The US uses the following attributes and terms to define domicile:
- US citizens: either natural-born or naturalised.[note 1]
- US resident aliens: that is, green card holders.[note 2]
- US persons: US citizens, resident aliens and residents are known collectively as US persons.
- Expatriate: The US Internal Revenue Services (IRS) code defines "expatriate" as someone who has given up US citizenship or permanent resident (green card) status.
- Take care not to confuse this with the more normal English meaning of the term "expatriate," which merely refers to a citizen of one country residing in another country. To avoid confusion, this page avoids the term "expatriate" and uses "US person living outside the US" or "US person living abroad" to mean US citizens and green card holders living in countries other than the US.
- US nonresident aliens: persons who are not US citizens or US residents.
- If you are not a US citizen, you are considered a nonresident alien unless you meet one of two tests. You are a resident alien of the United States for tax purposes if you meet either the green card test or the substantial presence test for the calendar year (January 1-December 31). In short, if you are not a US citizen or green card holder and have not been in the US for 183 days (calculated over a 3 year period), you are a nonresident alien for US tax purposes.
Residence and domicile
US income tax treaties treaties are generally controlled by your country of residence. Being a 'tax resident' of a country is normally sufficient to allow you to use that country's income tax treaty with the US.
In contrast, US estate tax treaties are generally controlled by your domicile rather than your country of residence. Domicile is where your permanent home is, and although it includes residence as one of its elements, residence alone in a country may not be enough to gain you coverage from a US estate tax treaty, so you may need to be particularly careful here. A few US estate tax treaties also cover citizens even when perhaps not resident or domiciled in the treaty partner country, for example the UK.
Domicile of a fund
Just like a person, a fund or ETF has a domicile. This is the country in which the fund's holding company is legally incorporated, and typically where the administration and management of the fund itself takes place.
Despite investing in identical underlying assets, investors in varying personal 'tax circumstances' will get different results depending on the domicile of the fund they choose to hold. Sometimes wildly different.
US domiciled funds
For a US resident, US citizen or green card holder investing in a US domiciled fund, the US will not withhold any tax on dividends, and the individual investor is responsible for their own tax payments to the US.
For a nonresident alien or non-US person investing in a US domiciled fund, the US will withhold up to 30% tax on dividends (the actual rate might be reduced by a tax treaty, typically to 15%), and could levy up to 40% estate tax of the balance on the holder's death.
Ireland and Luxembourg domiciled UCITS funds
UCITS (Undertakings for Collective Investment in Transferable Securities Directive) is an EU directive that regulates mutual funds and ETFs. It allows the funds to operate freely throughout the EU and UK on authorisation from a single member state. The UK left the EU in January 2020, but continues to participate in UCITS.
In addition every EU country has its own legislation and tax-treaties with other countries that govern the funds:
- Ireland domiciled funds: Ireland treats Irish domiciled funds advantageously. There are no dividends taxes or capital gains tax on dividends of Ireland domiciled funds. In addition Ireland has beneficial tax-treaties, in particular with the US. This treaty lowers dividend taxation to 15%.
- Luxembourg domiciled funds: Almost equally good, however dividends of US securities are subject to a US withholding tax of 30%. Prefer Ireland except where the fund holds only non-US stocks.
- Other EU countries often have legislation or tax treaties that is negative for the investor. For example, a country may levy a dividend withholding tax on the dividends distributed by the fund. This can lead to triple taxation for the investor: on the asset level, on the fund level, and by the country of the investor.
Other fund domiciles
Many countries have funds domiciled in their country, and with their own specific characteristics, for example:
- Hong Kong
These funds are typically designed for residents of the country in which the fund or ETF is domiciled. If your country offers funds like these, it is usually worth investigating whether they are suitable for your circumstances. For example, they might hold special local tax advantages for you.
You should however still watch out for fund-level tax withholding. For example, funds domiciled in Hong Kong and Singapore have no access to US tax treaties, so these will be unattractive relative to Ireland domiciled equivalents where their holdings are US stocks.
Impact of domicile of a person on investing
The domicile of a person will impact which fund a person can and should invest in. For more, see:
- Investing from outside of the US
- Nonresident alien investors and Ireland domiciled ETFs
- Please also see the country specific pages (see the table at the bottom) for more info.
EU and UK residents
The introduction of EU-wide legislation and UK equivalent regulation relating to investment has introduced significant hurdles for EU investors in regards to their access to funds domiciled outside of the US, in particular US domiciled funds, and introduces complexity around various matters including taxation.
The UK left the EU in January 2020, but created its own 'UK PRIIPs' regime that is fully aligned with the EU PRIIPs, so PRIIPs restrictions continue to apply in the UK.
For more, see:
- EU investing
- EU non-habitual residence - on the choice of your residence in the EU to optimise taxation on investing
Impact of US legislation on investing by non-US persons
US legislation impacts investing by non-US persons (known as nonresident aliens in US legislation). The US has harsh tax rules for US assets held by foreigners, some bordering on confiscatory. It taxes dividends paid by US stocks and US domiciled ETFs to foreigners at up to 30%, and may apply an estate tax of up to 40% on all US situated assets above a minimal $60,000 exemption. Be sure to understand how these tax rules will apply to you. If you need to avoid them, switch away from the usual US domiciled investments discussed among and used by US investors, and instead use equivalent investments domiciled in other countries, for example Ireland.
