Question
I just read your reply on 3rd May 2010 in which you explained the dividend and withholding tax for ETFs domiciled in Ireland, and that the net tax effect is the same for UK tax-resident, even though ETF domiciled in Ireland does not impose withholding tax.
I'm tax resident in a country where all foreign sourced income is tax-exempt and there is no tax treaty with the US. So, does this mean it is more tax-efficient that I hold ETFs domiciled in countries where there is no withholding tax, versus countries where there is withholding tax?Answer
Yes, no withholding tax is likely to be better in your situation.
Some countries deduct a 'withholding' tax on investment income (e.g. dividends) when paid to foreign investors. If the country in which you're tax resident has a double taxation agreement with the country withholding the tax, it might be you can reclaim some/all of the tax - usually by offsetting the withholding tax against any tax owed on that income in your country of residence.
For example, UK double taxation agreements usually allow around up to 15% of foreign withholding tax to be offset against any UK liability.
In your case there's no domestic tax to offset any withholding taxes against, because you've said foreign sourced income is tax exempt (in your country of tax residence). You might, in theory, be able to reclaim these withholding taxes from the foreign tax authority if there's a double taxation agreement in place, but in practice it'll probably be harder than getting blood from a stone.
So the best route in your instance is to simply avoid withholding tax wherever possible. Unfortunately, putting together a list of countries that don't apply withholding tax is not straightforward, as it can vary depending on the country in which you're tax resident. For example, Ireland doesn't deduct withholding tax on dividends from ETFs paid to UK tax residents, but it deducts 20% withholding tax when paid to US tax residents. Perhaps ask your local tax authority for a list, including details of any double taxation agreements.
Alternatively, you could avoid funds that pay an income, as withholding tax invariably applies to income, not gains. For example, you might invest in growth funds that pay little/no income or fund accumulation units (where the unit price increases to reflect income rather than it being paid out). In the case of accumulation units I suppose a tax authority might still want to withhold tax, but it will be harder for them to do so given there's no physical income paid out.
Also bear in mind when buying funds investing in foreign shares/investments that they too might suffer withholding taxes, which may or may not be reclaimed by the fund.
International taxation can get very messy...
I just read your reply on 3rd May 2010 in which you explained the dividend and withholding tax for ETFs domiciled in Ireland, and that the net tax effect is the same for UK tax-resident, even though ETF domiciled in Ireland does not impose withholding tax.
I'm tax resident in a country where all foreign sourced income is tax-exempt and there is no tax treaty with the US. So, does this mean it is more tax-efficient that I hold ETFs domiciled in countries where there is no withholding tax, versus countries where there is withholding tax?Answer
Yes, no withholding tax is likely to be better in your situation.
Some countries deduct a 'withholding' tax on investment income (e.g. dividends) when paid to foreign investors. If the country in which you're tax resident has a double taxation agreement with the country withholding the tax, it might be you can reclaim some/all of the tax - usually by offsetting the withholding tax against any tax owed on that income in your country of residence.
For example, UK double taxation agreements usually allow around up to 15% of foreign withholding tax to be offset against any UK liability.
In your case there's no domestic tax to offset any withholding taxes against, because you've said foreign sourced income is tax exempt (in your country of tax residence). You might, in theory, be able to reclaim these withholding taxes from the foreign tax authority if there's a double taxation agreement in place, but in practice it'll probably be harder than getting blood from a stone.
So the best route in your instance is to simply avoid withholding tax wherever possible. Unfortunately, putting together a list of countries that don't apply withholding tax is not straightforward, as it can vary depending on the country in which you're tax resident. For example, Ireland doesn't deduct withholding tax on dividends from ETFs paid to UK tax residents, but it deducts 20% withholding tax when paid to US tax residents. Perhaps ask your local tax authority for a list, including details of any double taxation agreements.
Alternatively, you could avoid funds that pay an income, as withholding tax invariably applies to income, not gains. For example, you might invest in growth funds that pay little/no income or fund accumulation units (where the unit price increases to reflect income rather than it being paid out). In the case of accumulation units I suppose a tax authority might still want to withhold tax, but it will be harder for them to do so given there's no physical income paid out.
Also bear in mind when buying funds investing in foreign shares/investments that they too might suffer withholding taxes, which may or may not be reclaimed by the fund.
International taxation can get very messy...
Read this Q and A at http://www.candidmoney.com/questions/question473.aspx
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