Taxation as a US person living abroad
Taxation as a US person living abroad involves special considerations for individual taxpayers. Uniquely among developed countries, the US taxes its citizens and permanent residents on their worldwide income whether they live in the US or outside. It has protectionist and draconian tax laws that dissuade US citizens and residents from holding non-US domiciled investments.
If you are a US citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad. Your worldwide income is subject to US income tax, regardless of where you reside.
Among the tax issues confronting US persons living abroad are additional reporting requirements for foreign bank and investment accounts, along with a number of applicable exclusions, deductions, and tax credits. A non-citizen spouse presents potential limitations on the inheritance and gifting of assets. Special tax assessments may be levied on the assets of those who renounce or relinquish citizenship, or abandon permanent residency.
Because of these, you must usually invest as if living in the US, and you effectively cannot use normal investments freely available to non-US persons living in the same country as you.
Choosing the domicile of the funds to invest in
As an investor you can choose the domicile of your investment funds. Next to home country domiciled funds, the choice is often between US domiciled funds and Ireland domiciled funds.
An EU or UK investor may only have limited access to funds domiciled outside of the EU (see EU and UK residents above). Non-US investors can use the Nonresident alien's ETF domicile decision table to choose the domicile of their investment funds.
Notwithstanding the above, US citizens and other US persons are effectively restricted to holding only US domiciled funds.
Tax legislation and tax treaties
Every country has its own tax legislation for individuals and funds. Domicile determines which country's tax legislation is applicable.
Countries agree on tax treaties that determine the cross border topics related to tax. One of the topics often discussed in the tax treaties is avoidance of double taxation.
US persons, particularly those living outside the US, should note that the US has placed a 'saving clause' in most of the treaties it has signed. The effect of this clause is to deny most treaty benefits to US citizens and US green card holders. The 'saving clause' generally has only a handful of exceptions.
The following is a (non-exhaustive) list of tax treaties in force in selected countries:
|Australia||Australian Tax Treaties|
|Canada||Tax Treaties: in force|
|European Union[note 3]||Treaties for the avoidance of double taxation concluded by Member States|
|Hong Kong||Comprehensive Double Taxation Agreements concluded|
|India||Double Taxation Avoidance Agreements|
|Israel||Avoidance of Double Taxation Treaties|
|New Zealand||Tax Treaties|
|Norway||General tax conventions between Norway and other states|
|Singapore||List of DTAs, Limited Treaties and EOI Arrangements|
|South Africa||Double Taxation Agreements and Protocols|
|United Kingdom||Tax Treaties|
|United States||United States Income Tax Treaties - A to Z|
|Estate & Gift Tax Treaties (International)|
- The US confers citizenship on anyone born in the US, and also on people born outside the US where one or more parent meets certain prior US residency conditions. People who grew up unaware of their US citizenship status are sometimes referred to as Accidental Americans.
- For green card holders, even living outside the US long enough that the card expires or that US immigration authorities consider it no longer valid for immigration does not change their tax and filing status for the IRS. Green card holders must formally surrender their status to free themselves from US tax filing requirements as a resident alien. This typically requires a trip to the nearest US embassy, and then filing Form 8854, "Initial and Annual Expatriation Statement." See Expatriation tax for further details.
- As of 2020, The European Union (EU) includes 27 nations: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden. The UK left the EU on January 31, 2020.
- Nonresident alien investors and Ireland domiciled ETFs
- Non-US investor's guide to navigating US tax traps
- Nonresident alien's ETF domicile decision table
- Taxation as a US person living abroad
- US tax pitfalls for a US person living abroad
- "Domicile (law)". Wikipedia. https://en.wikipedia.org/wiki/Domicile_(law). Retrieved September 17, 2019.
- "Residency (domicile)". Wikipedia. https://en.wikipedia.org/wiki/Residency_(domicile). Retrieved September 17, 2019.
- "Accidental American § Taxation of non-residents". Wikipedia. https://en.wikipedia.org/wiki/Accidental_American#Taxation_of_non-residents. Retrieved March 17, 2019.
- "Determining Alien Tax Status". IRS. http://www.irs.gov/Individuals/International-Taxpayers/Determining-Alien-Tax-Status. Retrieved December 2, 2019.
- "Estate, Gift, and Generation-Skipping Transfer Tax Treaties". SMU Law Review. 1983. https://core.ac.uk/download/pdf/147634389.pdf. Retrieved August 1, 2020.
- "Packaged Retail and Insurance-based Investment Products (Amendment) (EU Exit)". GOV.UK. https://www.gov.uk/government/publications/draft-packaged-retail-and-insurance-based-investment-products-amendment-eu-exit-regulations-2019/packaged-retail-and-insurance-based-investment-products-amendment-eu-exit-regulations-2019-explanatory-information. Retrieved February 1, 2020. Regulations 2019: explanatory information